Statute of limitations for tax offences and confiscation of crime proceeds: ‘cum-ex trades’ in Germany

December 2022  |  SPECIAL REPORT: WHITE-COLLAR CRIME

Financier Worldwide Magazine

December 2022 Issue

Since late 2012, so-called ‘cum-ex trades’, which were transacted in German equities on a large scale from 2007 to 2011 in particular, have been investigated and appraised, first and foremost by the Cologne Public Prosecutor’s Office. Since this time, the first trials have been conducted and concluded with binding effect.

Two judgements have already been affirmed in the second instance by the Federal Court of Justice (Bundesgerichtshof), the highest court in Germany, including the affirmation of a confiscation order issued against Hamburg-based private bank M.M. Warburg by the Bonn Regional Court (Landgericht Bonn) as the court of the first instance. This order was for the confiscation of an amount totalling €176m.

In contrast, in numerous other proceedings, investigations by German prosecuting authorities are still ongoing, reportedly involving more than 1500 defendants. The almost daily reporting in both German and foreign media keeps ‘cum-ex’ in the headlines. For instance, in August and September 2022, investigating authorities searched JP Morgan and KPMG in connection with cum-ex trades.

As reported in the media, cum-ex trades have caused billion-dollar losses around the globe. In view of complex trading structures, pervaded by concealment, and – most importantly – the fact that a lot of time has passed since these offences were committed, prosecuting authorities, particularly in Germany but also in other jurisdictions, are faced with an above-average expenditure of time and resources. Cum-ex trades ‘peaked’ during the period from 2006/07 to 2011. In many cases, criminal proceedings may be time-barred before any investigations can be finalised and the main proceedings conducted.

The purpose and intent of statutory limitation in Germany is to preserve legal peace and legal certainty. The inherent need of the state to punish offenders for wrongdoing wanes as more time passes since the offence was committed. Also, depending on the severity of the offence, an offender should not have to spend the rest of their life fearing conviction plus seizure of the proceeds from their offending, while the actual purpose of the punishment recedes into the background. The purpose and intent of statutory limitation contrasts with the state’s and general public’s overwhelming desire for prosecution (particularly when it comes to cum-ex trades), which the legislator is endeavouring to deliver.

To counter the looming limitation on cum-ex trades and give prosecuting authorities sufficient time to fully appraise this complex set of circumstances, 2020 saw German legislators first extend the absolute limitation period and then, a few months later, the relative limitation period for particularly serious cases of tax evasion. In addition, the law was amended to allow confiscation of any proceeds from cum-ex trades, even when the associated claims under tax law are time-barred.

Statute of limitations regarding tax offences in Germany

In Germany, the provisions governing limitation are codified in the Criminal Code (Strafgesetzbuch (StGB)), supplemented by special provisions, such as the rules of the Fiscal Code (Abgabenordnung (AO)) in the area of criminal tax law. In terms of limitation periods, the law distinguishes between absolute and relative limitation. In Germany, relative limitation determines the basic limitation period that applies to a particular criminal offence. The relative limitation period may be extended through interruption or suspension until the expiry of the absolute limitation period.

Consequently, prosecution becomes time-barred by the statute of limitations upon expiry of the absolute limitation period or the relative limitation period, whichever occurs earlier. Upon expiry of the relevant limitation period, any pending proceedings must be discontinued, and the offender can no longer be convicted for the offence. Relative limitation depends on the sanction that the law provides for a particular criminal offence, with the severity of the penalty reflecting the degree of wrongfulness.

Under criminal tax law, the relative limitation period for ordinary tax evasion offences under section 370 (1) AO is five years in accordance with section 78 (3) number 4 StGB and section 369 (2) AO. Pursuant to section 376 (1) AO, a special provision concerning the relative limitation period applies to particularly serious cases of tax evasion (evasion amounts of €50,000 or more): with the adoption of the Annual Tax Law 2020 (Jahressteuergesetz 2020), this period was increased from 10 to 15 years. However, the extended period only applies to cases that were not yet time-barred at the time the legislative change entered into force on 29 December 2020.

Accordingly, the relative limitation period for cum-ex trades, which are generally deemed to be particularly serious cases of tax evasion under section 370 (3) AO, has been 15 years since that time. In individual cases, this period may be extended by statutorily prescribed interruptions or suspensions. On the other hand, German law does not provide for an abridgement of the limitation period.

By operation of section 78a StGB, the limitation period commences upon completion of the offence.

However, it is often unclear, or even contentious, exactly when a criminal offence was completed. In cum-ex cases, the evaded capital yields tax was usually refunded or imputed upon application, so that the offence was completed at the time the tax was typically refunded or imputed, and this is when the limitation period began to run. In those cases where no tax was refunded, and thus only an attempt at tax evasion was committed, the limitation period commenced upon the submission of the refund application.

Whenever the limitation period is interrupted, the relative limitation period restarts from the very beginning once the reason for the interruption has ceased to exist (section 78c (3) sentence 1 StGB). Any part of the limitation period that has already lapsed by that time will not count toward the recommenced limitation period. An interruption occurs, for example, when the defendant is questioned for the first time (section 78c (1) number 1 StGB) or when the defendant is advised of the initiation of administrative fine proceedings (section 376 (2) AO). The issuance of a search order by the competent local court pursuant to section 78c (1) number 4 StGB is also of great relevance in legal practice. These interruptions may occur any number of times.

