Media Analyst
25 October 2017 – I just love the smell of a dawn raid in the morning (apologies to Lt. Col. Bill Kilgore):
U.S. regulators often note they would love to have one power that the EU Commission and other EU regulators have but they do not: the “dawn raid” (unannounced inspections on companies’ premises and “related parties” premises). It is given to the Commission so it can perform its role of enforcing the Treaty on the Functioning of the European Union. EU member states have similar statutes. There are rules and procedures for its execution … for the Commission, it may only inspect premises other than business premises if it has a reasonable suspicion that books or other records related to the business may be relevant to prove a serious violation of the Treaty … but few dawn raids have been successfully defeated when companies have appealed to the courts (although see the Jones Day story below).
And it has spawned a mini-practice within most major EU law firms which have developed specialised units that focus on these raids, working in concert with a bevy of e-discovery/forensics vendors. As we have noted before, scores of corporations and law firms use ediscovery technology following a dawn raid as well as for large-scale compliance audits. Check with your e-discovery provider.
Dawn raids by the European Commission and by national authorities are invariably stressful situations which require fast and cool-headed reactions from those on the site of an inspection, and from those leading the company’s legal strategy in response to the investigation. Certain decisions taken during a dawn raid inspection can have a direct impact – either helpful or damaging – on the eventual outcome of any subsequent investigation. So preparation by any personnel who will be involved in a dawn raid – either through direct exposure to an inspection team, or through management of legal and other corporate responses to the inspection – is essential.
According to a story in Reuters yesterday (which we confirmed by an independent source), Freshfields Bruckhaus Deringer’s Frankfurt office has been raided by German prosecutors in connection with a tax evasion investigation, the so-called “cum-ex” transactions, which are at the center of one of the largest tax scandals in Germany.
Background: the asset-stripping deals have allegedly been used by a number of banks in Germany to claim billions of euros in rebates from authorities in the country before a loophole was closed in 2012.The loophole effectively allowed two parties to claim ownership of the same shares enabling both parties to receive the rebates.
German newspaper Sueddeutsche Zeitung, which broke the news of the raid on Freshfields, claimed that it related to an opinion that the Magic Circle firm had prepared for Canada’s Maple Financial Group Inc. The German arm of the bank, which was raided by German authorities in connection with the tax evasion investigation in 2015, was closed by German authorities last year amid worries that unpaid taxes were threatening its financial position.
Forcing the expected statement from the law firm:
“Freshfields is confident that the prosecutor’s review will reveal that our advice has been legally sound”.
There must be competition going on amongst German firms: earlier this year, Jones Day’s Frankfurt office was raided by German authorities investigating its client, Volkswagen AG. Jones Day had carried out an internal investigation into an emissions-rigging scandal at Volkswagen.
Important note: a German court later ruled that the documents seized could not be used by investigators looking into the scandal.
And not to be outdone, Freshfields also had a role representing Volkswagen, having advised on the company’s $4.3 billion settlement with the U.S. Department of Justice.
Dawn raids across the EU relating to tax evasion have spiked … mostly by member state regulators … and the UK has joined the party. What’s interesting … especially in the UK … is that dawn raids on suspected tax evaders have increased by one-third this year as the UK’s tax authority …. HM Revenue & Customs (HMRC) … has stepped up its pursuit of white-collar fraudsters. Jason Collins, head of tax at law firm Pinsent Masons, said dawn raids were a vital way for HMRC to get hold of crucial evidence. He said in a Financial Times interview:
“By raiding premises, HMRC not only hopes to be able to seize the proof it needs to build its case, but also to clearly show strength and intent which should act as a deterrent to others. There is a message here.”
And according to my UK contact at the accounting firm EY, expect a greater spike in the UK. The introduction last moth of a new corporate criminal offense of failure to prevent the facilitation of tax evasion has a measure that enables HMRC to prosecute companies and partnerships which fail to prevent staff from engaging in or encouraging tax evasion. Banks and professional services companies have a high risk of their staff or agents being involved in tax evasion, because of the large amount of capital handled by them. But note the new offence applies to all sectors, so companies should be aware of how they may be affected.
And in Switzerland, our e-discovery document review unit recently staffed one part of a doozy of a project. The Netherlands led a coalition of five tax authorities conducting a criminal investigation into undeclared “black” accounts and money laundering, executing dawn raids on homes and offices in France, The Netherlands and Switzerland. If you’ve been following the Swiss press, prosecutors have been acting on tip-offs from the “Swiss Edward Snowden” on assets hidden within offshore accounts and policies, estimated to be in the millions of euros. Sorry. We shall not name the target. Spruce up on your German.
For those of us in the European Theatre of War (e-discovery speaking) these are heady times. The work is there to pick off the trees. It is probably why, in Rob Robinson’s eDiscovery Business Confidence Surveys we see a continuing spike in e-discovery related work in Europe.
If you operate in the EU, conduct a few mock dawn raids. Check with your law firm, and/or your e-discovery provider. We work with the Paris-based law firm Aramis Law (which operates across Europe) because they have partners who trained in e-discovery at U.S. law firms and they have an extensive EU practice.
Because … suffice it to say … the way in which a dawn raid is handled can have very significant financial consequences, both for an organization’s reputation and also for their market value. Fines can be imposed and enhanced where co-operation is inadequate and failure to secure privileged documents can also prejudice rebuttal and defense.
