Law Articles
2025-12-09
Law Articles
Legal Risks of Taiwanese SMEs’ Habitual “Two Sets of Books”: Criminal Liability and Governance Challenges under Stricter Regulations
【Partner Lawyer Charlotte Wu, Zhong Yin Law Firm】
charlotte.wu@zhongyinlawyer.com.tw
charlotte.wu@zhongyinlawyer.com.tw
In Taiwan’s business environment, some traditional small and medium-sized enterprises, due to early industry culture, tax cost considerations, or family-style management models, have long maintained parallel accounting systems of "internal books" (actual operations) and "external books" (external reporting). Such practices were often viewed in the past as industry convention, but with the comprehensive strengthening of financial supervision, anti-money laundering, tax reconciliation, and KYC mechanisms, the legal risks arising from maintaining two sets of books are no longer merely tax issues; they have expanded into substantial criminal liabilities across multiple domains.
If enterprises fail to adjust their systems in a timely manner, they may not only face audits by competent authorities and reports by banks, but the dual books may also be used as tools for attack or coercion during internal shareholder disputes or management control conflicts, becoming potential triggers that could undermine business operations. Therefore, how to promptly reform governance mechanisms and establish a transparent, compliant accounting structure has become a core issue that every traditional SME cannot avoid.
This article will, based on current regulations, analyze the main legal liabilities that a two-set-of-books system may involve; then discuss the legislative background, purposes, and impacts of the newly added and more heavily penalized offenses over the past decade—"bank fraud" and "money laundering"; and finally present simulated cases to illustrate the chain risks that maintaining two sets of books may trigger.
A. Primary legal liabilities potentially involved in maintaining two sets of books
1. Embezzlement in the course of business (Criminal Code Article 336, Paragraph2)
If managers or finance personnel divert company funds through discrepancies between internal and external accounts, they may constitute the crime of embezzlement in the course of business, punishable by imprisonment from six months to five years.
2. Breach of trust (Criminal Code Article 342, Paragraph 1)
Material misstatement of accounts causing financial loss to the company may constitute the crime of breach of trust by a responsible person, punishable by imprisonment of up to five years.
3. False Business Statements (Criminal Code Art. 215)
Recording false income, costs, inventory, or financial indicators in external accounts or external documents may constitute the crime of falsifying business records, punishable by imprisonment for up to three years.
4. Tax evasion (Article 41 of the Tax Collection Act)
Failing to declare income, fabricating expenses, and similar acts may constitute the crime of tax evasion, punishable by imprisonment for up to five years and a fine of up to NT$10 million. If an individual's evaded tax reaches NT$10million or more, or a business's evaded tax reaches NT$50 million or more, the penalty is imprisonment for one to seven years and a fine of NT$10 million to NT$100 million.
5. Crime of false accounting (Article 71 of the Business Accounting Act)
Recording false items in account books (inflating costs, forging supporting documents, failing to record income, etc.) may constitute the crime of false accounting, punishable by imprisonment of up to five years.
B. Newly added and more severe legal liabilities: bank fraud and money laundering offenses
In the past decade, revisions to financial supervision and anti–money laundering legislation have rapidly amplified the criminal risks arising from inaccurate accounting in small and medium-sized enterprises.
- Article 125-3 of the Banking Act (bank fraud): If a company submits false financial statements to a bank to obtain a loan, the penalty can be imprisonment for not less than three years and not more than ten years, together with a fine ofNT$10 million to NT$200 million, far exceeding traditional financial crimes.
- Anti-Money Laundering Act (money laundering): Hiding proceeds of specified crimes or disguising their origin, including tax evasion, breach of trust, bank fraud, etc., carries a maximum penalty of three to ten years’ imprisonment and a fine of up to NT$100 million.
C. Case: Traditional Accounting Practices Trigger "Chain-type" Increased Legal Risks
■ Background:
Company A was established in the 1980s and is a typical family-run SME. Major shareholder and manager B long practiced a system of internal and external books to handle the company's accounts. During this period the business operated fairly smoothly and made profits, and also negotiated with banks to obtain corporate credit loans; principal and interest payments on the loans were all made on time. Later new shareholder C joined. Shareholder C had different views on the business direction and clashed with manager B. Because C asserted shareholders' rights to inspect the accounts, friction arose with manager B, and C ended up reporting Company B. A bank credit review uncovered abnormal cash flows, prompting intervention by the tax authority and prosecutors/investigators, who uncovered the following potential criminal investigation lines:
- Inflating revenue in external books to obtain loans → false business records, bank fraud.
- The internal books show large amounts of income not reported for tax → tax evasion, inaccurate accounting
- Company funds transferred into the responsible person's family accounts → business embezzlement, breach of trust.
- Funds reinvested into real estate → if derived from criminal proceeds money laundering offense.
■ Risk chain:
Inaccurate accounting → False financial statements False loan applications Tax evasion Proceeds of specific crimes Money laundering Asset freezing and cumulative sentencing
Such cases have gradually increased in recent years, indicating that investigative authorities and banks' KYC processes have "shifted from financial anomalies toward money laundering investigations." Some are also driven by obligations imposed on relevant financial institutions under anti-money laundering regulations.
D. Conclusion: Enterprises should raise their legal risk awareness
Under the new regulatory framework, the two-sets-of-books system is no longer merely a tax issue, but can trigger: criminalized bank fraud liability, high-penalty money laundering investigations, and multiple criminal charges such as false financial reporting, breach of trust, and embezzlement.
Traditional Taiwanese small and medium-sized enterprise owners should also understand that, under increasingly fragmented regulations, even though the original purpose of the Anti‑Money Laundering Act was to combat major crimes such as drug trafficking and smuggling that launder illicit funds, current interpretations of the Act mean that various common small and medium‑scale economic crimes can also come under the AML law’s magnifying glass. Business owners should conduct cash flow compliance and anti‑money‑laundering reviews and heighten their sensitivity to respond to these kinds of legal risks.
Our firm's attorneys possess professional legal expertise and practical experience, combined with a deep understanding of commercial business operations, enabling us to provide clients with professional advice to reduce future criminal and administrative risks. We can also assist clients under investigation by providing immediate litigation representation to seek to minimize legal liability as much as possible. Such legal risks must not be taken lightly by traditional small and medium-sized enterprises; beyond the possibility of being discovered through random inspections or whistleblowing, they may also surface during shareholder disputes or be wielded as a weapon by one party in contests for control.
