THE BOTTOM LINE
- Due diligence is non-negotiable: Directors cannot claim ignorance of VAT fraud if they fail to perform basic checks on suppliers, especially after being warned by tax authorities. Personal criminal liability is a significant risk.
- Active participation negates legal ambiguity: Arguing that tax law was unclear at the time (an “arguable legal position“) is not a valid defense if your company is found to be an active participant in a fraud scheme, rather than just a negligent party.
- A pattern of negligence can prove intent: A court will look at the entire pattern of behavior. Ignoring multiple red flags—such as using suppliers with incompatible business activities, accepting falsified documents without verification, and unorthodox delivery methods—can collectively be used to prove a director’s intent to commit fraud.
THE DETAILS
In a recent advisory opinion to the Dutch Supreme Court, the Advocate General addressed the conviction of a de facto director for his company’s role in a sophisticated VAT carousel fraud. The company had claimed VAT refunds on purchases from suppliers who, it turned out, were fraudulent entities that never remitted the VAT they charged. The director was convicted for intentionally filing incorrect VAT returns and providing falsified documents to the tax authorities. This opinion reinforces that directors who turn a blind eye to clear warning signs in their supply chain do so at their own peril.
The director’s primary defense was that the law regarding VAT fraud liability was uncertain during the period in question (2014), before a landmark European Court of Justice ruling clarified the rules. He argued he had an “arguable legal position” that allowed him to deduct the input VAT, and therefore lacked the criminal intent to defraud. The Advocate General dismantled this argument by drawing a critical distinction. Any legal uncertainty may have applied to businesses that were merely negligent or should have known about fraud elsewhere in the chain. However, it offers no protection to a business that is an active and intentional participant. The court found that the director’s actions—including submitting a falsified Chamber of Commerce extract and a fake introductory letter to legitimize a supplier—firmly placed his company in the category of an active participant, making the defense irrelevant.
This opinion serves as a stark reminder of how courts establish a director’s personal intent and liability. The conviction was not based on a single oversight but on a compelling pattern of behavior that made claims of ignorance untenable. The director had received a prior general warning from tax authorities about VAT fraud. He proceeded to do business with suppliers whose registered activities were completely unrelated to his industry (e.g., building cleaning services supplying computer software). He accepted goods delivered through a window at a residential address and failed to conduct his own verification of supplier credentials, instead relying on and submitting documents that were later proven to be forgeries. For business leaders and their legal counsel, the message is clear: a consistent failure to scrutinize suspicious circumstances will be interpreted not as poor judgment, but as willful intent to participate in fraud.
SOURCE
Source: Parket bij de Hoge Raad (Public Prosecutor’s Office at the Supreme Court of the Netherlands)
