Embezzlement – legal “delicatessen”?

If executives are suspected of having enriched themselves at the expense of the company, a criminal liability according to § 266 StGB (“Strafgesetzbuch“, German Criminal Code) is regularly brought into play. Since two fundamental decisions of the German Federal Constitutional Court (“Bundesverfassungsgericht“, “BVerfG“) in 2010 and 2012, however, the courts have been considerably more hesitant with a corresponding conviction. This tendency is exemplified by the recent decision of the LG Hamburg to discontinue the proceedings against the imposition of money charges (here) despite the previous annulment of the acquittals against various bankers of the failed HSH Nordbank, and by a recent decision of the Berlin Court of Appeals (“Kammergericht“, “KG“) which cleared three former functionaries of the Kassenärztliche Vereinigung (a body of medical professionals organising the payment processes for the profession) of the allegation of breach of trust (here).

Also against the background of a current case in my own firm, reason enough to take a closer look at the development of case law, the current status and the (possible) future of this regulation.

Aim of the provision

The offence of embezzlement is intended to protect property and is therefore one of the offences against property in two variants: the offence of abuse and the offence of fidelity. In the former case, the offender damages the property of a third party by exercising his power of disposition or representation in an abusive manner by acting within the scope of his legal ability, but in so doing exceeding the legal entitlement in the internal relationship. In the case of the latter, financial loss occurs as a result of the breach of a trust relationship. This is mostly based on an obligation of safe-guarding the company assets, for example those of an asset manager.

Jurisprudence until 2010

In its decision on the so-called “Cologne garbage scandal” in 2005, the German Federal Court of Justice (“Bundesgerichtshof“, “BGH“) stated that in the case of kick-back payments, the amount of bribes received regularly represents the minimum damage to the client in accordance with § 266 I StGB, since it can be assumed that the contractor paying the bribe always passes on the costs to the client.

In December 2005, the BGH made one of the best-known decisions on embezzlement in the so-called “Mannesmann/Vodafone” complex. The central finding of the court was that the granting of non-compensated recognition bonuses constitutes or may constitute a breach of trust of the assets entrusted to the company.

In the so-called “Siemens decision” the BGH dealt with black funds in private companies. The BGH clarified that the concealment of funds from the company or the bookkeeping in black funds already represents a “final financial loss” since the power of disposition is part of the core area of assets. Also, new orders obtained through bribery payments from those funds should not cause the damage to cease.

Decisions of the BVerfG in 2010 and 2012

In its decision of 23 June 2010 – which, among other things, upheld the decision of the BGH in the Siemens case described above – the BVerfG did not see any fundamental violation of the provision of embezzlement in the German Criminal Code against the requirement of certainty under Art. 103 II of the German Constitution (“Grundgesetz“, “GG“) and determined that a sufficiently concrete interpretation of the standard was still possible on the basis of the groups of cases developed by the courts. However, it was necessary for the courts to further clear any ambiguities as far as possible (requirement to specify).

From the point of view of the BVerfG, the lower courts initially did not seem to have sufficiently complied with this tenor, because in the next decision the tone became significantly sharper. Thus, in its decision of 1 November 2012, the BVerfG demanded that the financial disadvantage caused by the criminal act must also be quantifiable within the framework of the recognised case group of “subjective” or “individual damage”. In particular, any compensation payments – in this case the possibility of using the loan amount granted for the agreed term – must be taken into account when applying the facts of the case. Accordingly, flat-rate findings are no longer sufficient for a conviction. There are also very critical remarks on the “dilution” of the constituent element of the breach of duty with that of the financial disadvantage. Thus, in the opinion of the BVerfG, a pecuniary disadvantage may not automatically be assumed on the basis of a breach of duty without further in-depth explanations being given.

Current approach of the courts

In accordance with the restrictions of the BVerfG, the BGH interpreted the offence of embezzlement much more narrowly in subsequent decisions, which led, for example, to acquittals in the so-called “Berlin banking scandal” (more on this here, in German). In this case, the BGH ruled in May 2013 that in the case of risky business decisions, increased requirements had to be placed on the determination of the subjective intention of the suspect, since the possibility of a threat to lose an investment is inherent in risky business decisions. The shareholder’s consent to the risky transaction could also rule out embezzlement und certain conditions.

