In August 2014, the Federal Court of Justice handed down a recently publish decision in connection with the creation of slush funds. The 5th Criminal Senate concluded that the creation of an external slush fund constitutes embezzlement / breach of trust (section 266 German Criminal Code).
What had happened?
The head of the railroad track department (“H”) of a German construction company (“C”) was solely responsible for engaging subcontractors and for negotiating the conditions of the purchase agreement for materials to manufacture railroad tracks. One of the subcontractors (“S”) approached him in 2000 and offered to create a slush fund for H. At first, S declined but over time, a mechanism evolved in which H contacted H and asked them to increase the amounts invoiced for the purchased materials without any relevant consideration for C. H “parked” these sums on a separate bank account. H was allowed to dispose of the slush funds as he saw fit. In return, H preferred S in cases a delivery was urgent, i.e. the price for the materials was higher. H also informed S about lower quotes from competitors. At first, H used the slush funds to finance business for C. Later-on, we used the funds to pay for private scuba diving trips.
What did the Court decide?
In 2010, the 2nd Criminal Senate of the Federal Court of Justice had ruled that the crime of embezzlement / breach of trust is completed, once the money to create a slush fund has been transferred and is “out of the companies reach” (BGH decision of 27. August 2010 – 2 StR 111/ 09, BGHSt 55, 266, 282 et seq.). Under these circumstances, the money is permanently withheld from the company. It is irrelevant if and for what purpose the slush funds are being used at a later stage. The use of the slush funds only deepens the damage to the company. The decision did not clarify whether or not the 5th Criminal Senate agreed with a previous decision by the 2nd Criminal Senate in which the later had concluded that embezzlement / breach of trust is possible even if the money is hidden in a slush funds within the companies organization (see BGH decision of 29. August 2008 – 2 StR 587/ 07, BGHSt 52, 323, 336 et seq.).