2021 yielded many developments in the field of white-collar crime enforcement and investigations in Germany. In July, the German Federal Court of Justice (Bundesgerichtshof) ruled that obtaining a refund of unlevied withholding tax in connection with a cum/ex trade constitutes the criminal offence of tax evasion. Against this backdrop, criminal enforcement against participants in these trades continued unabated, with several dawn raids being conducted and new bills of indictment being issued. Criminal proceedings into cum/ex trading are now directed against more than 1000 suspects, including C-level executives of international banks.
In addition, the German legislator enacted a Supply Chain Due Diligence Act, which will come into force on 1 January 2023. The German lawmaker also expanded the scope of the criminal offence of money laundering with effect from 18 March 2021. The Corporate Sanctions Act, which was supposed to introduce more severe corporate fines and new rules for conducting internal investigations, was not passed. The previous German federal government also failed to enact the Whistleblower Protection Act, despite EU member states being obliged to transpose the underlying EU directive into national law by 17 December 2021. The new German federal government has announced that it will readopt these unfinished legal initiatives.
- Investigations trends/developments
- Significant law reforms impacting corporate criminal liability
- Internal investigations – key developments
- Sectors targeted by law reforms or enforcement action
- Cross-border coordinated enforcement activity
- Financial crime issue predictions for 2022
The German criminal prosecution authorities can be expected to continue their enforcement activities relating to cum/ex trades in 2022. We expect a wave of new indictments following the German Federal Court of Justice's decision on the illegality of cum/ex trades and the recent increases in human resources in both criminal prosecution authorities and criminal courts. In June 2021, a former senior banker was sentenced to five and a half years’ imprisonment for his involvement in cum/ex trades. In addition, criminal courts have ordered the confiscation of proceeds generated by these trades, in one case resulting in a confiscation order of more than EUR176 million against a German bank.
There is an increased risk to companies and their managers of being confronted with allegations of business human rights infringements, which may even amount to accusations of participating in crimes against humanity. In September 2021, a non-governmental organisation filed criminal complaints against the managers of various fashion companies and retailers, accusing them of aiding and abetting crimes against humanity. The fashion companies or retailers have allegedly benefitted from forced labour by manufacturing or selling products containing cotton harvested in the Chinese province of Xinjiang.
We expect a rise in the number of reports of suspicious activity and criminal investigations into alleged money laundering as a result of the changes made to the definition of criminal property. In March 2021, a legislative amendment to the criminal offence of money laundering (Section 261 of the German Criminal Code) came into force. Prior to the amendment, Section 261 of the German Criminal Code specified predicate offences for money laundering, thereby excluding the proceeds of various criminal offences such as theft, fraud and embezzlement, unless committed commercially (gewerbsmäßig) or by members of a gang. In contrast, under the revised provision, any criminal act can be a predicate offence for money laundering.
As of August 2021, the amended German Money Laundering Act (Geldwäschegesetz) requires all companies domiciled in Germany to provide detailed information on their ultimate beneficial owners to the German Transparency Register (Transparenzregister) within certain time limits. The German Federal Office of Administration (Bundesverwaltungsamt) is likely to continue its rigorous investigation and enforcement of contraventions of the transparency requirements.
The Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtengesetz), enacted in June 2021, aims to prevent human rights violations in supply chains. With effect from January 2023, companies operating in Germany and employing a certain number of employees will be subject to an entirely new set of rules obliging them to review their supply chains and to enact a supply chain-related compliance management system. The new rules demand remediation measures and may even require companies to terminate relationships with suppliers as a measure of last resort. The possibility of private enforcement measures by workers' unions and non-governmental organisations will further increase the exposure of companies to litigation, financial and reputational risks in connection with the new rules.
The new German federal government plans to reform the legal regime for corporate sanctions according to its coalition agreement. The government is also required to transpose the EU Whistleblower Directive into national law in the short term as the directive's deadline for implementation lapsed on 17 December 2021. A previous draft bill prepared by the former German federal government provided, among other things, that all companies with 50 or more employees and companies with an annual turnover of EUR10 million or more will be obliged to set up internal whistleblowing systems for employees.
The German Federal Labour Court (Bundesarbeitsgericht) has acknowledged that a company can reclaim the costs of an internal investigation conducted by an external law firm from an employee under certain circumstances. It applied principles from previous case law, on the reimbursability of investigation costs in cases of suspected misconduct by employees, to the reimbursement of attorney fees. However, the Court set out strict requirements for such a recourse claim that will have to be taken into account right from the start of any investigation.
The Corporate Sanctions Act, by which the former German federal government planned to introduce new rules for conducting internal investigations, was not enacted. However, according to its coalition agreement, the new German federal government plans to create a "precise legal framework" for internal investigations. Some laws enacted by the previous German federal government, such as the Supply Chain Due Diligence Act, include features that were in the aborted draft Corporate Sanctions Act. This includes the mitigation of a corporate administrative fine in return for a company's efforts to uncover infringements of legal obligations.
After a corruption scandal emerged involving several members of the German Federal Parliament (Bundestag) who had conducted business regarding medical face masks during the pandemic, the relevant criminal offence of bribery of elected officials (Section 108e of the German Criminal Code) has been increased to a felony with a minimum term of imprisonment of one year.
More than one hundred criminal investigation proceedings against operators of Covid‑19 test centres are ongoing throughout Germany. The German federal government has already spent several billion euros on providing free lateral flow tests that were performed in these centres. Several operators are now being accused of fraud. In one case, the operator of more than 50 test centres nationwide is accused of having issued fraudulent invoices amounting to a total of more than EUR25 million. As a result, the German Ministry of Health issued a regulation to counter such fraud.
As a result of the Wirecard scandal, the German Federal Financial Supervisory Authority (BaFin) has been restructured and reorganised. Around 150 new positions have been created and a new head has been appointed, Mark Branson, the long-time director of the Swiss Financial Market Supervisory Authority. In addition, its competence in supervision and examination has been strengthened, and as a result BaFin now has the right to audit all capital market-oriented companies, not only banks, and is steadily gaining influence.
The highly controversial cum/ex transactions took place not only in Germany but throughout Europe. German criminal prosecution authorities are said to have set up joint investigation teams with their counterparts in other European countries.
We expect a rise in criminal investigation proceedings into allegations of money laundering following the amendment of Section 261 of the German Criminal Code. We also anticipate that enforcement actions into requirements stipulated by the German Money Laundering Act, such as notification requirements vis-à-vis the German Transparency Register, will remain at a high level.
We expect a large number of high-profile indictments and criminal trials into alleged tax evasion in connection with cum/ex transactions in 2022. The proceedings will keep public prosecution authorities and criminal courts busy for years to come. The Regional Court of Bonn has even set up additional criminal chambers to handle the upcoming amount of cum/ex proceedings.
This article is part of the Allen & Overy Cross-border White collar Crime and Investigations Review. Please visit the review homepage for our overviews and insights in other jurisdictions.
Wolf Bussian and Jan Erik Windthorst both have strong expertise in internal investigations in the financial sector.
Legal 500, Germany 2020
[Jan Erik Windthorst] provides smart and clear legal advice."
Juve Handbook 2020/2021
[Dr Tim Nikolas Müller] is very smart and always focused on the client's interests.
Juve Handbook 2021/2022
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