In the so-called “Nürburgring” judgement of 2015, the BGH then made the following summary comments on the constituent element of the “asset disadvantage”:

“The financial disadvantage as a result of the breach of trust must be examined from an economic point of view by comparing the total assets before and after the disposition complained of. A disadvantage within the meaning of § 266 (1) StGB can also lie (as a so-called endangerment damage, “ Gefährdungsschaden” ) in the fact that the victim’s assets are specifically impaired due to the danger of the later final outflow of assets, which is already justified by the act, to such an extent that a de facto reduction of assets is already completed at this stage. Since the legal figure of the endangerment damage is not a special category of endangerment offences created by court law, but also in this case the reduction in assets must actually have occurred, it is not sufficient to merely determine the mere (concrete) endangerment of the assets. Depending on the circumstances of the individual case, this may entail the risk of a diffusion of the elements of the offence of breach of duty and of the financial loss; similarly, such a procedure, due to an undifferentiated equation of future risk of loss and current loss, is also suitable to undermine the legislative decision not to make the attempt of embezzlement a punishable offence. Therefore, the probabilities of a loss must not be so diffuse or move in such low ranges that the occurrence of a real loss ultimately remains unprovable. The financial disadvantage must therefore be determined independently and concretized on the basis of the usual standards of economic life. The prerequisite for this is that, taking into account the specific circumstances of the individual case, the occurrence of a loss appears so obvious that the asset is already reduced due to the risk of loss. Under these conditions, the conclusion of economically disadvantageous contracts may also constitute a financial endangerment equivalent to a financial disadvantage, the assumption of which does not necessarily presuppose the legal validity of the obligation entered into – in particular due to the increased litigation risk associated with the creation of the documentary evidence.”

(para. 62 of the decison

On the basis of this standard, the court denied that the directors of the Nürburgring GmbH were criminally liable.

By contrast, in its decision in 2016 in the case of the “HSH-Nordbank“, the BGH lifted the acquittals of the LG Hamburg for various members of the Bank from the allegation of embezzlement. He stated that the so-called “Business Judgment Rule” codified in § 93 (1) 2 of the German Stock Corporation Act (“Aktiengesetz“, “AktG“) also defined the framework of entrepreneurial freedom of decision in criminal law terms. Compliance with § 93 (1) 2 AktG excludes a breach of duty under company law and thus also a breach of duty under § 266 (1) StGB. Conversely, exceeding the limits of § 93 (1) 2 AktG alone does not constitute a breach of duty (to be assessed under criminal law). In the case, however, the failure to observe the limits of entrepreneurial freedom of decision was interpreted as an indication of the existence of a breach of trust which also had to be assessed under criminal law.

Final Thoughts

Since the restrictive rulings of the BVerfG, a conviction for breach of trust is generally much more difficult to achieve, which is shown in a decreasing number of cases recorded, as is shown in practice by the acquittal of the KG Berlin and the decision of the LG Hamburg to discontinue the respective embezzlement proceedings mentioned at the beginning of this article. Accordingly, the criminal prosecution authorities are already acting rather cautiously in the affirmation of an initial suspicion.

It is possible that a large part of the policy’s motivation to create a new law allowing for the punishability of companies instead of individual persons (“Verbandsstrafrecht“) results from the (actual or presumed) resulting enforcement deficit. Because in view of the ever new scandals since the outbreak of the last financial crisis in 2007/2008, the number of criminal sanctions in this area has remained rather modest, to put it mildly. The question is why the legislator does not make the attempt of embezzlement a punishable offence instead of the creation of a new criminal law – because in this case the previous discussion on the question of the “dilution” of the constituent element of the breach of duty with that of the financial disadvantage would become irrelevant. In the current version, together with the interpretation by the highest German courts, the offence of embezzlement is certainly an intellectual “delicatessen” for lawyers, but the lack of sanctioning of the excesses of the last financial crisis is likely to be rather difficult to digest for the legal peace.

BVerfG, Beschl. v. 23.06.2010 – 2 BvR 2559/08
BVerfG, Beschl. v.  1. 11. 2012 –  2 BvR 1235/11

BGH, Urt. v. 2.12. 2005 – 5 StR 119/05 („Cologne garbage scandal )
BGH, Urt. v. 21.12.2005 – 3 StR 470/04 („Mannesmann/Vodafone“)
BGH, Urt. v. 29.8.2008 – 2 StR 587/07 („Siemens“
BGH, Urt. v. 28.5.2013 – 5 StR 551/11 („Berlin banking scandal“)
BGH, Urt. v. 26.11.2015 – 3 StR 17/15 („Nürburgring“)
BGH, Urt. v. 12.10.2016 – 5 StR 134/15 („HSH Nordbank“)

All decisions are in German!

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