Can a shareholder be convicted of credit fraud?
With the information in the public domain that law enforcement authorities have opened a pre-trial investigation into suspected credit fraud in a company owned by the Prime Minister, questions arise as to what the allegations mean, who can be prosecuted, and whether only the head of the company is liable, or whether the shareholder is also liable.
There are a number of cases of farmers and entrepreneurs who have been tried for fraudulently obtaining loans or aid, so this case is neither new nor exceptional.
What constitutes credit fraud?
According to the Criminal Code of the Republic of Lithuania, credit fraud is a situation where a loan, aid, subsidy or grant is obtained by fraud. Such acts are qualified as a criminal offence under Article 207 of the CC.
Fraud usually involves misrepresentation, including information about the borrower's financial situation. However, such information is only considered fraudulent if it was decisive for the creditor's decision to grant financing.
The objective part of Article 207 of the Criminal Code is that the perpetrator obtains a loan or credit by deceiving the victim. The person must be aware that he or she is acting fraudulently and is seeking a pecuniary advantage or knowingly allowing damage to occur. It should be noted that the fact that a loan has been illegally obtained, irrespective of how it has been used, is sufficient for criminal liability.
For example, if a person knows that his or her existing company does not qualify for soft loans, but sets up a new company, obtains a loan and uses the funds to operate the old company, this could amount to credit fraud.
Setting up companies or selling assets is not prohibited. However, if such transactions are carried out with the criminal intent of obtaining financing by deception, they may be considered a crime.
Who can be prosecuted?
As a rule, specific natural persons acting on behalf of a legal person are prosecuted. This can include:
CEO - if he or she decided to apply for a loan and then used the funds for the benefit of another company;
- Company staff responsible for drafting or signing documents;
- Shareholders - if they gave instructions to carry out unlawful acts or took other decisions related to the offence.
Can a shareholder be convicted?
Being a shareholder in a company that has received credit does not automatically mean that you will be prosecuted. However, if it is established that the shareholder not only invested, but also effectively controlled the company, exercised shareholder rights, gave instructions or encouraged fraudulent conduct, he or she may be liable.
Evidence of shareholder-manager communication, shareholder decisions and shareholder knowledge of activities is crucial in such investigations. It also assesses whether the manager was not merely a formal figure (a figurehead).
A shareholder can only be prosecuted if his role goes beyond that of a passive shareholder to active participation in the illegal activity - especially if he acts as a de facto manager.
What are the possible consequences?
In addition to personal criminal liability (fines, imprisonment or restriction of liberty), the company itself can also be sentenced. It can be fined, restricted or even wound up. It may also be liable to claim damages.
Egidijus Kieras, Attorney at Law, AVOCAD