Investigations trends/developments
The activity levels of German criminal prosecution authorities and courts surpassed recent benchmarks as the authorities worked through backlogs caused by the pandemic. In their wake, the frequency of dawn raids increased. Search and seizure measures in corporate crime cases often extend to the private homes of directors and senior employees, which could be a response to expanded remote working in many companies.
Companies need to be mindful that in the current German tax enforcement environment, there is an increased tendency of tax authorities to bring tax controversies to the attention of criminal prosecution authorities which previously would have been dealt with in tax proceedings only, eg tax audits and fiscal court proceedings. A number of criminal investigation proceedings have been initiated against the backdrop of such notifications, which concern, eg transfer pricing arrangements and the tax residency of foreign companies and involve several national and international private equity and real-estate firms.
The risk of being subjected to criminal proceedings has significantly increased for companies which were historically involved in cum/cum transactions in German shares. Generally speaking, cum/cum transactions involved the transfer of German shares from a foreign shareholder to a German entity before the dividend record date, and a subsequent retransfer to the foreign shareholder, with the aim of reducing or avoiding German withholding taxes on dividends. Various German public prosecutors’ offices have launched investigations into cum/cum trading in 2023.
German criminal prosecution authorities have stepped up enforcement of EU sanctions violations, particularly for financial and economic sanctions imposed against Russia. The German Federal Prosecutor General and local Public Prosecutor’s Offices started criminal investigation proceedings into prohibited transactions, some of which resulted in defendants being arrested and taken into pre-trial detention.
The Federal Court of Justice (Bundesgerichtshof) ruled that the initiation of a ‘self-cleaning process’ after the onset of an investigation can result in a reduction in fines. In the case under review, the company, whose employees were accused and later convicted of fraud and bribery, implemented comprehensive compliance measures and a whistleblower protection procedure. In its judgment, the Federal Court of Justice explained the fine calculation. Notably, the court pointed to the positive impact of implementing a compliance management system, building on a similar sentiment in a decision from 2017.
Most of the Second German Sanctions Enforcement Act (zweites Sanktionsdurchsetzungsgesetz), aimed at improving the enforcement of sanctions, came into force in December 2022. It provides, among other things, for the establishment of a federal central sanctions enforcement authority (Zentralstelle für Sanktionsdurchsetzung), the possibility of monitorships to ensure sanctions compliance, the creation of a register on the assets of sanctioned persons, a ban on cash payments in real estate transactions, and direct applicability of the United Nation’s sanctions lists in Germany.
The German Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtengesetz) became effective in January 2023. Companies with over 3000 employees and, starting from 2024, companies with over 1,000 employees, are obliged to comply with a comprehensive set of due diligence requirements. The new legal obligations include risk assessment, third-party due diligence, and reporting requirements. The potential consequences of non-compliance can be substantial: the Federal Office of Economic Affairs and Export Control (Bundesamt für Wirtschaft und Ausfuhrkontrolle) can levy fines of up to EUR100,000 or EUR500,000 depending on the violation and fines of up to 2% of a company’s average annual turnover for companies with an annual turnover of over EUR400 million.
Internal investigations – key developments
The Whistleblower Protection Act (Hinweisgeberschutzgesetz) came into force in July 2023. Now all companies employing more than 50 people must establish an internal reporting office (interne Meldestelle). The Whistleblower Protection Act enables whistleblowers to claim damages for retaliation measures and reverses the burden of proof on showing causation between reporting and retaliation. Its scope encompasses whistleblowing related to criminal offences, administrative offences as well as violations of EU law. A failure to comply with the Whistleblower Protection Act may result in corporate administrative fines (Unternehmensgeldbußen) of up to EUR500,000.
The draft of the Combating Financial Crimes Act (Finanzkriminalitätsbekämpfungsgesetz) was introduced by the German Ministry of Finance (Bundesministerium der Finanzen) in July 2023. The law is intended to help combat financial crimes more effectively and enforce sanctions more rigorously. At its core is the proposal to establish a Federal Office for Countering Financial Crimes (Bundesamt zur Bekämpfung der Finanzkriminalität). The Federal Office would assume an oversight role in the fight against money laundering, the prosecution of financial crimes, and the investigation of suspicious transactions. It will focus more on illegal financial flows (‘follow the money’ approach) than on predicate offences to better identify money laundering networks. We expect that the Federal Office, once operational, will spark an increase of enforcement activities for suspicions of money laundering. This is likely to result in more enquiries and work for anti-financial crime teams at financial institutions.
Cross-border coordinated investigation or enforcement activity
French and German authorities raided several major international financial institutions in Paris in a joint investigative operation in March 2023. dawn raids were based on a tax evasion investigation that has been underway since December 2021. The search and seizure measure involved numerous French investigating judges, as well as six prosecutors from Cologne, Germany.
Predictions for 2024
The German authorities will continue to focus on the prosecution of tax offenses in 2024. We expect the opening of further criminal trials into cum/ex transactions in the coming year, including against senior employees of international financial institutions, and an expansion of criminal investigation proceedings into cum/cum transactions. We believe that German authorities will also focus on investigating suspected non-compliance with the Supply Chain Due Diligence Act, the Whistleblower Protection Act, the Money Laundering Act, and EU sanctions against Russia. We could also see an increase of regulatory investigations into alleged ‘greenwashing’, in particular in respect of financial products.
Continuously improving their tax compliance systems is of utmost importance for companies operating in the rigid German tax enforcement environment. Managing supply chain risks and evaluating environmental claims is also an important risk-mitigating strategy. Companies outside the financial sector, especially companies commercially trading in goods, which are ‘obliged entities’ within the meaning of the German Money Laundering Act, should focus on the implementation and improvement of anti-money laundering and counter-terrorism financing compliance management systems. The same applies for sanctions compliance management systems, which are often insufficient even at companies engaging in international business transactions.
This article is part of our Cross-Border White Collar Crime and Investigations Review. Please click here for our overviews and insights in other jurisdictions.
