Recently, the People's Procuratorate of Tianxin District concluded its examination of the case of an electronic technology company (hereinafter the "Company") and its legal representative, Zong X, who were suspected of falsely issuing value-added tax ("VAT") special invoices, and decided not to prosecute the company and its legal representative has been made.
The Company is a private enterprise engaged in the sale of electronic components. In 2016, Zong X was suspected of falsely issuing VAT special invoices because he purchased VAT special invoices by paying "invoice fees" for tax deduction, resulting in a loss of state taxes of CNY149,500. In July 2021, the case was transferred to the People's Procuratorate of Tianxin District for examination and prosecution.
During the examination, the prosecutor found that the Company had a good development prospect, but it was very likely to break down if prosecuted due to its poor internal management mechanism. Giving such a typical small and micro enterprise the opportunity for compliance rectification, it may not only save the Company, but also drive the associated enterprises and even other small and micro enterprises to operate in compliance with the law, which can achieve the effect of "handling one case and inspiring others". After reporting to and approved by the People's Procuratorate of Hunan Province, the People's Procuratorate of Tianxin District decided to conduct a compliance review of the Company.
This is the first corporate compliance reform case in Tianxin District, Changsha City. In order to give full play to the role of the third-party supervision and assessment mechanism, the People's Procuratorate of Tianxin District established an expert group of five people, including lawyer, certified public accountant, tax professional, and business manager, to conduct compliance inspection on the Company and provide opinions. Tiandiren senior partner Yanglin participated in the whole process of the case as the leader of the expert group and guided the Company to make compliance rectification. Eventually, the Company passed the evaluation and obtained prosecutor’s decision not to prosecute.
It is reported that since the Supreme People's Procuratorate ("SPP") launched the pilot program of corporate compliance reform in March 2020, the procuratorates have handled 1777 corporate compliance cases by the end of May 2022, of which 1,197 cases applied the third-party mechanism, accounting for 67.36% of all compliance cases, involving 1,222 enterprises, with 14 enterprises failing the examination, and 333 enterprises and 1106 persons obtained the prosecutor's decisions not to prosecute after completing compliance rectification.
Causes of the Involvement
According to the written materials submitted by the Company and the statement of its managers, as the counterparty of the transaction was not qualified to issue special VAT invoices and the Company, in reliance on its fluke, purchased special VAT invoices from other company. The causes of the Company's involvement in the case mainly include that the legal representative has excessive decision-making power of the legal representative over the Company's operation, unclear responsibilities of each position, weak awareness of overall compliance management, failure to establish an effective tax invoice audit mechanism, lack of compliance management supervision mechanism, and imperfect accounting system.
Process of Rectification
1. Compliance construction: focus on specific compliance and aim for comprehensive compliance
Since August 2021, the expert group led by lawyer Yang Lin has, according to the relevant compliance management standards and the specific tax-related management defects in the operation process of the Company and in light of its actual operation, guided and supervised the Company to achieve the phased achievement of compliance construction in such aspects of "building a corporate compliance supervision team", "optimizing the allocation of posts and personnel", "special tax-related compliance training, education and examination" and "establishing a compliance supervision mechanism".
Through months of efforts, the Company has gradually established sound management system for business operation, financial management as well as compliance and internal control, and have corrected its original barbaric and extensive development and operation mode through compliance rectification, so as to raise the compliance awareness and responsibility among management and staff, and enhance MSEs' ability to resist and prevent compliance risks.
2. Compliance evaluation: a multi-dimensional evaluation of the effectiveness of the compliance plan and the compliance management system
Lawyer Yang Lin, together with other professionals of the expert group, paid a field visit to the Company, held special meetings, examined the compliance rectification, and supervised the rectification progress in real time. They carried out independent corporate compliance supervision and assessment of the case in strict accordance with the relevant provisions of the Guiding Opinions on the Establishment of the Third Party Supervision and Evaluation Mechanism for the Compliance of Enterprises Involved in Cases (for Trial Implementation) formulated by the Supreme People's Procuratorate and other eight ministries and commissions.
After three rounds of rectification, the team carried out a comprehensive evaluation and assessment of the implementation of the Company's compliance plan. Upon evaluation, it concluded that the Company had completed compliance rectification, and submitted a Compliance Examination Report of the Third-Party Organization with more than 100 pages to the People's Procuratorate of Tianxin District.
3. Compliance review: to review the results of the third-party organization's evaluation in terms of form, procedures and substance to ensure the effectiveness of compliance construction of the Company.
On April 15, 2022, the People's Procuratorate of Tianxin District organized a hearing for compliance rectification of the Company.
At the hearing, Yang Lin, as the representative of the expert group, introduced the work of the group, the rectification of the special compliance plan of the Company and the results of compliance evaluation.
After hearing and inquiring about the rectification, the hearing officer concluded that the Company had met the compliance requirements, and accordingly suggested to the People's Procuratorate of Tianxin District that the Company and legal representative should not be prosecuted. On the basis of the hearing and the compliance review, the People's Procuratorate of Tianxin District concluded that the compliance construction of the Company was positive and effective, and accordingly made a non-prosecution decision against the Company and its legal representative.
Insights
This case is one of the first cases in Hunan Province to which the “corporate compliance non-prosecution system” applies. The People's Procuratorate of Tianxin District made procuratorial suggestions on the management loopholes of the enterprises involved, guided the corporate operations to the track of the rule of law, and let the enterprises "survive", "stay" and "operate well". The People's Procuratorate of Tianxin District has demonstrated the efficiency of active participation in social governance with its actual action, and achieved organic unity of political, legal and social effects of judicial handling of the cases.
"The construction of the corporate compliance system requires strong comprehensive capabilities of the service team and relies on the collaboration of all parties to give full play to their professional strengths," said Yang Lin. Whether as a third-party supervisor or a compliance team hired by the company itself, it needs to be fully prepared with the knowledge base, professional competence, team structure and comprehensive service capability. To this end, Tiandiren has set up a specialized committee on corporate compliance to contribute more valuable and dynamic legal services in corporate compliance reform and services to ensure quality economic and social development through team-based and professional collaboration.
