Criminal Defence in Corruption and Tax Fraud Matters

For most people, the connection between a company tax audit and subsequent prosecution for corruption is only discernible on a second glance, because the tax officers are usually only interested in fiscal matters and mandated to audit tax-relevant circumstances. The backdrop for later criminal proceedings is usually § 4 Sec 5 No 10 EStG, which stipulates that non-deductible operational expenses may include payments representing a criminal offence or sanctioned by a fine (colloquially “bribes” or “beneficial expenditure”).

This breaks down to the following: Bribes are not deductible operational expenses. The tax auditor must report an initial suspicion of bribery to the public prosecutor, as provided for in §4 Sec 4 No 10 lit 3 EStG. The Federal Fiscal Court has affirmed this statutory duty to report. (BFH dated 14.07.2088, Az. VII B 92/08).

If the tax auditor holds an initial suspicion (of corruption), he will comply with this duty for his own sake, because failure to do so would result in the offence of obstruction of justice by a public servant being committed. This was emphatically pointed out by the Federal Fiscal Court (BGH dated 30.04.2009, Az.1 StR 90/09).

The most frequently committed corruption offences are the granting of an undue advantage (§ 333 StGB), bribery of officials (§ 334 StGB) and commercial bribery (§ 299 StGB). While the offence of bribery presupposes a causal connection between the bribe and the returned performance, the act of giving something without expecting a predefined return performance suffices for the offence of granting an undue advantage. Typical cases are “presents to foster good will”.

Money required for handing out bribes is often held in so-called slush funds. This is an explosive situation, both from a criminal as well as from a taxation perspective. Logic dictates, that slush funds cannot originate from taxed income. To avoid detection of the slush funds by German authorities, e.g. by way of requesting account information from German banks, they are frequently parked in foreign trusts or charitable foundations.

The failure to subject the slush funds and the income generated by the charitable foundations/trusts to tax constitutes an evasion of income tax, corporate tax, sales tax and commercial tax. The establishment and maintenance of slush funds also meets the criteria for the offence of embezzlement as set out in § 266 StGB. Finally, the actual act of bribery must be considered in terms of its ramifications in criminal law.

A “Kick-back” payment means a company offering products or services at an inflated price, in order to funnel back the surplus (or part thereof) to the decision-maker of the business partner. Criminal and tax consequences are inevitable.

This is, because the surplus is usually not declared as revenue or the subsequent repayment is accounted for as operational expense (in breach of § 4 Sec 5 No 10 EStG). “Kick-back payments” will result in the offenders or their aides being subjected to criminal prosecution for tax fraud, bribery and embezzlement.

Payments to a sole trader carry no risk of criminal prosecution - at least in respect of corruption. A company owner - including a sole shareholder of a GmbH (controversial) - cannot be bribed under applicable criminal law. He is at liberty to make a business transaction subject to a “consideration”.

Caution is advised. This “consideration” represents taxable income. If, for example, the funds are transferred to an anonymous account in a tax haven, the payer may have committed the offence of abetting tax fraud.

Liability under § 71 AO is of particular (financial) significance for corporate bodies (director, executive board, supervisory board) and other decision-makers.

It stipulates liability for those persons, who have committed or abetted tax fraud, e.g. if the tax debtor (e.g. the company) becomes insolvent or impalpable. The Fiscal Court of Cologne has ruled, that any attempt to obfuscate the actual recipient of a bribe suffices to be held liable (Cologne Fiscal Court dated 18.11.2011, case number 10 V 2432/11).

As attorneys / tax law specialists / tax advisers in Cologne, we assist you in preventing actions that would constitute the crime of corruption.

In some regions of this world, corruption (which is an offence in Germany) is a frequent occurrence in daily business. We assist German companies and their decision-makers in dealing with this difficult situation.

Further complications with the tax investigator can be prevented: This particularly avoids the liability issues mentioned above, which can have grave financial consequences. If tax fraud has been committed, the perpetrator may still be exempt from prosecution if a valid voluntary self-disclosure is submitted (§ 371 AO). The hurdles for a valid voluntary self-disclosure have however been set very high since the corruption laws came into effect on 28.04.2011, but it can be still achieved with the professional assistance of our attorneys / tax law specialists / tax advisers. Avoiding suspicious conduct is simple in theory. Bribes must be accounted for as non-deductible operational expenses as set out in § 4 Sec 5 No 10 EStG and added to the operational result for the purpose of calculating the taxable profits. So far in theory.

The problem in practice is the duty to report upon an initial suspicion of an offence being committed (§ 4 Sec 5 No 10 lit 3 EStG). The auditor will promptly comply with this duty to report, because he would otherwise be liable for prosecution for the offence of obstruction of justice. This means, that if a high amount is declared as “non-deductible operational expenses” under § 4 Sec 5 No 10 EStG in the company accounts, this will most likely entail a report to the public prosecutor.

