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Stefano Manacorda
Chiomenti, Rome
stefano.manacorda@chiomenti.net

Carla Vassalli
Chiomenti, Rome
carla.vassalli@chiomenti.net

 

New predicate offences for corporate liability: the emerging role for tax crimes

2019 was a fast-moving year for the Italian legal framework governing corporate criminal liability, which is embodied mainly in Legislative Decree 231/2001 ('Decree 231'). As a brief background, Decree 231 provides for the liability of entities, to be resolved in front of a criminal court, where a person with representative, administrative or directive capacity (also de facto) or a person subject to their direction or surveillance, commits or attempts to commit one of the predicate offences listed in the Decree in the interest or to the benefit of such entity. The list of predicate offences is quite broad and includes: corruption, money laundering, manslaughter and injuries as a consequence of health and safety violations, environmental crimes, cybercrimes, corporate crimes, market abuse and insider trading. Sanctions under Decree 231 can consist of fines reaching €1.5m, disqualification measures, confiscation and publication of the conviction. Disqualifications and confiscation are particularly troubling for companies. The former can, for instance, lead to the suspension of any business activity or to the prohibition of negotiating with the public administration, a risk that many companies cannot easily afford. Confiscation refers to the price or profit of the offence, or to any sum of money, goods or other benefits equal to the value of the price or profit of the offence. This can have a significant economic impact on the convicted company.

Over the last few months, together with more than 20 categories of criminal offences capable of triggering corporate liability under Decree 231, which were progressively included in the list of the so-called predicate offences since 2001, there has been an unprecedented expansion to new sets of crimes, mostly under the impetus of EU law. This expansion include: trading in illicit influence (which carries a penalty of up to €300,000); fraud in sports competitions and abusive exercise of games and betting and gambling through banned devices (with possible fines of up to €700,000 and disqualification measures of at least one year); as well as certain new offences against national cybersecurity (with sanctions of up to €600,000). The sanctions system for individuals in relation to certain offences proposed by Decree 231 was also strengthened, particularly by virtue of a new, sweeping anti-corruption law (Law 3/2019). Just to give an example, the penalty for corruption pursuant to Article 318 of the Criminal Code ranges from three to eight years of imprisonment, while under the previous version of the provision it ranged from one to six years.

More significantly, very recent legislative developments have targeted tax offences, an important and sensitive new addition for companies, responding both to a protracted debate taking place at a domestic level and to legislation issued at EU level.

Law 157/2019, definitively approved on 19 December and entered into force on 25 December, contains important amendments relating to criminal liability of both individuals and legal persons for tax offences. Before analysing its content, we will briefly mention the different past attempts to have tax crimes included in the list of predicate offences capable of triggering the liability of entities under Italian law.

Previous attempts to introduce tax offences within the corporate criminal liability system

Before the introduction of Law 157/2019, tax crimes established by Decree 74/2000 were not expressly included in the list of Decree 231 predicate offences capable of triggering corporate liability. Consequently, companies could only be subject to sanctions issued by the tax administration for fiscal violations or have to deal with the consequences of seizures and confiscations arising out of offences committed by their legal representatives. Nevertheless, since certain tax offences were widely considered to be relevant to corporations, as well as compatible with the requirements contained in Decree 231, their total exclusion from Italy’s corporate liability system has long been a topic of contentious debate in academia, in the legislature and in courts.

The first legislative proposal to include tax offences in Decree 231 came in 2007 following a Ministry of Justice commission. Later in 2014, a similar proposal was presented to the Chamber of Deputies concerning the introduction of tax offences as a Decree 231 predicate offence, with a view to filling ‘an unjustifiable gap not only at the political-criminal level (…) but also at the systematic level.’

At the same time, certain Italian judges have made creative attempts to hold companies liable for tax offences, albeit indirectly. On the one hand, they have based corporate liability on existing Decree 231 predicate offences (such as money laundering and criminal association) when these are linked to or stem from tax offences. For instance, in 2013 the Italian Supreme Court held that Decree 231 seizures that target profits of a criminal conspiracy also concern profits of tax crimes committed as the aim of the conspiracy, as such seizures relate to all benefits obtained as a result of the offences committed within the conspiracy.^[1] This decision was highly criticised and remains an isolated precedent. Courts also relied on an extensive application of confiscation measures to seize profits deriving from tax offences committed by companies’ legal representatives or other individuals when the sums were within the possession of companies, irrespective of the fact that the tax offence was not a predicate offence for corporate.^[2]

The European Delegation Law 2018 and the upcoming European Public Prosecutor’s Office: the VAT offences

Directive (EU) 2017/1371 on the fight against fraud to the European Union’s financial interests by means of criminal law, also known as the 'PIF Directive', adopted on 5 July 2017, was grounded on the knowledge that ‘fraud affecting EU revenue and expenditure in many cases was not confined to a single country.’

