Financial Crime World

German Courts and Prosecutors Crack Down on White-Collar Crime and Finance: A Year in Review

Surge in Criminal Prosecution Activities in Germany

German criminal prosecution authorities and courts have experienced an increase in activity levels, surpassing recent benchmarks. This rise is attributed to the clearing of the backlog caused by the pandemic. Consequently, there have been more dawn raids, even extending to the private homes of directors and senior employees. This intensity might be a response to the growing trend of remote work in corporations.

Increase in Tax Enforcement and Criminal Proceedings

International firms under scrutiny

German tax authorities are becoming more likely to involve criminal prosecution in tax controversies that were previously handled through tax proceedings. Several criminal investigation proceedings have been initiated against international private equity and real-estate firms concerning transfer pricing arrangements and foreign companies’ tax residency.

Historical risks revisited

Companies involved in cum/cum transactions of German shares face an increased risk of criminal proceedings. These transactions, which involved the transfer of German shares from a foreign shareholder to a German entity before the dividend record date and subsequent re-transfer, aimed at reducing German withholding taxes on dividends. Several German public prosecutors’ offices have launched investigations into cum/cum trading during 2023.

Enforcing EU Sanctions Violations

German criminal prosecution authorities are intensifying their efforts to enforce EU sanctions violations, particularly financial and economic sanctions imposed against Russia. Several defendants have been arrested and taken into pre-trial detention for prohibited transactions related to these sanctions.

Reduced Fines through Compliance Measures

The German Federal Court of Justice (Bundesgerichtshof) ruled that a company engaging in a ‘self-cleaning process’ after the onset of an investigation could lead to a reduction in fines. This case involved the implementation of comprehensive compliance measures, including a whistleblower protection procedure, which positively influenced the fine calculation.

Key Legislative Changes Impacting Corporate Criminal Liability

The Second German Sanctions Enforcement Act

Aims to improve the enforcement of sanctions:

  • Establishment of a federal central sanctions enforcement authority
  • Monitorships
  • A register on the assets of sanctioned persons
  • Ban on cash payments in real estate transactions
  • Direct applicability of United Nations sanctions lists in Germany

The German Supply Chain Due Diligence Act

Obliges companies to comply with a range of due diligence requirements:

  • Companies with over 3,000 employees (currently) and, from 2024, companies with over 1,000 employees will be affected
  • Failure to comply can result in substantial fines

Whistleblower Protection Act

Introduced in July 2023:

  • All companies employing more than 50 people must establish an internal reporting office
  • Whistleblowers are entitled to claim damages for retaliation measures
  • The burden of proof shifts to the company
  • Covers various offenses (criminal offenses, administrative offenses, and violations of EU law)
  • A failure to comply with this Act can result in corporate administrative fines of up to EUR500,000

Targeted Sectors

Several sectors are under the scrutiny of law reforms or enforcement actions:

  • Financial institutions
  • Companies in the supply chain
  • International business transactions subject to the German Money Laundering Act

Combatting Financial Crimes Act

This Act aims to strengthen the fight against financial crimes and increase the enforcement of sanctions by setting up a Federal Office for Countering Financial Crimes.

International collaborative investigative efforts

French and German authorities have recently conducted raids on several major international financial institutions in Paris as part of a tax evasion investigation.

Anticipated Criminal Cases

In 2024, we anticipate the German authorities will continue to focus on the prosecution of tax offenses, with further criminal trials into cum/ex transactions and expanded criminal investigation proceedings into cum/cum transactions. There may also be increased criminal investigations into suspected non-compliance with the Supply Chain Due Diligence Act, the Whistleblower Protection Act, the Money Laundering Act, and EU sanctions against Russia. Regulatory investigations into alleged ‘greenwashing’ may also increase, specifically regarding financial products.

Conclusion

Companies operating in the rigid German tax enforcement environment and engaging in international business transactions need to continuously improve their tax compliance systems, focus on supply chain risks, and evaluate environmental claims. Those subject to the German Money Laundering Act should prioritize the implementation and improvement of anti-money laundering and counter-terrorism financing compliance management systems. Regardless of sector, compliance is critical in navigating the evolving German white-collar crime landscape.