Additional revenue for the State through deterrent fines


Are penalties for white-collar crime in Germany too lenient?

The example of the USA – and, incidentally, also the Ecclestone case – show what could be done to provide the state with additional revenue through fines for economic crime. Domestically, too, one could – as is customary in the USA – set up competition among investigators – at the federal, state, BaFin, stock exchange supervisory authorities, public prosecutors depending on the seat and branch, cartel office, etc. – could be set up. If you release the hunt and the loot is worth it, you will find enough hunters. There should be no shortage of reasons.

Ex-bank manager Birkenfeld is alleged to have helped “blow up a $20 billion tax evasion scheme,” to have been partly responsible for a $780 million fine on a major Swiss bank, and ultimately to have received a $104 million reward.

If such penalties usually go to the US today, they do us no good domestically. Through manager liability insurance and recourse to business managers at the expense of their pensions and private assets or D&O insurance, companies would be even more capable of paying higher fines without their existence being threatened. Following the example of the USA and as with Ecclestone, the penalties could be negotiated, but only in the sense that a penalty payment is given to the company which it can voluntarily agree to in order to avoid further criminal proceedings and disadvantages, whereby it must be clear that anything else is hardly an option.

“What – antidote to Caesar?”

As for business leaders who think they have their house so in order that they would have prevented such proceedings, the answer would be what Galigula said when it was reported to him that someone was taking antidotes for fear of being poisoned: “What – antidotes against Caesar?”

It must be clear to every senior manager or business leader that he is being deceived in his own company and can never have everything under control, although he should. It would therefore make sense to set up an information service within the company, through special investigators on secret assignment, placed in certain places as employees of those they are to investigate, including further secret investigators to investigate them. Anything official won’t really work. In the end, government investigators will find enough to bring expensive cases.

Compliance system ineffective costs Manger 15 million euros in damages

The Regional Court of Munich I sentenced the ex-manager of a DAX-listed company to pay damages in the amount of €15 million for failing to establish an effective “compliance system” in a judgment dated December 10, 2013 (Case No. 5 HK O 1387/10). So-called “slush funds” for bribe payments could have been prevented, as well as the subsequent corruption. The ruling, however, does not address in a single word the fact that the corporation may have gained an economic advantage from the corruption – but the manager’s liability insurance company is unlikely to overlook this point to reduce its indemnity, and set off the corruption benefits against the damages, along the lines of “crime pays.”

Benefit sharing

An incentive for corruption and cartel violations is economically the prospect that only a part will be discovered and only a fraction of the corporate profit will be skimmed off by fines in particular. If a manager is later taken to court for the fines to be paid by the company, he could try to counter that the company still obtained considerably higher benefits from the criminal conduct.

Of course, many executive insurances provide for further possibilities to refuse compensation or indemnification, such as the allegation of a knowing or intentional breach of duty, as well as, for example, a criminal conviction for intent.

Many a manager is surprised when he is first allowed to sue his manager’s insurance company for benefits because, for example, the manager’s insurance company surprisingly limits or excludes benefits in the event of the insolvency of his own company, if applicable, according to the insurance conditions. Such surprises would – theoretically – be recognized by the courts later – but for the insurer such ambiguities offer scope for out-of-court negotiations.

In the press you can often read about multi-million compensation as a golden farewell handshake for managers – non-publicly there are often liability claims in the background, so that the compensation is not even paid out.

System of deterrence from America

The profit skimming is probably accepted as comprehensible, then there is the amount of the damage caused as a basis for the assessment of the penalty. Then, however, the quality of cooperation with the authorities and the deterrent effect may have to be added, whereby here again the mitigating effect is whether the establishment of effective measures for the future can already be demonstrated. But when American politicians criticize the penalties as too lax, especially when American soldiers have died as a result, they quickly become even higher, as can be observed. The limit is only where it becomes existentially dangerous – but then there will be new proceedings and penalties for newly found reasons in subsequent years, as soon as profits are made again. The fact that the penalties are no longer comprehensible or calculable in advance makes sense, if only for reasons of deterrence. For the rest, it will often simply be an additional source of revenue besides taxes – also to recoup some of the expenses of the bank bailout. Reasons will be found every year, actually, always and new. In the USA, the penalties are “voluntarily” settled – the company could have gone to court, but it is clear that this would not be a viable option. Particularly as there is often the threat of the withdrawal of a licence or banking licence for a period of at least years, and arrested managers are waiting in custody for a solution to be found.

Draconian fines under German antitrust law

However, the German guidelines on the assessment of cartel fines, calculated on the basis of 10 % of the dishonest turnover multiplied by a factor of 2 to 6, depending on the total group turnover, also point in this direction. According to the guidelines:

“The Bundeskartellamt assumes a profit and damage potential amounting to 10% of the company’s act-related turnover achieved during the period of the cartel infringement” and “Note 2: A fine that exceeds the profit and damage potential several times over may be appropriate for deterrence considerations.”

In addition, reference is made to § 17 IV OWiG: “The fine should exceed the economic advantage that the offender has derived from the administrative offence. If the statutory maximum is not sufficient for this purpose, it may be exceeded.” But this does not have to be the end of the matter by a long shot if the public prosecutor finds other reasons for initiating criminal proceedings.

by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm

by courtesy of (Business Magazine for the Dermatologist, 06/2014)

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About the author

Dr. Johannes Fiala Dr. Johannes Fiala

Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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