Invalidity of contracts, confiscation of assets and arrest in case of breach of penalties

Sanctions have been in fashion for centuries, and are being broken. The widow Barbe-Nicole Clicquot-Ponsardin, in reaction to Napoleon’s Russian campaign, was concerned with the embargo imposed by the Russian Tsar on French products in 1812. The widow hired a Dutch ship, had it loaded with over 10,000 bottles of the 1811 vintage, and was delighted when it arrived in Königsberg on August 2, 1814 without damage. Two weeks later the next load followed – the Russian market had been conquered, despite the tsar’s sanctions.

Even today, sanctions not only affect individuals, but also small and medium-sized businesses and industry. Often, one (perhaps false) suspicion is enough to ruin people or companies. Billion-dollar deals are falling through the cracks because specialist staff overlook them, and current sanctions can simply run dry. Just as the European Court of Auditors said that customs in Europe lose billions every year through false declarations and fraudulent business models. Asians think little of foreign customs duties and sanctions.

Mere suspicion of terrorism is sufficient for the order to freeze an account

The Administrative Court of Frankfurt/Main (ruling of 25 October 2007, file no. 1 E 5718/06) considered it justified that the Federal Financial Supervisory Authority (BaFin) had blocked the account of the credit institution due to investigations by the Federal Public Prosecutor’s Office, Section 6a I No.1 and 2 of the German Banking Act (KWG). The Syrian account holder did not have to be on a “terror list” (of the EU Council), as this list was not exhaustive. Suspicion and investigation are enough.

One could have taken precautions here – but not even all consultants of oligarchs are able to do this. Where banking secrecy has “fallen”, banks have the business model of “transition” – i.e. a clean-up of the files: Account holders become noble trustees, including foundations and trusts.

But one can also ask oneself who informed the BaFin about alleged x-thousand endangered persons?

Membership in al-Qaida is enough for a terrorist conviction – mere support is not enough

A Syrian and two Palestinians wanted to collect around €4.3 million as life insurance sums, namely through planned fictitious accidental death in Egypt. The BGH (ruling of 14.08.2009, ref. 3 StR 552/08) decided that “integration” into the organisation would have been required for criminal membership.

The Federal Constitutional Court (BVerfG, decision of 07.12.2011, ref. 2 BvR 2500/09, 2 BvR 1857/10) also overturned this decision, because there was already a lack of a quantified minimum amount of damage or a viable estimate (“ban on sharpening”).

Without financial loss, attempted fraud would be the only possibility – and this is also not yet the case if significant intermediate steps (fictitious accidental death, notification of claim, assertion of insurance benefits) are still outstanding. Fraud is not an “abstract threat”. Life insurance policies taken out in “bad faith” therefore remain unpunished.

Of course, such projects are still neither limited to “dark pigmented” nor to “foreigners”.

Terrorist financing through life insurance

The British – who suffer from terrorism – are leaving the EU not because its regulation goes too far, but because it is still too lax, and German insurers in the common market are endangering the security of the British by unlawful omission. In addition, as an insurance intermediary, one should not complain to the legislator if the latter now calls on him after insurers have not fully taken care of legislation in a satisfactory manner. May he express his thanks there; for example for the additional work involved in checking legitimacy and preventing money laundering. If he doesn’t take this seriously either, everything can be made even worse.

The financing of terrorism is not only carried out in small amounts – perhaps via money transfer or Paypal – but also through veiled money grants. Apparently the insurers have neglected their obligations so far, because “German life insurers have frequently violated the old Money Laundering Act (GWG) for 18 years because they still failed to identify the beneficial owner in 2011, as required by Section 8 GwG since 25 October 1993 – despite all the terrorist attacks including 9/11. According to the BaFin annual report 2016, blatant deficiencies were also identified in 2016”.

So if further groups of persons – such as insurance brokers and real estate agents – are now obliged under the GWG, this is only logical as a reaction to the blatant shortcomings identified.

In annuity insurance, the contributor can pay a single premium and the policyholder can use the subsequent surrender value to finance a serious terrorist attack. This money laundering via the pension scheme would conceal the criminal flow of money – the fact that the tax office receives a notification after payment no longer prevents a terrorist attack. Even carelessness is sufficient for criminal liability (BGH, ruling of 11.09.2014, ref. 4 StR 312/14).

A lot of money can also be raised to finance terrorism through risk insurance, for example by means of fictitious damage. Any exception would be a gateway to bypass. The British could not rely on German insurers in the common market. After the brexite, they alone have more efficient ways to ensure their safety.

