The CJIP, which at the time of its creation was only permitted in matters of corruption, influence peddling, offences related to corruption and influence peddling, and laundering of tax fraud and other similar offences set out in Articles 1741 and 1743 of the French General Tax Code, was subsequently extended to tax fraud, similar offences, and their related offences, as well as to the laundering of corruption and influence peddling offences.
As a result, tax CJIP’s were promptly concluded. Indeed, in addition to those already concluded for laundering of tax fraud, the Financial Public Prosecutor concluded on 28 June 2019, a CJIP with the company Carmignac Gestion for tax fraud and aggravated tax fraud, which was followed on 12 September 2019, by a CJIP concluded with the companies Google France and Google Ireland Ltd for tax fraud, aggravated tax fraud, money laundering and complicity in these offences. Finally, on 11 May 2020, a CJIP was concluded with the company Swiru Holding AG for complicity in tax fraud.
Thus, the latest CJIP between JPMorgan Chase Bank, National Association (“JPMorgan”) and the Financial Public Prosecutor demonstrates once again the French authorities’ interest in negotiated justice in the area of criminal tax law.
I. Facts underlying the CJIP between JPMorgan Chase Bank, National Association, and the Financial Public Prosecutor
This procedure against JPMorgan stems from acts committed within the investment company Wendel, and more specifically by fourteen of its executives, against whom the French General Directorate of Public Finances filed a complaint for under-reporting of their income tax returns due for the year 2007.
Through a complex operation called “Solfur”, the executives abused the system of tax suspension which aims to prevent “the taxpayer who realizes a capital gain at the time of a contribution to companies being immediately taxed on it while he did not receive cash that allows to pay the tax”.
More specifically, when the Wendel group was restructured, they contributed shares of one of the group’s entities, the Compagnie de l’Audon (“CDA”), to several non-trading companies subject to corporate income tax, all of which were controlled by the executives, alone or in conjunction with their families. These shares, subscribed by the directors for a nominal value of 0.10 euros per share, were contributed on the basis of a real unit value of 19.17 euros.
Subsequently, this transfer was followed by the repurchase by the CDA of the said shares for a unit price of 19.17 euros which was identical to the value of the contribution, allowing the executives to avoid immediate taxation of their capital gains, of 19.07 euros per share, in respect of their income for the year 2007 as a result of the tax suspension. The total amount of taxes evaded was estimated to be 78,414,973 euros.
JPMorgan as involved in this operation not because it provided tax or legal advice, but because it provided financing by granting loans to some of the executives of the Wendel group so that they could carry out this operation and ultimately benefit from the tax suspension.
Although it was acknowledged that JP Morgans role was minimal within the operation as it was only consulted in the final phase of the discussions and was not involved in most of the discussions in relation to the development of the latter, the Financial Public Prosecutor still considered that JPMorgan had been aware of the tax suspension sought by the executives of the Wendel group and the existence of a risk that the authorities would challenge this scheme as an abuse of rights. The Financial Public Prosecutor therefore considered that those facts were equivalent to providing means and thus constituted an act of complicity in tax fraud.
II. JPMorgan’s sanctions and consequences for Wendel Group’s executives
For the facts described above, JPMorgan agreed to pay a public interest fine of 25 million euros. Several minor factors were considered in deciding the amount, such as: the limited nature of JPMorgan’s involvement, the long-standing and isolated nature of the facts and the cooperation provided to the judicial authorities in the context of the investigations, which counterbalanced a major factor that was the complexity of the tax scheme.
It should be noted that the basis for calculating the public interest fine was the sum of the benefits derived by the executives of the Wendel group, i.e., 78,414,973 euros equivalent to the sum of the taxes evaded, and not the benefits obtained by JPMorgan since it is specified that it did not receive any tax benefits from such operation.
There have been doctrinal debates as to the interpretation of Article 41-1-2 of the French Criminal Procedure Code, which states that the amount of the public interest fine “shall be fixed in proportion to the benefits obtained from the breaches observed, within the limit of 30% of the average annual turnover calculated on the last three annual turnovers known at the time of the finding of these breaches”. Some consider that the argument of the Financial Public Prosecutor does not contravene the text, which does not specify that a link is to be established between the person sanctioned and the beneficiary of the benefits obtained from the breaches committed, but, on the contrary, that it corresponds to the spirit of the text and therefore does not prevent the application of the 30% limit. Others, on the other hand, consider that such an interpretation is contrary to both the letter and spirit of the text and that it is particularly severe since it uses the profits of one party to calculate the sanction of another.
In any event, although such an interpretation seems opportunistic in the present case in light of the amount of the fine imposed, which is almost equivalent to the theoretical maximum amount of the fine (25 million as opposed to 26.405 million) , the Latin adage “ubi lex non distinguit, nec nos distinguere debemus”, according to which it is not appropriate to distinguish where the law does not distinguish, allows for this interpretation.
Also, it should be mentioned that in the context of CJIPs regarding tax fraud, including the one concluded by JPMorgan, the compliance obligation provided for in Article 41-1-2 of the French Criminal Procedure Code, implemented under the control of the French Anti-Corruption Agency, specific to corruption and influence peddling, has never been mentioned. In addition, as the tax authorities have never claimed any damages in the context of a CJIP regarding tax fraud, the same applies to the obligation to compensate victims for their damages, also provided for in Article 41-1-2 of the French Criminal Procedure Code .
It should also be noted that in this case, the fate of fourteen executives of the Wendel group is still pending. Although they are not representatives of JPMorgan, the CJIP concluded by the latter could have an impact on the legal proceedings that could be opened against them.
Indeed, as the CJIP is only applicable to legal entities under Article 41-1-2 of the French Criminal Procedure Code, physical persons remain liable and may be subject to parallel legal proceedings or a procédure sur reconnaissance préalable de culpabilité (“CRPC”). However, as recently reported in the Information Report on the impact of the Sapin 2 law and given that cooperation is expected from the legal entity during a CJIP, as well as the public nature of the agreement and the multitude of information shared in the context of the procedure, this situation presents a real risk of infringement of the rights of the defence for these persons.
As this issue is clearly identified in the said Report, a proposal for the creation of a CRPC specific to acts of corruption (which should nevertheless be extended to acts of tax fraud) was made to improve the framework applicable to physical persons, more specifically regarding the articulation between the CJIP and a possible CRPC. This point, which reflects a real difficulty in the defence of physical persons in the context of negotiated justice with a legal entity, could therefore be addressed in future reforms and should be the subject of particular vigilance.