New confiscation rules in Germany – a challenge for compliance
February 2018 | SPECIAL REPORT: CORPORATE FRAUD & CORRUPTION
Financier Worldwide Magazine
February 2018 Issue
Crimes must not pay off. This rationale governs the new confiscation rules in Germany that have been in force since 1 July 2017. The new rules strengthen the principle that everything that has been obtained by the perpetrator or a third party as a result of a criminal or administrative offence must be confiscated. Corporations will be affected if the perpetrator has acted in the interest of a company or if proceeds have been transferred to them. Changes in both substantive and procedural law will lead to a considerable rise in confiscation orders and will make them a major instrument in fighting crime. This will pose a severe threat to companies, which requires an upgrade in compliance and risk assessment tools.
Items to be confiscated
The main idea of the new law is that whatever has been used to commit or obtained by committing a criminal or administrative offence must be confiscated. Confiscation is not restricted to certain types of offences and instead will be applied to every criminal or administrative offence. Thus confiscation will become a main purpose in any investigation. Orders may be issued to the perpetrator or any other third party who gains from the act. Each item deriving from a criminal or administrative offence is subject to confiscation. Costs and expenses related to the acquisition of the item cannot be deducted. If the item is no longer available to the perpetrator or any person to which it was given, for example if it was sold or otherwise transferred to another person, then its value can be confiscated.
In most white-collar crime cases, the confiscation of this value will be the primary focus since either the item was transferred in a chain of transactions or the proceeds of an offence are the crediting of a payment to a bank account, meaning that only the monetary value of such crediting can be subject to confiscation.
Where the value is confiscated, it will be calculated in two steps. Firstly, it will be determined what item was obtained as a result of the criminal or administrative offence. In fraud cases, for example, if inferior goods are sold as high-quality goods, it is the purchase price that was obtained by deceit. The same applies in cases of export control violations or insider trading. If a business is operated without a necessary licence or permission, the whole turnover is subject to confiscation. If a contract has been obtained by means of bribery, the proceeds in the first step are the remuneration for the sale or services delivered. The value of what has been obtained is determined as of that time of acquisition. Any subsequent rise or fall in value is irrelevant.
Secondly, costs and expenses incurred for obtaining the object of an offence can only be deducted if they do not constitute an investment in an offence. In the examples mentioned above, costs and expenses for fraud are the purchase price of the goods sold, in insider dealing the purchase price of stocks, and in export violation or bribery cases the purchase price of materials and production costs of goods or services. The decisive question will be whether these expenses constitute an investment in an offence. This requires costs and expenses to have been incurred knowingly or at least with conditional intent that they will be used to commit an offence. For example, if products are sold without a necessary export licence, the production costs cannot be deducted if the goods in question were produced with the intention of illegally exporting them.
It is different if products were taken from stock, since then the production costs were incurred without the purpose of committing an offence. In bribery cases, the production costs or the purchase price of raw materials can always be deducted, since the offence only prohibits the offer, promise or grant of a benefit to the bribed person but not entering into a purchase or other contract, meaning that these costs are not covered by the incriminated conduct and thus do not constitute an investment in that sense. Following on from this, in bribery cases only the direct or indirect profits from bribery are subject to confiscation.
When incurring costs and expenses, the dividing line between conditional intent and wilful negligence is of the essence. In the latter case, costs and expenses may be deducted, whereas they remain unconsidered in the former case. The commercial consequences are tremendous. If a company’s profit rate is 5 percent and the whole turnover from a business transaction is subject to confiscation, compensation requires additional turnover of 20 times the confiscated amount. Since the state of mind determines whether only the profit resulting from an offence or the whole turnover may be confiscated, compliance systems will be essential.
Confiscation cannot be ordered if a board member or employee committed a criminal or regulatory offence for the benefit of the company, or if the company benefited from offences committed in their interest by third persons such as agents. In group constellations, dividend payments to the parent company deriving at least in part from criminal activity might also be subject to confiscation. Confiscation rules and money laundering rules may apply simultaneously.
Confiscation is compulsory
Confiscation is compulsory and must be ordered in each case, irrespective of any civil claims the victims might have against the perpetrator or any third person who gains from the act. The purpose of the new law is to encourage law enforcement authorities to issue confiscation orders in every single case. Such orders may be issued in the criminal proceedings against the perpetrator or independently. As the perpetrator does not even have to be convicted, confiscation may be ordered prior to or subsequent to the trial against them.
In investigation proceedings, prosecutors are required to issue seizure or freezing orders to ensure the enforcement of expected confiscations, if such confiscations are likely. The enforcement of a freezing order can be abandoned by providing security to the relevant value. The number of prosecutors and law enforcement staff dedicated to confiscation is expected to soar in the next couple of years.
What is more, as confiscation is not regarded as a punishment, the new confiscation law applies retroactively for all criminal or administrative offences committed or investigated in the past unless a confiscation order has already been issued under the old law. Furthermore, the limitation periods no longer follow the criminal limitation periods. This means that confiscation can also take place if prosecution of the offence is time-barred. The limitation period for confiscations has been extended to cover the past 30 years.
Confiscation orders will most likely become one of the main instruments in fighting crime and will contribute tremendously to the state budget. Companies that benefited from criminal or administrative offences by board members, employees or other third persons run the risk of confiscation for a period of three decades. Compliance programmes to avoid criminal or administrative offences committed by board members and employees are essential and prudent business partner screening and continuous monitoring will be important to protect the financial interests of corporations. Shortcomings will expose corporations to enormous risks, potentially for decades. A wave of confiscations is expected to come – be prepared.
Dr Christian Pelz is an attorney at Noerr LLP. He can be contacted on +49 89 28628 179 or by email: firstname.lastname@example.org.
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