Criminal Defence in Cases of Subsidy Fraud

In defence cases, the particularities of subsidy fraud have to be taken into account - in all stages of the proceedings. In essential aspects, subsidy fraud according to section 264 German Criminal Code (StGB) differs from the “normal case” of fraud according to section 263 StGB:

• In the case of subsidy fraud, even reckless commission is punishable (section 264 sub-section 4 StGB). Premeditation does not have to be proven.
• In contrast to the offence of fraud according to section 263 StGB, proof of premeditation to cause damage or intent of unjust enrichment on the part of the perpetrator does not have to be provided.

Note by the LHP lawyers:This means that, compared with “normal” fraud, the legislator has significantly reduced the requirements for the offence of subsidy fraud. Therefore, the investigation authorities tend to focus their investigation on this offence since they hope that this will make an indictment in a criminal court easier. As defence lawyers, we therefore know that in these types of criminal proceedings knowledge of the specific character of subsidy legislation is particularly important. However, the question of whether organisation or supervision fault can always be considered a reckless omission remains doubtful and, as defence lawyers, we know that we have to focus on the individual case.

Recklessness describes a higher degree of a violation of duty of care compared with simple negligence. Such reckless violations of duties of care can, e.g., result from the fact that the employer

• does not obtain sufficient information on the preconditions for short-time work;
• because of financial difficulties simply ignores obvious circumstances which indicate that short-time work is not applicable. 
• does not sufficiently ensure that the necessary work is distributed to (other) employees to ensure full capacity utilisation in the framework of his right to issue instructions;
• does not ensure that employees reduce overtime in advance in the framework of the possibilities under labour legislations;
• does not follow up on obvious indications that short-time employees have another secondary employment (which is taken into account). 

Note by the LHP tax lawyers: Even in the above-mentioned cases, dolus eventualis can apply instead of recklessness in individual cases leading to the threat of stricter sentences.

Example of lack of recklessness

The German Federal Supreme Court set aside a sentence on grounds of subsidy fraud because of a lack of recklessness (reference number of the 5th criminal court 5 StR 138/10). Chemnitz Regional Court sentenced the defendants because of reckless subsidy fraud in two cases. The defendants subsequently appealed the ruling. Afterwards, the Federal Supreme Court found that the regional court had not given sufficient reasons for the recklessness within the meaning of section 264 sub-section 4 StGB. The regional court should have given special reasons for the negligence since recklessness is more than just negligence and assumes the precondition of special indifference or gross negligence.

In cases of reckless subsidy fraud according to section 264 sub-section 1 no. 3 in conjunction with sub-section 4 StGB, the perpetrator must recklessly keep the subsidy authority in ignorance of facts which are relevant for the subsidy. In this context, the perpetrator’s individual skills are decisive. In its ruling, the Federal Supreme Court emphasised that the accusation of recklessness has to be proven on the basis of the circumstances at the time (i.e. the time of the offence) (Federal Supreme Court, reference number: (5 StR 542/12)). This means that the consideration based on the current level of knowledge is not sufficient (ban on “ex post” consideration).

Dolus eventualis is sufficient for premeditation.

However, a premeditation is often alleged in investigation proceedings. In this respect, the investigation authorities consider the fact that dolus eventualis is sufficient. This means that, in an individual case, an applicant can already be liable to prosecution on grounds of premeditation if he has doubts about his claims regarding fulfilment of the preconditions for the subsidy. In the relevant criminal proceedings, the question of whether or not such an alleged premeditation even applies is often hotly debated.

In individual cases, this can be controversial and if the criminal judge disagrees with the department of public prosecution as a result of our defence activities, this can lead to a more positive continuation of the criminal proceedings for our client. Because if there is no subsidy fraud because there were no subsidies or no deception regarding facts relevant for subsidies, the department of public prosecution can only assert a normal case of fraud according to section 263 StGB. However, this has much higher requirements and, in many cases, it does not apply or cannot be proven.

The legislator has specified the cases in which, in his opinion, a subsidy applies within the meaning of this criminal offence. According to section 264 sub-section 8 StGB, benefits under federal or state law or benefits under the laws of the European communities are covered by this. A subsidy is characterised by the fact that there is no market-based quid pro quo. In our defence activities, we always check whether the contested benefit is really covered by the legal definition in section 264 sub-section 8 StGB. For example, subsidies under federal or state law must, at least, in part serve the purpose of business development for this offence to apply.

Any action can only be liable as subsidy fraud if it constitutes deception regarding facts relevant for subsidies. But just when is a fact relevant for subsidies? The legislator has defined this in section 264 sub-section 9 StGB. However, for effective criminal defence it is important to know that this provision does not mean that all facts automatically have to be evaluated as being facts relevant under criminal law (relevant for subsidies).

Note by the LHP lawyers:Our experience gathered in defence practice has repeatedly shown that we have to examine in detail whether controversial facts are really facts which are relevant for subsidies. Otherwise, subsidy fraud does not apply. With regard to this, there has been a large number of rulings in case law which the defence counsel should know and which frequently offers a good approach to defending the case.

The relevant literature does not conclusively answer the question of whether the act of deception must be suitable to cause damage. This can also provide an approach to defending the case for the benefit of the accused. This question applies in those cases in which the perpetrator commits deception regarding a fact relevant for the subsidy which is beneficial for him but which deception does not actually improve his situation because he is entitled to the subsidy for other reasons. These cases are frequently seen in practice.

