High-Profile Catalyst Tough Times Ahead for German Tax Evaders
Part 2: Despite Tougher Rules, Little Has Changed
But then came the decision by the BGH's criminal division, under its chairman Armin Nack, and suddenly tax evaders were shaking in their boots. The court ruled that anyone found guilty of tax evasion to the tune of 1 million or more should be given a prison term without probation. When a Bavarian developer evaded paying taxes and social security contributions in the millions, the BGH confirmed that the man should be sent to prison. Suddenly, men and women with a little secret realized they could go to jail as quickly in real life as they could in the game of Monopoly.
Despite the high court's tough stance, however, little changed in the regional courts or the social structure of German prisons at first. Those incarcerated there still include offenders like the retiree from the northern state of Lower Saxony who unsuccessfully tried to blackmail a cosmetics company and was sent to prison for more than three years. Or the marriage swindler who bagged 375,000 and was sentenced to five-and-a-half years by a Munich regional court. And then there was a man who was given a three-year sentence for growing marijuana in his attic apartment, earning all of 17,000 in the process.
Ask any number of attorneys specializing in criminal tax offences and you will be told that none of them, supposedly, is familiar with any cases of higher-stakes tax evaders (in the millions) who are now likely to go to prison because of the BGH decision. That is, at least not when it comes to the classic pattern of hiding assets in Switzerland, Liechtenstein or Luxembourg, or failing to pay capital gains tax, as in Hoeness' case. No one in this class has gone to prison, and that includes the thousands of tax evaders whose names appeared on various CDs containing information on their offshore bank accounts. Former Deutsche Post CEO Zumwinkel, for example, owed 970,000 in back taxes, putting him just below the limit.
As much as the BGH may have startled and deterred people with its 2008 decision, the stark reality in German criminal tax evasion cases is that most cases don't even make it to trial. Instead, the tax authorities' offices in charge of penalties and fines settle the matters themselves. The rule of thumb is that cases involving 50,000 or less don't even reach the public prosecutor's office. The tax authority submits a petition for a penalty order, which the court then reviews, depending on the individual circumstances. In practice, this means that these cases are generally rubber-stamped.
The public prosecutor becomes involved when there is more than 50,000 at stake, but even then many cases end without charges being filed or penalty orders being issued. A quick penalty order is popular among tax investigators and public prosecutors because it enables them to increase their case numbers, which is good for their careers. For example, a regional tax authority in the Rhineland processed one of the many CDs containing data from Credit Suisse completely on its own.
And even if a public prosecutor does file charges, it still doesn't mean that he expects the case to go to trial. Even after the BGH decision, "70 to 80 percent of cases are still settled to avoid a public trial," says Munich tax attorney Jan Olaf Leisner. The few trials that normally materialize -- usually only with damages of 200,000 or more -- also end up being relatively short because agreements have often been reached in advance. "The judges, too, are literally begging for a pre-trial settlement negotiation," says an experienced tax attorney.
The parties negotiate for the usual reasons that lawyers invented the term "judicial economy." But in tax matters, the reasons are especially valid. The cases are complicated, which makes the legal situation confusing, so much so that it often exceeds the expertise of prosecutors and judges. On the other side are tax evaders determined to keep themselves and their names out of a courtroom -- and who can afford the best attorneys to do so, even when these experts bill them at daily rates of 3,500. Prosecutors still willing to battle with these specialists can quickly expect to see trials lasting 50 or 60 days. "If each of these cases went to trial, the legal system would be crippled, given current staffing levels," says tax union leader Eigenthaler.
In addition, the investigators are often reliant on help from the defendants, especially given the sheer volume of material involved. For example, the documents on HSBC Bank's Luxembourg division acquired by the state of North Rhine-Westphalia are filled with dry data -- names, amounts, account numbers -- ranging from 1998 to 2004.
Merely being in possession of such data isn't enough to successfully prosecute a case. Prosecutors must prove that the defendant actually evaded taxes, as well as the amount involved. If they lack evidence, they can expect little assistance from their counterparts abroad, even today. But why should a culprit help prosecutors without a guarantee that he will not be doing time in a 10-square-meter cell with a steel toilet?
By establishing the 1-million threshold, the BGH judges in the southwestern city of Karlsruhe also imposed a strict restraint on prosecutors' room for negotiation, which they didn't exactly welcome. "It drew the public's attention to tax evasion," says the head of a law firm that focuses on white-collar crime. "But we didn't need the limit. It makes the whole thing that much more difficult for us."
What to do, for example, with a man who investigators in the western city of Bochum could only prove owed 100,000 in back taxes, but who then voluntarily disclosed another million that no one would otherwise have noticed? Should he be sent to prison? And a wealthy retiree who, well over 80 and ailing, was so cooperative that he gave investigators the current balance in his Swiss bank account? Lock him up?
'More Prison Sentences in the Future'
Given these issues, investigators have dealt with the BGH decision the way tax accountants deal with amendments to tax laws. They looked for creative ways to circumvent the hurdle presented by the 1-million threshold -- or better yet, to remain below it. The trick is to push the tax liability below the 1-million limit, a process attorneys call "tuning it down."
It means turning 2 million in back taxes into less than a million -- by both sides agreeing, somewhat tongue-in-cheek, that the legal situation is apparently unclear. Or that a portion of the tax liability must fall within a period that is already under the statute of limitations. Investigators have also been generous when it comes to possible grounds for leniency. But now the BGH has introduced clarity in the form of stricter guidelines. Today, when someone has evaded taxes on more than 1 million, even a confession is not necessarily treated as a mitigating circumstance, nor is the fact that a would-be tax offender used a tax accountant.
The BGH, for its part, is constantly fine-tuning its decision. It's what usually happens when a new principle is decreed from above and the lower courts continue to defend their old practices. But because the BGH is more powerful than the lower courts, things have indeed changed in practice, at least a little. "The penalty orders are getting higher," says Munich tax law attorney Christian Pelz, noting that investigators can now apply more pressure by simply citing the BGH decision. "People in the judiciary first had to internalize the BGH decision," says Düsseldorf tax expert Wessing. "But there will be more prison sentences in the future."
Wessing's calendar is his early warning system. There were times when he spent only 10 days a year in courtrooms, with everything else settled out of court. Last year, however, he spent 50 days in court. The Bochum public prosecutor's office, known for reaching high settlement amounts, has reportedly been informed by the regional court's criminal division that it no longer has as much room for negotiation, there must be more indictments and the court can no longer play along with settlement deals the way it has in the past.
Now, amid this delicate but difficult transition period, the Hoeness case has burst onto the scene. The status quo could have remained in place as long as only elderly, unknown small and mid-sized business owners were tried in the nation's courts instead of high-profile tax evaders. But the Hoeness case changed that.
He is unlucky enough to be one of Germany's most famous men, garnering his case public attention. If his voluntary declaration indeed fails to save him, everyone will pay close attention to if, how and why the numbers are finessed in the preliminary investigation, and to whether mitigating circumstances are found. This heightened attention would make any deal with the courts more difficult and perhaps even impossible. The real danger for Hoeness is that his case will become part of an end game that pits principle against practice, and the high court against the lower courts.
And when it comes to principles, the high court wants to see high-stakes tax evaders go to prison.
BY JÜRGEN DAHLKAMP, CONNY NEUMANN, HORAND KNAUP, BARBARA SCHMID AND JÖRG SCHMIT
Translated from the German by Christopher Sultan
- Part 1: Tough Times Ahead for German Tax Evaders
- Part 2: Despite Tougher Rules, Little Has Changed