Financial terrorism of the subprime crisis was sanctioned, and remains without compensation

The EFTA Court (ruling of 28 January 2013, Case E-16/11) ruled that Great Britain (GB) and the Netherlands will not receive compensation from the Icelandic State for the indemnification (up to GBP 50,000 and EUR 100,000 respectively) of their citizens as customers of Icesave Bank (part of the Icelandic Landesbank) following its bankruptcy. The Icelandic deposit insurance only guaranteed up to 20 TEUR – and not even this money was completely available in real terms; the (Icelandic) state is not liable beside the deposit insurance – even if a chancellor verbally promises it to our savers. Prior to the EFTA Court ruling, GB had unsuccessfully requested an Icelandic State guarantee for British savers from Icelandic banks. The UK Treasury froze the assets of Icelandic companies in the UK: Iceland (Central Bank and Ministry of Finance) and the Landesbank then ended up on the British “rogue list” according to their anti-terrorist laws – in the best company alongside, for example, Al-Qaeda and the Taliban.

Anyone who asks banking associations in this country how much money the “inter-institutional deposit guarantee scheme” has, and how it is currently invested, will not receive an answer, or at best a phone call, because it is better to remain silent. Because security systems do not work in real times of crisis.

In Iceland, many bankers have been sentenced to prison following the subprime or financial crisis, while in other EU regions, for example, embezzlement and fraud by bank(s) have been ignored.

Payments to and from Persia – the solutions are called Hawala, Nostro and Vostro

Without BaFin, you can hand in your money at the greengrocer’s, which is then paid out again hours later at the market in Istanbul or Mogadishu. Never would a greengrocer come up with the idea of registering with BaFin for this “secret” business model – there is a lack of state personnel to advise or supervise all greengrocers, and so the relatively recent “Payment Services Supervision Act” (Zahlungsdienste-Aufsichtsgesetz, ZAG) remains meaningless in the case of hawala money transfers. However, an attempt is being made to arrest any “financial agents in the onecoin investor environment”.

Nostro means that one credit institution maintains an account with another – Vostro is the opposite case. In this way, banks can discretely circumvent the monitoring of the SWIFT system (hence the introduction of BIC and IBAN), which is dominant in the West, for their customers by using transaction numbers in the intended purpose. Whether there is a Russian or Persian or Taliban behind the transaction (number) remains hidden. In addition, there are alternatives to SWIFT, as merchants often find ways to avoid control through sanctions. In addition, up to more than 1,000 law firms worldwide – including ours – deal with the establishment and fiduciary management of camouflage structures to shield beneficial owners from charges and demands. The Russians installed “SPFS” as a SWIFT alternative years ago – there is a trend among the BRICS countries to abandon the USD and strengthen their new Eurasian Economic Union (EEAS).

Manger’s error concerning his insurance cover for sanctions

Part of the business model of insurance companies is to collect the money first – in the past, agents would bring it by the company headquarters in suitcases. In the occupational pension scheme (bAV), for example, most entrepreneurs are not aware of the gap between the commitment to employees and the available financial resources for later financing. Many company managers feel the same way – they do not know how much of what they were promised “as protection in the employment contract” is actually available (as manager liability, D&O policy). Most managers hope that things will go well – they don’t know the insurance terms and conditions, and only find out in the event of a claim that it is not even intended that they could sue for benefit(s) from the insurer themselves. Seen in this light, they are carefree, because in the end, with (international) sanctions, the entire private assets, i.e. the bourgeois existence, is at stake.

Perhaps it has not yet been understood that since 2010 and 2012, respectively, it has no longer been possible to insure sub- and subsidiary companies in Syria and Iran. Numerous managers have allowed the payment of insurance premiums for such projects – without checking the numerous international prohibition lists. Agents and brokers usually don’t know them – maybe out of business interest? Managers who know e.g. the EU regulations 961/2010 and 267/2012 are at an advantage. Not only insurance contracts are therefore void, but also those with insurance agents and brokers – some unknowingly ignore the legal situation and then lose everything.

Anti-terrorism lists or ordinances could also be (or are they) null and void?

Regulations 881/2002 and 2580/2001 have been cashed by the
European Court of Justice (ECJ)
in its second-instance ruling of September 3, 2008 (Ref. C-402/05 and C-415/05) concerning the plaintiffs there. The fundamental right of defence had been infringed by inclusion in the list of sanctions without notification of the reasons for this, in particular the right to be heard and the right to effective judicial review. The freezing of funds violated property rights.

