Football fans in the western German city of Dortmund consoled themselves with several revenge fantasies last Tuesday when their top player transferred to the country's most prominent team, FC Bayern Munich. The first was to wish a home game loss on the Munich team when it played FC Barcelona that evening. The second was the fervent wish that the traitorous player would play for Bayern next year, but that the team's current President Uli Hoeness would be denied the pleasure of watching. Why? Because they probably don't get cable sports channels in prison.
As we now know, the Dortmunders won't be getting their first wish, after Bayern Munich beat Barcelona 4:0 last week. But the second one could come true, and instead of requiring a revenge fantasy to make it happen, all it could take is the state's monopoly on the use of force -- even if Hoeness, now Germany's most famous tax evader, was sitting in the stands in the match against Barcelona, thanks to a suspended arrest warrant and bail posted at €5 million. Although Hoeness submitted a voluntary declaration to report his hidden assets in Switzerland, he apparently made such a mess of it that it might not save him, after all.
If that's the case, the public prosecutor's office in Munich will have to investigate him as if he had never come clean. And that could put him closer to prison than any other high-profile tax evader since Peter Graf, the father of tennis star Steffi Graf.
It's a full-blown drama, complete with all the requisite elements, starting with pride and stigma. And then there is the arrogance of a public figure, one who is now more likely than ever to face public scorn and ridicule. And, finally, pity and malice will also play a role, especially when a figure like Hoeness, with all of his big talk and noble claims, comes crashing down. It has become clear that the Hoeness case is also about to make waves in the political world, especially given his close ties to many politicians.
High-profile politicians have sought his advice and basked in the sunshine of his popularity, including Chancellor Angela Merkel, a member of the center-right Christian Democratic Union (CDU), Bavarian Governor Horst Seehofer, who heads the CDU's conservative sister party, the Christian Social Union (CSU), and opposition Social Democratic Party (SPD) chancellor candidate Peer Steinbrück. But now Hoeness' sunshine is about to turn into a shadow, one that will also be cast over Berlin. For the contenders in the upcoming federal election, the trick will be placing their respective opponents in that shadow while remaining in the sunlight.
A Campaign Issue
As the campaign for this fall's general election gets started, one of the biggest issues is the question of justice. Could it be that the opposition was right when it torpedoed the government's plan for a tax treaty with Switzerland? A treaty that would have guaranteed anonymity to tax evaders like Hoeness? And should those who submit voluntary declarations go unpunished, even when they have defrauded the German treasury of millions over the years?
The SPD has been only too pleased to address the issue, gratified that the government finally provided a target for popular anger. With scandals involving Swiss banks, tax evasion and illicit earnings, the SPD was able to paint the issues as a battle of good against evil, with the CDU, CSU and their coalition partner, the pro-business Free Democratic Party (FDP), standing accused of betraying the public.
But the government immediately staked out its own claim to the issue. After SPD Chairman Sigmar Gabriel demanded that tax evaders be permitted to avoid prosecution in minor cases by turning themselves in, the governing coalition also publicly declared its support for the idea. Now the CSU's Seehofer is also calling for limiting voluntary declarations "to certain, minor cases," adding that leniency would be completely inappropriate when "a lot of money and criminal energy are involved." Even the FDP, which generally favors lower taxes and is therefore notoriously suspected of having a weak spot for tax fugitives, wants to take a closer look at the issue of voluntary declaration.
All of this could continue to fuel the election campaign for days, perhaps even weeks, but then politicians will start latching onto other issues. The Hoeness case, on the other hand, is primarily an issue for the judiciary. If charges are filed against Hoeness, the issue of whether the courts are ready to take a tougher position on tax evasion will come to a head. Although the Federal Court of Justice (BGH) already made it clear in 2008 that it planned to deal more harshly with tax evaders, its position hasn't trickled down to courtrooms throughout the country yet.
In 2008, the judges on the BGH decided that, as a rule, a person who has evaded taxes on €1 million or more should go to prison. So far, however, there have been only exceptions to the rule. In the end, even tax evaders who allegedly failed to pay taxes on €4-5 million have somehow managed to escape with suspended sentences.
A Landmark Case?
But perhaps the change decreed by the BGH merely needed an impetus or a catalyst, a case as spectacular as that of former Deutsche Post CEO Klaus Zumwinkel several years ago. The €3 million that the Süddeutsche Zeitung reported Hoeness had paid in back taxes is clearly well over the critical €1 million threshold, even with the special allowances that those who submit voluntary declarations usually build in. In other words, his case could be the precedent that sets everything in motion.
One thing is clear: By keeping his money in Switzerland, Hoeness was long in good company. After World War II, wealthy Germans began stashing funds in Switzerland, Luxembourg and Liechtenstein, fearing inflation or currency reform, that the Russians were coming or that the SPD would come into power. It was essentially a community of anxious Germans investing their money abroad. And then there were the owners of small and mid-sized companies, who refused to accept that while they were often working 12-hour days, the government was, in their view, giving their money away to the wrong people, namely their lazier countrymen or foreigners.
Many were the pillars of society, with the "Order of Merit of the Federal Republic of Germany pinned to their jackets while their wallets were tucked inside," as the head of the German tax union (DSTG), Thomas Eigenthaler, scoffs. This explains why, at the time when Hoeness began depositing his money in Swiss bank accounts, the German legal system was extremely indulgent with the respected citizens who were secretly cashing in.
It began with the fact that the option of voluntary declaration existed in the first place -- and still exists today. It enables a tax evader to avoid prosecution by simply paying back taxes and, if the sum exceeds €50,000, an additional 5-percent fee to the treasury. "Tax evasion is the only offense where the government dispenses with its right to prosecute and would rather take the money," says union leader Eigenthaler. Jürgen Wessing, a Düsseldorf expert on the criminal code for tax offences, agrees: "It's alright as long as the money comes in."
And even when a tax evader was actually caught without having turned himself in, his chances of avoiding a prison sentence were good. Horse breeder Paul Schockemöhle, who owed 22.6 million deutsche marks in back taxes, was given an 11-month sentence, but on probation. Tennis star Boris Becker owed 3.8 million deutsche marks and was sentenced to two years on probation and a fine of €500,000. Singer Freddy Quinn, who had cheated the state out of 1.8 million deutsche marks, also received two years on probation, plus a fine.
Those who had the money to pay their back taxes and fines could buy their freedom. In 2008, a businessman from Bad Homburg, near Frankfurt, owed the government €7.5 million and still avoided a prison sentence. After he had paid €15 million and handed two years on probation, the case was closed.
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