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24 September 2018
Granting unsecured loans: criminal conviction for breach of trust allegations
Organisational deficiencies may mitigate severity of sentence
Compliance management systems can reduce fines
Structural differences between tax evasion and breach of trust allegations
According to the Federal Court of Justice's established case law, the penalty for tax evasion of more than €1 million should generally be imprisonment rather than a suspended sentence.
On 14 March 2018 the court ruled that these principles cannot apply to breach of trust allegations (2 StR 416/16, NJW 2018, 2210).
In 2015 the Cologne Regional Court found four bank managers guilty of particularly serious breaches of trust. One was sentenced to two years and 10 months' imprisonment while the other three were given suspended sentences. The regional court found that the accused had unlawfully granted an unsecured €20 million loan to Arcandor, an ailing retail group.
The sentences fell short of the public prosecutor's demands. During the appeal on a point of law, the public prosecutor argued that the sentences were much too lenient in view of the eight figure losses incurred and that case law on tax evasion amounting to millions could also apply to breach of trust allegations. The Federal Court of Justice dismissed the appeal. The grounds for its decision have now been published.
In practice, there are stringent requirements on annulling a decision in the first instance due to incorrect sentencing considerations. The appellate court can intervene only if there is a gross and obvious disparity between guilt and the penalty imposed. Generally, the Federal Court of Justice must accept the assessment made by the trial court. This was the case here.
According to the Federal Court of Justice's ruling, the court was right to take into account that the accused were able to commit these offences owing to the inadequacy of the bank's control systems. It took the view that organisational deficiencies at a company may have a mitigating effect on the penalties if these deficiencies make it is easier for someone to commit an offence. For example, an inadequate level of supervision benefits the offender even where the losses incurred are high and the offence is committed over a protracted period.
To a certain extent, the Federal Court of Justice's ruling evidences the downside of its 9 May 2017 decision in which it ruled for the first time that companies with an effective compliance management system (CMS) may expect lower fines in the event of compliance breaches (1 StR 265/16 – juris).
In a civil law decision of 10 December 2013, the Munich Regional Court stated that setting up a CMS is a basic organisational duty of a member of the management board of a stock corporation (5 HKO 1387/10).
The Federal Court of Justice also explicitly states that the principles which it has established for penalising tax evasion cannot apply to breach of trust allegations in the same way. Under the court's established case law, imprisonment rather than a suspended sentence should generally be imposed for tax evasion of more than €1 million (2 December 2008, 1 Str 416/08, BGHSt 53, 71).
According to the Federal Court of Justice's ruling, these underlying principles for penalising tax evasion cannot apply to breach of trust allegations in the same way because the two criminal offences differ fundamentally. The court's reasoning was that tax evasion is generally driven by the selfish pursuit of profit, whereby the amount of undeclared tax can often be predicted. By contrast, the abstract and complex criminal act of a breach of trust may occur in an extremely wide range of business circumstances.
The decision has significant implications for white collar crime and compliance. Public prosecutors often take the position that the Federal Court of Justice's sentencing principles for tax evasion should also apply to breaches of trust or fraud. This argument has now been undermined by the Federal Court of Justice's ruling, which is a welcome development. The decision also clearly indicates that an effective CMS must always include mechanisms to protect a company's assets.
For further information on this topic please contact Daniel Kaiser at CMS Hasche Sigle by telephone (+49 711 97 64 0) or email (email@example.com). The CMS Hasche Sigle website can be accessed at www.cms-hs.com.
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