The PIF Directive imposes a duty on Member States to criminalise four offences: fraud, money laundering, bribery and misappropriation. The definition of fraud distinguishes between: (1) non-procurement related fraud; (2) procurement related fraud; (3) non-VAT (value added tax) revenue fraud (ie, customs revenue fraud); and (4) VAT revenue fraud. The offence of VAT revenue fraud applies only in case of ‘serious offences’ against the common VAT system, namely where the intentional acts or omissions underlying this offence are connected with the territory of two or more EU Member States and involve a total damage of at least €10m.

When it comes to legal persons, the PIF Directive requires Member States to ensure that they can be held liable for any of the PIF offences ‘committed for their benefit by any person, acting either individually or as part of an organ of the legal person, and having a leading position within the legal person (…)’, as well as for PIF offences, made possible by the lack of supervision or control by such a leading person over a person under their authority. The European text goes on to require that Member States take the necessary measures to ensure the application against legal persons of ‘effective, proportionate and dissuasive sanctions, which shall include criminal or non-criminal fines and may include other sanctions’, such as exclusion from public benefits or from public tender procedures, disqualification from the practice of commercial activities, judicial winding-up and others.

As a consequence, within the Italian legal system, the issues surrounding the inclusion of tax offences as a predicate offence for corporate liability have once again come to the fore.

The European Delegation Law 2018,^[3] which entered into force on 2 November 2019, implements and transposes 26 EU Directives into Italian law, including the PIF Directive. Specific guidelines are given concerning corporate liability: the government is asked to extend, by 28 February 2020, Decree 231 to the ‘offences which harm the financial interests of the EU and which are not already included in the Decree’ and envisage that ‘all sanctions be effective, proportionate and dissuasive’.

The real innovation is the inclusion within the regime of corporate criminal liability of VAT frauds. The latter are defined by the Directive as any act or omission committed in cross-border fraudulent schemes in relation to: (1) the use or presentation of false, incorrect or incomplete VAT-related statements or documents, which has as an effect the diminution of the resources of the EU budget; (2) non-disclosure of VAT-related information in violation of a specific requirement, with the same effect; or (3) the presentation of correct VAT-related statements for the purposes of fraudulently disguising the non-payment or wrongful creation of rights to VAT refunds.

To make it clear, the European Delegation Law for 2018 did not produce any practical result for individuals and companies: the government has to fulfil its tasks by adopting a more detailed piece of binding legislation in the upcoming weeks.

The Italian government took a step in this direction on 23 January 2020 by approving the draft Legislative Decree which implemented the PIF Directive into domestic law. The Legislative Decree modifies, among others, the tax offences provided by Decree 74/2000 that are included in the list of Decree 231 predicate offences. The list will now encompass false or omitted statement of income (Articles 4 and 5 of Decree 74) and illicit clearance (Article 10 quarter of Decree 74). The following changes are also worthy of note:

• an attempt at committing a tax offence will be also punished, where the crime is transnational and if evaded tax is greater than €10m;

• the list of 231 predicate offences will also include fraud in the public supply, fraud in agriculture and smuggling; and

• two more crimes against the public administration will be included in the list of 231 predicate offences – embezzlement and abuse of office.

It should be noted that this is not a definitive text and that the Decree is likely to undergo further amendments before its adoption.

The PIF Directive is strictly intertwined with the Council Regulation (EU) 2017/1939 of 12 October 2017 implementing enhanced cooperation on the establishment of the European Public Prosecutor’s Office (EPPO). The EPPO, expected to commence its activities in November 2020, is the new EU body responsible for investigations and prosecutions relating to criminal offences affecting the EU’s financial interests.

The structure of the EPPO includes European Delegated Prosecutors (EDPs) across the current 22 participating Member States. EDPs will investigate and prosecute cases in their respective jurisdiction and bring them before domestic criminal judges. Its responsibility covers so-called ‘PIF offences’ (fraud, corruption, misappropriation, money laundering) and ancillary offences, inextricably linked to them. Within this framework, the EPPO will also be applicable for serious frauds against VAT where the misconduct is connected with at least two participating Member States and has caused a total loss of at least €10m, as stated in the PIF Directive.

Law 157/2019 and the new corporate criminal liability system for a wide range of tax offences

The above debate has been widely overcome by the adoption of the latest piece of legislation, the most important being in relation to corporate criminal liability for tax offences. The first step was made on 26 October 2019, when the Italian President issued Law Decree 124 (also referred to as the 'Fiscal Decree'), which contains ‘urgent measures for non-deferrable tax and financial needs, also through the fight against tax evasion and related criminal law’. Law 157/2019, which was definitively approved on 19 December 2019 and came into force on 25 December, made some amendments to Decree 124/2019 and converted it to Law.