Example of a lack of facts relevant for the subsidy

Lübeck Regional Court sentenced the accused on grounds of aiding and abetting subsidy fraud. The Federal Supreme Court voiced concerns that the funding applied for under the II German Housing Promotion Act were actually subsidies within the meaning of subsidy fraud according to section 264 StGB. However, this was not decisive here. This was because, in the opinion of the Federal Supreme Court, the defendant had not provided incorrect or incomplete information regarding facts relevant for the subsidy. Therefore, there was no offence liable to prosecution according to section 264 StGB (reference number of the 3rd criminal court of the Federal Supreme Court: 3 StR 101/98).

Example of a lack of causality of deception:

Laws under which subsidies are granted often specify that investments have to be made during a given period. As a rule, the reference point for this is the time of the order, production or purchase, For example, an entrepreneur places an order for a machine with the manufacturer via phone on the last day of the concession period. Since he is afraid of problems in proving this to the office granting the subsidy, he prints out the order letter with an earlier date and submits it to this agency. Under prevailing opinion, the entrepreneur deceived the agency regarding a fact relevant for the subsidy and beneficial for him; the “written” order was not placed on the date specified. However, following a comprehensive inspection of the relevant literature, the criteria for the offence are not fulfilled since the subsidy would have had to be granted under the actual circumstances. This has the following background: This result is explained against the background that section 264 StGB does not punish every complication of the official decision-making process in the subsidy sector; it is only designed to prevent the misallocation of public funds. However, the Federal Supreme Court has disagreed with this view and does not follow this line of argumentation. However, considerably reduced sentences can often be achieved.

Completion of the offence occurs at an earlier time. This is because the offence is already fulfilled by attempted fraud towards the grantor of the subsidy. In this respect, the question of whether the grantor of the subsidy is already aware of the true facts of the matter, immediately recognises the attempted fraud or whether the subsidy is granted based on the incorrect information is irrelevant for completion. Instead, these circumstances only have to be considered in sentencing. This earlier time of completion again underlines the purpose of this criminal law provision: The central purpose of the provision regarding subsidy fraud is to avoid difficulties for the investigation authorities to prove such an offence which would otherwise apply in the normal case of fraud according to section 273 StGB (see above).

Because of this earlier time of completion, the special provision of “withdrawal”, so-called “active contrition” was included (section 263 sub-section 5 StGB). According to this special provision, the perpetrator is not punished if he/she voluntarily prevents the subsidy from being granted as a result of the offence. If the subsidy is not granted without assistance from the perpetrator, he/she is not punished if he/she voluntarily and seriously tries to prevent granting of the subsidy.

Our practice in the field of subsidy fraud shows that, in many cases, several authorities become involved. For example, in criminal proceedings other authorities or public institutions (e.g. state banks that have paid out subsidies) often become involved. The authorities support each other and exchange information. In some cases, the fiscal authorities can also carry out investigation proceedings on grounds of subsidy fraud under their own responsibility. In many cases, the departments of public prosecution call in the customs investigations departments as further investigating authorities to do the preliminary work. Moreover, the criminal proceedings in court also have a special characteristic: The court divisions for business offences at the regional court have jurisdiction. Therefore, the judges often have a particularly high level of practical experience in carrying out these proceedings. Therefore, it is all the more important to adjust the strategy of the defence to this. Mere moves by the defence designed to impress the court (which can be helpful in local courts) or approaches which appear unprofessional will certainly not produce the desired results in court divisions for business offences. 

Note by the LHP tax lawyers:In defence practice, designing a strategy and bringing the different authorities on board, if possible, is certainly worthwhile. This should take account of the fact that several opposing parties are involved and that a reclaim of the subsidies might be considered. A result based on discussions with the authorities involved is optimal both for the criminal proceedings and the procedure for reclaiming the subsidy. In practice, this aim is often hard to attain and, sometimes, court proceedings cannot be avoided.

In addition to the criminal proceedings on grounds of fraud/subsidy fraud, the company might also be subject to

• the repayment of the short-time allowance received and,
• in individual cases, to the payment of a company fine according to sections 30 and 130 German Administrative Offences Act.
• In addition, the collection of the subsidies paid to the company might also apply (sections 73 and 73s StGB).

Furthermore, employeeswho contribute to an incorrect application for granting of subsidies can also be subject to criminal proceedings on grounds of aiding and abetting the employer’s offence. 

Note by the LHP tax lawyers: The jurisdiction does not put any high requirements on the term “aiding and abetting”. This means the employee’s simple statement that he/she agrees to the short-time work even though he/she knew he/she did not work “short hours” already fulfils the definition of aiding and abetting.

Liability in case of unjustified granting of subsidies

According to earlier jurisdiction, the perpetrator or his assistant is liable for the subsidies according to section 71 German Fiscal Code (AO). For example, according to the Investment Allowance Law (now: section 14 InvZulG 2010) the provisions of the Fiscal Code (AO) applicable to tax rebates have to be applied accordingly to investment allowances. This jurisdiction which is disadvantageous for the accused was correctly abandoned by the Federal Financial Court (ruling of 19th December 2013, III R 25/10, discussed by our lawyer Dirk Beyer in the journal AO-StB). Based on its wording, section 71 AO only applies to cases of tax evasion (and handling of profits of tax evasion). Under the wording of the law, the subreption of an investment grant or other subsidy cannot be classified as tax evasion within the meaning of section 71 AO. This is not a tax. However, the Federal Supreme Court has not answered the question of whether there might be a claim to damages under civil law.