Whoever is on such an “anti-terrorism list” may not receive payment – funds are to be frozen, § 34 IV No.2 AWG. You could rely on software alone for the legal review of sanctions, and later on you might get the chance to think about whether this negligence was a good decision while in custody. The Advocate General had considered freezing the funds of terror suspects alone to be null and void.

The mass sanction lists worldwide, the susceptibility of software to errors, the uninsurability due to the invalidity of corresponding contracts in case of doubt – all this will dampen “globalization and free trade”, but hardly the international transfer of money. Nevertheless, numerous international sanctions lists and embargo lists must be observed.

Since 2017 there is a new “terror list” of Egypt, Saudi Arabia, UAE and Bahrain – which includes persons and organizations with connections to Qatar: This includes, for example, account suspensions and a collapse of air traffic.

Germans have also already been placed on the UN sanctions list, for example for promoting the IS, with the result that assets are frozen, access to the financial system is denied and a travel ban is to be imposed.

What is legal at home and in the EU may be punishable elsewhere abroad

Several very large German credit institutions had to pay billions of Euros in penalties in the USA, and dismissed selected employees (“Termination”) because they (allegedly) did not know or did not want to know which transactions are punishable under US sanctions. From 2014 at the latest, a German medium-sized company was put on the US terror list and remained on it – despite the Bundesbank’s audit finding that the person concerned had not been involved in prohibited business with Iran.

Information from BAFA and customs authorisations do not protect against the criminal judge

The information of the
Bundesamt für Wirtschaft und Ausfuhrkontrolle (BAFA)
on the scope of an EU trade embargo, as well as the export licence issued by the customs administration did not protect exporters of fish roe (caviar substitute) and liquor from conviction by the
Chemnitz district court
. For the second criminal court, it was questionable what in the end could be exported with impunity as “not yet a luxury good”: the
LG Chemnitz
(Judgement of 20.03.2017, Az. 4 Ns 910 Js 11214/13), an embargo regulation seemed too vague for a conviction due to the lack of a value limit: This leads to the conclusion that already at the EU level, the staff formulates the embargo regulations too nebulously.

European Court of Justice (ECJ) confirms Russia sanctions as effective

The European Court of Justice (ruling of 28 March 2017, case no. C-72/15) decided that the EU sanctions against Russian oil companies are not objectionable and are therefore effective. In these proceedings, it was also criticised that “the terms used by the Council of the EU” had not been clarified; in particular, there was a contradiction between the wording of EU Decision 2014/512/CFSP and 2014/872/CFSP and that of EU Regulation No 833/2014 and No 1290/2014. The ECJ clarified that the execution of payments does not constitute “financial assistance” within the meaning of the Regulation.

GB has to comply with EU sanctions as long as the brexite has not been implemented.

Violation of US-Iran sanctions cost major German bank 1.45 billion euros

US authorities pursue sanctions violations as well as money laundering. Since 2014 at the latest, several listed German companies have already agreed on corresponding penalty payments. Sanctions lists list not only individuals but also groups, companies and organisations. It is not always easy to identify the members of these bodies (see EU Regulations No. 2580/2001, 881/2002, 83/2011). Violations are not only punishable by fines and imprisonment, but also the good prospect of landing on a sanctions list.

This also applies to trade in prohibited “dual-use” economic goods. Sanctions and embargoes can be person- and country-specific. In addition, the provisions of the
US Office of Foreign Assets Control (OFAC)
which address citizenship, residence and assets. Many US sanctions lists apply de facto extraterritorially, with sanctions such as exclusion from the US financial or goods market.

Fortunately, there is compliance

LG Munich I
, judgment of 10.12.2013, Ref. 5 HKO 1387/10). After the conviction in the amount of 15 million euros, the Chief Financial Officer concerned voluntarily retired from life. The reversal of the burden of proof in the case of organ liability was recognized too late by the convicted ex-management board. According to § 130 OWiG, a lack of a compliance system, even for medium-sized GmbHs, should be a punishable offence in Germany. EU companies that do business in Syria also have problems with ransom and protection money as well as road tolls.

The
BGH
(judgement of 09.05.2017, Az. 1 StR 265/16) already decided that an employee who bribes a foreign buyer can act in indirect perpetration, especially as a tax evader, because even disguised bribes are not deductible with us, just like extorted protection money.

Many a German manager has been arrested in Miami on entering the country, or his holiday abroad ended with extradition to the USA: according to the principle of “minimum contacts”, no residence or company headquarters, citizenship or branch office is required.

