Federal Court of Justice: Detection of criminal acts in criminal tax law also possible by foreign authorities / Significance of an efficient compliance system and its optimization after legal violations as a penalty assessment criterion

In its recently published ruling of May 9, 2017, the German Federal Court of Justice (BGH) made several findings of practical relevance. In its decision, the Federal Court of Justice confirms that the discovery of a crime, which is required by law, is not a crime. § 371 para. 2 S. 1 Nr. 2 AO precludes a voluntary disclosure from having the effect of exempting the offender from prosecution, even if the offence is discovered by foreign authorities. At the same time, the BGH clarified that, when assessing corporate fines, mitigating consideration must be given to whether an efficient compliance system has been implemented. In addition, how the company and its management behaved after legal violations were uncovered may play a role.

The judgment (BGH ruling dated May 9, 2017; Ref.: 1 StR 265/16)

The defendant, a senior executive of a German defense company, had been convicted in the first instance by the Munich I Regional Court of various tax offenses. A fine was imposed on the defense company as an accessory. The background to the conviction was – in simple terms – an arms deal between the company and the Greek state in 2001, which was based on a bribery agreement between the company’s management and the Greek defense minister. The defendant had released an invoice which served to conceal the bribe payment, as well as not paying tax on commission payments (“refunds”) himself. During the ongoing investigation, the defendant filed a voluntary declaration regarding his German income with the German tax authorities.

In the course of the investigation, the Greek authorities came into possession of bank statements proving the commission payments. Accordingly, the BGH assumed that the Greek authorities were aware of the commission payments at the time of the defendant’s voluntary disclosure. According to the BGH, the voluntary disclosure submitted to the German tax authorities thus fails to have a penalty-exempt effect pursuant to Section 371 (1) of the German Income Tax Act. 2 S. 1 No. 2 AO of the discovery of the offense by the Greek investigating authorities.

Tat discovery

An act discovery pursuant to § 371 para. 2 p. 1 no. 2 AO is assumed if the probability of a convicting finding is given in the preliminary assessment of the offense. The requirements for the probability prognosis must not be overstretched, as this is still regularly made on a narrow factual basis. Thus, neither sufficient suspicion is required, nor that the perpetrator of the tax evasion has already been identified.

Rather, it is sufficient that concrete evidence of the act as such is known. It is true that the knowledge of a tax source alone is not sufficient for an act to be discovered. However, the act is discovered if further circumstances suggest a tax offense or tax misdemeanor according to general criminalistic experience. The act is therefore always discovered when a comparison with the corresponding tax returns has taken place. However, crime detection is conceivable even before a comparison if the manner of concealment is, according to criminalistic experience, a significant indication of incomplete or incorrect information.

Furthermore, the act can be discovered not only by tax authorities, but by anyone, including private individuals. However, it is necessary that the findings are likely to be forwarded to the authorities. According to the current ruling of the Federal Court of Justice, the same also applies to members of foreign authorities if the state in question provides international legal assistance on the basis of existing agreements. The assessment of whether disclosure of the information is likely depends on how likely it is that mutual legal assistance will be granted. According to the BGH, such a situation cannot arise only at the time when the foreign authority decides to grant legal assistance. On the contrary, it may already coincide with the obtaining of the information on the criminal offense, provided that at that time the granting of mutual legal assistance is probable. Whether or not this is the case depends on the respective practice of the state concerned with regard to legal assistance in fiscal matters.

In the present case, according to criminalistic experience, it was “extremely obvious” to the Greek authorities, due to the way the payments were concealed, that the defendant had not declared the income to the tax authorities in Germany. Furthermore, in view of the great media interest and the scope of the case, it was to be expected that the findings would be forwarded to the German authorities. Thus, the act was considered discovered within the meaning of § 371 para. 2 S. 1 Nr. 2 AO, so that the penalty-exempt effect of the voluntary disclosure could not come into effect.

In this context, reference should also be made to the OECD Convention on Mutual Administrative Assistance in Tax Matters. Article 6 of the Convention provides that two or more Contracting Parties may exchange tax information automatically in categories of cases determined by them and according to a specified procedure. For practical purposes, however, it should be noted that the automatic exchange of information is merely international administrative assistance. This cannot be seen as legal assistance, i.e. international cooperation under criminal law, as the Federal Court of Justice presupposes in its judgment. The exchange of information is thus not relevant for the detection of crimes by foreign authorities, but it is relevant for the detection of crimes by German authorities. Against this background, it may be urgently recommended to consider the possibility of a voluntary disclosure prior to a possible discovery of the offense by German authorities.

Amount of fine / existence of a compliance system

In addition, a fine was imposed on the defense contractor pursuant to Sec. § 30 OWiG imposed. This provision makes it possible to impose a fine on legal entities, linking it to criminal or administrative offenses committed by their managers. However, according to the BGH, if several management personnel participate in one and the same criminal act, only one fine can be imposed on the company. However, when assessing this fine, the culpability of all management personnel involved in the linking act must be taken into account in order to increase the fine.

On appeal by the public prosecutor’s office, the BGH overturned the fine imposed on the company: The Regional Court had wrongly based its assessment of the fine exclusively on the culpability of the defendant, but had not also taken into account the wrongful acts committed by the shareholder-directors involved when assessing the fine.

In this context, the BGH pointed out for the new hearing that, when assessing the fine, it is also relevant to what extent the company has fulfilled its duty to “prevent infringements of the law from the sphere of the company and has installed an efficient compliance management, which must be designed to prevent infringements of the law”. According to the Federal Court of Justice, actions by the company that it has only implemented as a result of the state investigation, such as the optimization of the relevant regulations and the structuring of internal processes in such a way “that comparable violations of standards are in any case made significantly more difficult in the future”, should also expressly play a role here.

With this ruling, the BGH has for the first time commented on the controversial question of whether and to what extent the establishment of a compliance management system (CMS) can be taken into account when calculating a fine pursuant to Section 30 OWiG – with a reduction in the fine. In contrast to some foreign legal systems (USA: FCPA; United Kingdom: UK Bribery Act), this possibility has not been standardized by law in Germany. Following a view already expressed in the literature, the Federal Court of Justice (BGH) has now come out in favor of taking this into account.

Level of fines / revision of a compliance system following misconduct

In addition, the BGH also emphasized that in the specific case it must be examined not only whether an efficient compliance system was implemented, but also whether this was optimized after the legal violations became known in such a way that comparable violations of the law are at least made significantly more difficult in the future.

Compliance system and intentional tax evasion

The BGH’s decision fits into an overall picture according to which the legislator also rewards the introduction and maintenance of a compliance system, at least in the area of criminal tax law. For example, the Federal Ministry of Finance documented a positive effect of internal control systems with regard to the demarcation between voluntary disclosure and correction pursuant to Section 153 of the German Fiscal Code (AO) in the Application Decree on the AO (AEAO) dated May 23, 2016. According to this, an internal control system, which serves the fulfillment of tax obligations, may possibly represent an indication, which can speak against the existence of intent or recklessness. It can therefore help to invalidate the accusation of intentional tax evasion.

IV. Conclusion and recommendation for action

If a tax crime has already been discovered – whether by national or foreign authorities – this does not mean for the company that “the child has already fallen into the well.”

Against the background of the ruling of the Federal Court of Justice and the application decree of the Federal Ministry of Finance, there are many possibilities to influence the outcome of preliminary or main proceedings in favor of the company. In particular, it is important to implement an efficient compliance system and to take consistent action in the event of violations.

We are happy to support you in implementing, reviewing and, if necessary, also improving a compliance system.

In disputes, we represent companies and legal representatives before the German criminal and tax authorities.