Pursuant to Law 157, the following provision is to be added to Decree 231:

‘Article 25-quinquiesdecies (tax offences). 1. In relation to the commission of the offences under Decree 74, the following pecuniary sanctions shall apply: (a) for the offence of fraudulent declaration through the use of invoices or other documents for inexistent transactions envisioned in Article 2(1) of Legislative Decree 74/2000, a pecuniary sanction of up to 500 quotas; (b) for the offence of fraudulent declaration through the use of invoices or other documents for inexistent transactions envisioned in Article 2(2-bis), a pecuniary sanction of up to 400 quotas; (c) for the offence of fraudulent declaration through the use of other artifices envisioned in Article 3, a pecuniary sanction of up to 500 quotas; (d) for the offence of issuing of invoices or other documents for inexistent operations envisioned in Article 8(1), a pecuniary sanction of up to 500 quotas; (e) for the offence of issuing of invoices for inexistent operations envisioned in Article 8(2-bis), a pecuniary sanction of up to 400 quotas; (f) for the offence of destruction and concealment of accounting documents envisioned in Article 10, a pecuniary sanction of up to 400 quotas; (g) for the offence of fraudulent subtraction to pay taxes envisioned in Article 11, a pecuniary sanction of up to 400 quotas. If following the commission of the above offences the entity has obtained a profit of substantial amount the pecuniary sanction is increased of a third. In all cases can be applied also disqualification measures envisioned in Article 9(2 c, d and e) Decree 231.’

The following points are worth highlighting:

• Following Law 157/2019, a wide range of tax offences are now included in the list of predicate offences, while the Fiscal Decree included only one category of tax crimes. In fact, in addition to fraudulent tax declarations through the use of invoices or other documents for inexistent transactions (so-called ‘false invoicing’ offence), punished under Article 2 of Decree 74, the following offences are now included in the list: (1) fraudulent declaration through the use of invoices or other documents for inexistent transactions if the amount of the evaded tax is lower than €100,000, punished under Article 2(2-bis) of Decree 74; (2) fraudulent declaration through the use of other deceptions, punished under Article 3; (3) issuing of invoices or other documents for non-existent transactions, punished under Article 8 (1 and 2-bis); (4) destruction and concealment of accounting documents punished under Article 10; (5) fraudulent tax avoidance, punished under Article 11.

• Law 157/2019 also includes certain disqualification measures as penalties applicable to companies in addition to pecuniary sanctions. The following disqualifications measures apply: bans from contracting with the public administration; exclusion from benefits, loans, grants or subsidies, including revocation of those already granted; ban on advertising goods or services. These measures can range from three months to two years and are imposed if: (i) the organisation has made a substantial profit and the crime was committed by persons in senior position or individuals with directorial functions when the crime was determined or facilitated by serious organisational shortcomings; (ii) in case of reiteration of the offences.

• Law 157/2019 also made substantial amendments to the criminal regime for tax offences committed by individuals encompassed in Decree 74. The main amendments regard: (1) the increase of penalties for certain crimes; (2) the lowering of the thresholds required to trigger the criminal offence; (3) the applicability of the ‘extended confiscation’ under article 240-bis of the Italian Criminal Code to tax offences as well. Now confiscation under article 240-bis of the Criminal Code is also applicable to tax offences in case of conviction or plea bargaining (provided by article 444 of the Criminal Procedure Code) for each crime encompassed in Legislative Decree 74/2000 (except for failure to pay withholding taxes or failure to pay VAT), when the omitted payment exceeds €100,000.

The impact of the new legislation on companies in terms of compliance programmes

These legislative developments, combined with the difficulty to detect problematic tax practices and the potential pervasiveness of these crimes, should put companies on guard. The focus should now home in on what actions and measures companies can put in place to prevent such offences from being committed, first and foremost through the adoption and implementation of effective systems and controls pursuant to Decree 231.

Indeed, it should be borne in mind that under Decree 231, when a predicate crime is committed, a company can avoid or reduce liability if it proves, inter alia, that it has adopted and effectively implemented adequate systems and controls in accordance with the Decree. This would include an organisation and management model (known as a ‘231 Model’) to prevent this sort of crime from being committed. Notably as discussed in a previous newsletter, since Decree 231 can, in certain instances, also apply to foreign companies, foreign companies are also advised to monitor these developments and ensure Decree 231 compliance when its operations fall within Italian jurisdiction.

In light of these significant new legislative developments, it is important for companies to update their own organisation and management model to render it ‘tailored’ to the recent new provisions and thereby avoid the risk of being exposed to the new, severe punishments.