Executive orders can be irrelevant

EU branches of a US credit institution are only bound by European law – they cannot invoke an executive order of the US President (
OLG Frankfurt/Main, judgment of 09.05.2011, Ref. 23 U 30/10). As a result the
LG Hamburg
(Judgement of 03.12.2014, file no. 401 HKO 7/14), on the obligation of the subsidiary of a US insurer to regulate transport damage, concerning a purely civil Iranian delivery of goods (no dual use).

The EU regulation 961/2010 postulates in Art. 35 narrow exceptions from the insurance ban concerning Iran (similar to the EU regulation 36/2012 concerning Syria); regularly, corresponding insurance contracts are null and void, § 134 BGB. Any attempt to conclude such contracts should be reported to the Bundesbank. Even so-called sanction clauses do not provide legal certainty that the risk carrier will actually pay in the event of a loss.

The normative force of the factual reached the Latvian ABLV Bank, because US accusations of money laundering in favour of Russian and Ukrainian clients led within days to the withdrawal of client funds, and then to the drying up of funds. In addition, there was contact with North Korean business in contravention of UN sanctions. Due to a lack of “system relevance”, the ABLV was wound up.

Legal advisors are only considered as assistants if the client is recognisably inclined to act (BGH, decision of 20.09.1999, Az. 5 StR 729/98). For a money laundering report to be filed against one’s own client, it is necessary to have explicit positive knowledge that the services were used for this purpose or to promote terrorism – suspicion is not enough.

Cuba and Turkey as examples of disobedient allies

After Fidel Castro identified himself as a socialist, President Eisenhower imposed his first embargo, a “Law on Trade with the Enemy” (TWEA of 19 October 1960) against Cuba. The EU, Mexico and Canada reacted to the Helms-Burton Act of 12.03.1996 from Clinton by “blocking statutes” (EU regulation 2271/96 of 22.11.1996), which prohibited their own companies from following the US embargo. However, these statutes did not prevent a criminal conviction for violation of the TWEA in the USA. And in this country, some banks were more likely to be impressed by potential US fines than by the EU anti-boycott regulation (2271/96) – for example when it came to remittances to Cuba. After all, no one can be forced to conclude certain commercial transactions if they do not want to – for reasons other than the US embargo, of course.

Violations of Iran sanctions, bank fraud, money laundering and gold smuggling are accused of some Turks (“Operation Midas”), who were arrested on entry into the USA from 2015. Iran also found business supporters in China, UAE, Russia, Uzbekistan, Malaysia, France, Switzerland and Germany. After Iran was cut off from data traffic with SWIFT on 17.03.2012, they were looking for payment methods without data traces: Hence the gold, and traditionally perhaps rather precious stones.

No visa for potentially dangerous persons

The ECJ (ruling of 04.04.2017, ref. C-544/15) underlined in its decision that authorities have a wide margin of discretion when assessing whether a person poses a threat to public security. A mere potential threat is sufficient to deny an Iranian woman a study visa (EU Directive 2004/114/EC of 13.122004).

Citizens have been wrongly placed on a terrorist list for years

Legally binding findings by European courts have already led to repeated annulments of the formally continuing listing of persons on sanctions lists, as in the case of Moallem Insurance CO (Case T-182/13) or Naser Bateni (Case T-45/14).

A well-known example is Youssef Nada, who since 2006 was imprisoned in the Italian enclave “Campione d’Italia” surrounded by the Swiss Ticino, as he was not allowed to travel through Swiss territory. It was not until 12 September 2012 that the ECtHR (Case No 10593/08) ruled in favour of the person concerned, who was wrongly placed on a sanctions list.

Acquisition of real estate by terrorists and other money launderers

The European Court of Justice (ruling of 11 October 2007, case no. C-117/06) already decided that persons on sanctions lists against, among others, Osama bin Laden, do not have to be registered as owner in the land register after a property sale. If an entry is nevertheless made, the land register is incorrect and an objection would be appropriate “ex officio”, § 53GBO. The absolute restriction on disposal is to be noted in the basic file on the land register (BayObLG, DNotZ 1988, 784). For civil servants at the land registry and notaries, checking all sanctions lists is tedious, partly because there is usually hardly any software that works well. Whether the payment of the purchase price will be “arrested” by oligarchs, for example, has not yet been clarified in court, but it is conceivable under § 74c StGB.

When it comes to money laundering and terrorist financing, the 2015 mantra “We can do it” seems inappropriate. The Federal Court of Justice (decision of 28 April 2011, file no. V ZB 194/10) made it easier with its decision “Proof of the existence, the identity and the representation relationships of this GbR are not required vis-à-vis the land registry office” also in Germany via shareholder relationships to camouflage a perhaps only apparently completely legal real estate acquisition.