Moreover, the relative limitation period may be suspended in accordance with section 78b StGB. A suspension under section 78b (3) StGB is deemed to have occurred, for example, when a judgement has been issued in the first instance, but the proceedings have not yet been concluded with binding effect. Furthermore, section 78b (4) StGB permits suspension of the main proceedings in particularly serious cases of tax evasion for a total of five years after indictment by a regional court. The relative limitation period resumes as per normal once the suspension has been lifted. In contrast to the interruption, it does not restart from the very beginning.

However, absolute limitation may occur while the relative limitation period is still running. The absolute limitation period for ordinary tax evasion offences is twice as long as the relative limitation period (section 78c (3) sentence 2 StGB, section 369 (2) AO), i.e., 10 years from the commencement of the limitation period. The Second Corona Tax Relief Act 2020 (Zweites Corona-Hilfesteuergesetz 2020) increased the absolute limitation period under section 376 (3) StGB in particularly serious cases of tax evasion (which cum-ex cases are generally deemed to be) to two and a half times the relative limitation period.

For those cum-ex scenarios where prosecution was not time-barred prior to the legislative change, this means in practice that prosecution only needs to be completed within a period of up to 37 and a half years after the actual commencement of the limitation period. Nevertheless, this legislative change will probably not apply to offences committed between 2007 and 2009 and the majority of offences committed during 2010, as the tax refunds for 2010 would have generally been paid out prior to 29 December 2010. The extension of the relative limitation period will therefore primarily affect cum-ex scenarios from 2011, where – in the majority of cases – the requested tax refund would not yet have been paid out. For the criminal defence, this means that it must be carefully examined, in each individual case, whether or not the extended limitation periods are applicable at all.

Another aspect to be taken into account is the fact that, while the legislative rationale for extending the limitation period to prosecute criminal tax offences made special mention of cum-ex cases, the legislative change affects all cases that are explicitly listed in the AO as standard examples of particularly serious tax evasion.

Confiscation despite time-barring of prosecution

The German law on confiscation, which was revised in its entirety in 2017 and incorporated into section 73 of the StGB, must be strictly distinguished from the time-barring of prosecution. With the adoption of section 73e (1) sentence 2 StGB in 2020, the authorities now have the option of seizing assets derived through crime by way of independent confiscation proceedings, even if the prosecution of the underlying offence itself is time-barred by limitation (despite the massive expansion of the statute of limitations).

In its decision of February 2021, the German Federal Constitutional Court (Bundesverfassungsgericht) ruled that the decreed retrospective effect of the confiscation provisions is constitutional, even if prosecution of the underlying offence was time-barred prior to the new confiscation provision entering into force on 29 December 2020.

Furthermore, the Federal Constitutional Court stated that the new law does not constitute a violation of Article 103 (2) of the German Basic Law (Grundgesetz (GG)) – “An act may be punished only if it was defined by a law as a criminal offence before the act was committed” – as confiscation is not a punishment. According to the Federal Constitutional Court, disgorgement is not an additional penalty that is subject to the principle of culpability but rather a legal measure in its own right that seeks to correct unjust enrichment. The court further stated that the purpose of confiscation is not to inflict grievance but rather to eliminate a (financial) benefit which, if it were to remain with the offender, could induce the offender to commit further crimes.

Likewise, the court does not perceive any violation of the rule of law (article 20 (3) GG) occurred with the revision of the statute of limitations. While the court concedes that the independent confiscation of proceeds from time-barred offences constitutes a retrospective effectuation (Rückbewirkung) of legal consequences, and thus a genuine retrospective effect that is, as a rule, unconstitutional, it also points out that it is a recognised principle that protecting legitimate expectations on the part of the individual is by no means absolute.

According to the court, the principle of legal certainty is outweighed by the requirements of the public good, which necessitate the retrospective elimination of assets obtained through crime (or tort) and thus wrongfully obtained. It is the court’s view that this paramount objective serves to clearly demonstrate to both the offender and the legal community that any illicit gain in assets will not be tolerated by the law and therefore cannot prevail.

This understanding is in line with the legislator’s will at European – and therefore also at German – level. Not only should a crime be punished, it should also not pay. For this reason, any disruption to the legal order – in this article exemplified by cum-ex trades – in the form of illegally obtained financial benefits must be eliminated “at almost any cost”.

Criminal defence lawyers are among those who take a critical view of this opinion. In a democratic legal system, any historical state of affairs must, at some stage, be laid to rest once and for all. At the end of the day, it is one of the mainstays of the legal system that time-barring by limitation, once occurred, must be recognised as such, even if it ‘only’ relates to the confiscation of assets. Clearly defined framework conditions for legal transactions are of far greater importance than the confiscation of illegally obtained assets long after prosecution has been time-barred by an expanded statute of limitations.

 

Dr Moritz Lange and Dr Katrin Wick are lawyers at Feigen Graf Rechtsanwälte. Mr Lange can be contacted on +49 (0)69 7701 9613 or by email: lange@feigen-graf.de. Ms Wick can be contacted on +49 (0)69 7701 960 or by email: wick@feigen-graf.de.

© Financier Worldwide

BY

Moritz Lange and Katrin Wick

Feigen Graf Rechtsanwälte

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