To prevent this, no further details should be provided in respect of the non-deductible operational expense (bribes in the meaning of § 4 Sec 5 No 10 EStG). This will nevertheless attract the increased attention by the auditor. Without further background information, this should however not suffice for a report, because the amounts might also be other types of “non-deductible operational expenses”. It should in any case be pointed out to the auditor, that he is not permitted to report the situation to the public prosecutor or other third parties without a justified initial suspicion. If he does so nevertheless, he is liable for prosecution of the offence of breaching tax confidentiality under § 355 StGB.

It might also be helpful to mention the jurisprudence by the Federal Constitutional Court, which holds that accounting for expenses as “non-deductible operational expenses” is in itself not sufficient ground for taking action under the criminal code of procedure. The fact, that a taxpayer accounts for certain expenditure as non-deductible operational expenses and declines disclosure of the recipient of such expenditure, is not sufficient to justify a suspicion of bribery (BVerfG dated 09.02.2005, case number 2 BvR 1108/03). The designation of such a payment’s recipient is not prescribed by law, and its omission is not an offence. It only results in the payment being classified as a non-deductible operational expense (§ 160 AO), as was intended at the outset.

The provisions of § 160 AO may be the ideal solution, depending on the individual situation. If the bribes were unlawfully accounted as deductible expenses, it is recommended to submit a voluntary self-disclosure, which is possible if the offence has not been detected yet and no other estoppels preclude doing so. If the voluntary self-disclosure is valid, exemption from prosecution would at least be secured for the offence of tax fraud. Disclosing the recipient of a payment may be declined by referring to § 160 AO and the (intended) non-deductible character of the payment.

You should refrain from making up stories in respect of the background of “non-deductible expenses”. On the one hand, you will often be caught up in contradictions, on the other hand it often raises the curiosity of a psychologically trained tax auditor. Bribes are also frequently accounted for as tax-neutral loans. This may appear as an elegant solution on first glance, but it turns into a problem when the tax auditor requests to see the loan agreements and details on the parties to it.

A differentiation must be made in respect of criminal consequences for the participating individuals and for the company. Financial penalties can be a significant financial burden for the affected company and must be prevented or mitigated. Being recorded in the so-called corruption blacklist should be avoided by all means.

Financial penalties or imprisonment may be imposed on participants in corruption, which includes the giving and receiving end (offender, accomplice, abettor). If a German public servant is bribed, imprisonment of at least one year, possibly suspended on a good behaviour bond, is the mandatory sentence under § 334 StGB.

If public servants in a EU-member country are bribed, the EU-Bribery Act (EU-BestechungsG) applies since 10.09.1998. If the bribery occurs outside of business life (e.g. an employee of a company) and public servants of non-EU-member countries are bribed, the offender is liable for prosecution in Germany under the International Bribery Act (IntBestG). The wide scope of the term public servant in Art 1 Sec 4 a IntBestG is noteworthy.  

If companies have benefited of the bribery, the financial sanctions are extensive. All financial benefits may be rescinded from the company. The Federal Fiscal Court calculates the financial benefit by applying the gross principle. This means that the expected profit at the time of obtaining a contract by way of corruption is considered. Depending on the transaction volume, the penalty described as forfeiture of the value of the assets may go into the millions (e.g. Siemens AG was sentenced by the Darmstadt Higher State Court to a forfeiture of the value of assets in the amount of EUR 38 million, the judgement was set aside due to a formal error (Federal High Court dated 29.08.2008, case number 2 StR 587/07).

Companies engaging in international trade are also faced with the problem of multiple financial penalties in different countries. The UK should be mentioned here, which has increased sanctions under the UK Bribery Act. Jurisprudence, not only in Germany, has a long way to go in clarifying the question of multiple penalties in different countries. It remains to be seen, if and how far the international legal principle “ne bis in idem” (no-one can be penalised twice for the same offence) applies in this context. In addition to forfeiture of assets, the company may be liable for a fine under § 30 OWiG.  

These fines will be painful for most companies, but will not threaten their existence. This however changes, once a company which depends on public contracts is included in the corruption blacklist.

Compare:

• Corruption blacklist Cologne (NRW) www.vergabe.nrw.de
• Hamburg: http://www.hamburg.de/pressearchiv/3331504/2012-03-13-fb-antikorruptionsregister.html
• Berlin: www.stadtentwicklung.berlin.de/service/korruptionsregister/
• Munich (Bavaria): www.stmi.bayern.de
• Frankfurt (Hesse): www.esf-hessen.de
• Stuttgart (BW): www.rp.baden-wuerttemberg.de

If the corruption was accompanied by a tax offence, exemption from prosecution may be available by submitting a voluntary self-disclosure.

• Advice on conduct during searches in residential and business premises by the police, public prosecutor or tax investigator
• Information on the federal and state corruption blacklists
• Information on the central EU blacklist
• General advice on criminal tax law and voluntary self-disclosure