Guidance and obfuscation by finance ministers and legislators

In its letter of 11 December 2017 (Gz. IV A 3 – S 0325/17/10001), the Federal Ministry of Finance (BMF) made a correct effort to ensure that the truth of the account is fulfilled, § 154 AO. The question there, but also with the GWG, is “who is the beneficial owner”, i.e. boss in the ring, beneficiary, helmsman, owner etc., § 3 GWG: Even if it is a corporation, there are natural persons behind it – possibly only at the end of a chain of cover companies, which investigators can identify for journalists; notaries and land registries and tax offices are rather rare. This deplorable state of affairs could still be sanctioned by US authorities if, for example, a German notary public were to be placed on a sanctions list for an oligarch (indirectly) because of the securitisation of real estate, and later also found himself on the same list?

Frequent tax evasion without sanctions-Deluxe

The
BGH
(judgement of 30.01.1970, file no. V ZR 139/68) denied – completely in the tradition of the Reich Court – foreign (camouflage) companies with actual administration in Germany legal capacity – the notarial assignment of a land charge with deed of 04.10.1966 was therefore null and void.

The BGH (ruling of 29.01.2001, Az. II ZR 331/00) put an end to the mass nullity of insurance, banking and real estate transactions of this kind by transforming foreign companies into sole proprietorships, legally responsible BGB companies or OHGs after (possibly temporary) management from within Germany. Companies incorporated in the EU are not affected (
EuGH
, judgment of 5 November 2002, Ref. C-208/00); British, for example, only again after the brexite, unless a bilateral treaty would recognise them, just as the German-American Friendship Agreement of 1954 guarantees legal capacity to the Corporation and LLC.

The obligation to keep accounts with transparent tax liability(s) was not complied with on a massive scale in those cases where foreign companies are still not correctly treated as sole proprietorships, BGB companies or OHGs. Paradise and Panama papers, Bahamas and Luxembourg leaks in connection with real estate, banking and insurance transactions revealed the difficulty of correctly establishing beneficial owners, Section 3 GWG. Sanctions against countries without cross-border reporting under the
“OECD Common Reporting Standard” (CRS)
, there is no such thing: As before, one can also evade punishments and sanctions through trustees, but remains susceptible to blackmail by those contemporaries who know the actual circumstances better.

Are sanction cases insurable at all – what threatens managing directors and board members?

Criminal law protection provides protection in the event of criminal liability, precisely because a criminal conviction is imminent – after a conviction for intent, the costs must be reimbursed. More often, managers find sub-limits in their “special policies”, for example of 5 TEUR – this can pay for up to less than 10 hours of a prominent defender. Even the amount of usual defender’s fees on a time basis are often sparsely regulated – the manager might end up in the rain? Not to mention the costs for private experts, who at best should produce a retroactive certificate of cleanliness, which are rarely insured. Geographically, there are often gaps in coverage as well, something if you ask yourself whether merchant ships could be controlled and possibly boarded by the US navy because of the Iran sanctions; similar to the Nigerian pirates?

From the equivalent of 8,000 euros to four years in prison, the new punishment for Russians who participate in US sanctions to the detriment of their home country – whether as employees or shareholders – will range from 2018. Imagine that the Vatican Bank employs Russian and American staff? Punishments imposed as such will hardly be able to be insured anywhere.

D&O could also pay for pure errors without proven criminal liability. In the event of a claim, perhaps only the company owns the legal rights – the (ex-)manager then realises too late that it is not his head that is at stake in the insurance cover, but the “share-holder value”?

Apparently, some German transport insurers also pay in the case of purely US sanctions, but more often in the case of larger losses only after years of litigation. The claim adjuster’s motto should then be emphasised “we are not here to provide you with the equity you need” – or perhaps “we often compare ourselves more pleasantly with your future insolvency administrator – why should we decide on your claim right away?

Managers could also be kidnapped as alleged terror supporters: Like the Germans Kahaled el-Marsi and Murat Kurnaz. Some (terror) suspects have already had a bounty imposed on their heads – if they have a known (manager) address in Germany, they could be “persuaded” to agree to travel with them to the USA. Even a stopover in Poland or Thailand would then be a good prospect to get to know the physical limits once in a lifetime – and afterwards to complain about deficits in the efforts of one’s own government for a timely release.

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

by courtesy of

www.pt-magazin.de (published on 08.08.2018)

Link: https://www.pt-magazin.de/de/gesellschaft/recht/vertragsnichtigkeit-verm%C3%B6gen-Einziehung-und-verhaf_jkl7gu3n.html

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About the author

Dr. Johannes Fiala
PhD, MBA, MM

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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