Risk of Fraud when Applying for Emergency State Aid in the Corona Crisis

The restrictions on public and economic life due to the coronavirus have led to a large number of companies drastically reducing or even completely suspending their business operations. To prevent the companies affected by the resulting drop in sales from being pushed into a serious economic crisis that threatens their existence, the Federal and State Governments are supporting those affected with various offers of assistance, in particular with financial emergency aid.

Even if application procedures are meant to be uncomplicated from the point of view of the Federal and State Governments, if applications are to be examined only superficially and thus aid is to be paid out quickly, the application requirements must be known and observed precisely (cf. No. 1). Incorrect or incomplete information may not only result in the recovery of the amounts paid out but also entail a considerable risk of criminal liability for subsidy fraud (see No. 2). This applies not only if the misstatements are intentional. For a criminal liability, reckless, i.e. grossly negligent, acts are already sufficient (see No. 2.3)!

1. Basic prerequisites for applying for emergency aid

The details of who can apply for emergency aid vary from one federal state to another. Smaller businesses, freelancers, (solo) self-employed persons and farmers with up to 10 employees who have a German business establishment or management headquarters in Germany and are registered with a German tax office can apply for up to EUR 15,000 from federal funds (see the numerous contributions in the BEITEN BURKHARDT Corona Information Center (LINK) and the publication of the BMWi (LINK). In their emergency aid programmes, the federal states are extending the circle of those eligible to apply in some cases to companies with up to 250 employees, such as Bavaria, and are increasing the subsidies to up to EUR 60,000 in some cases, as in the emergency aid programme in Brandenburg (see the BB Short News of 27 March 2020 LINK).

Both the emergency aid provided by the Federal Government and the State Governments is aimed at securing the economic existence of the companies. The emergency aid is intended to prevent liquidity shortages arising due to corona-related restrictions and ongoing operating expenses.

The applicant must have suffered economic difficulties as a result of the corona pandemic in particular which actually threaten the existence of the company. It is usually not sufficient that the applicant has only suffered a drop in sales that does not threaten its existence. A "liquidity shortage" is thus deemed necessary for the Federal Government's aid "if, as a result of the corona pandemic, the ongoing income from business operations is unlikely to be sufficient to pay the liabilities from ongoing material and financial expenses (e.g. commercial rents, leases, leasing instalments) in the three months following the application" (for Bavaria BayStMiWi LINK. For instance, according to the "Brief Facts on the Corona Emergency Aid Programme of the Federal Government", the applying company must not have been in financial difficulties as early as 31 December 2019 (see BMWi LINK).

In addition to a liquidity shortage, the emergency aid programmes of the federal states also recognise other reasons as threatening their existence. In this respect, it is imperative that the requirements are thoroughly and conscientiously examined when applying for aid, and that the existence of these prerequisites is precisely documented internally in order to avoid unpleasant surprises at a later date.

2. Risk of the accusation of fraud

Particularly in view of the information and assurances required when an application is submitted, there is a not inconsiderable risk of an allegation of fraud if a subsequent review reveals that the prerequisites for emergency aid were not met. False statements at the time of application or improper use of the aid generally fulfil the objective criminal offence of subsidy fraud (see Nos. 2.1 and 2.2). From a subjective point of view, intent is not necessarily required but reckless behaviour is sufficient to make it a criminal offence (see No. 2.3).

2.1 Fraud with regard to facts / application prerequisites

For instance, anyone who provides incorrect or incomplete Information to a subsidy provider about facts relevant to subsidies (section 264 (1) no. 1 German Criminal Code (BGB)) or who, contrary to the legal provisions governing the award of subsidies, fails to disclose such facts (section 264 (1) no. 3 German Criminal Code (StGB)) will be sanctioned for subsidy fraud.

Since the emergency aid is a benefit which, in the case of federal aid from federal funds and in the case of state aid from state funds, is granted to businesses or enterprises without market compensation and serves to promote the economy, it fulfils the definition of a subsidy in section 264 (8) sentence 1 no. 1 StGB.

Pursuant to section 264 (9) StGB, all factual circumstances defined by law or on the basis of a law by the grantor of a subsidy as subsidy-relevant (section 264 (9) no. 1 StGB) or on which the granting, approval, reclaiming, continuation or retention of a subsidy or a subsidy advantage is legally dependent (section 264 (9) no. 2 StGB) are of relevance to subsidies.

But which details in the applications are now relevant to subsidies in this sense? In some cases, the applications leave it at the blanket statement that all information in the application is relevant to subsidies, in others the facts relevant to subsidies are specifically stated. In particular, it should be considered that the assurance about the existence of an economic situation threatening the existence of the company and the liquidity shortage caused by the corona pandemic is a fact relevant to subsidies. However, information on the number of full-time employees, the amount of funding applied for or state aid already received or applied for is also of relevance to subsidies. Every applicant should therefore verify carefully whether it is really in an economic situation that threatens its existence, which was triggered by the corona pandemic, and what amount of subsidy is actually needed to maintain the liquidity of the business.

2.2 Assignment of emergency aid

In addition to deceiving the applicant about the requirements for filing an application, the improper use of emergency aid that has been obtained in principle lawfully can also be punishable. In this respect, under section 264 (1) no. 2 StGB, anyone who uses a monetary benefit whose use is restricted by legal provisions or by the subsidy provider with regard to a subsidy in contravention of the restriction on use is sanctioned.

As a matter of principle, corona emergency aid may only be used to overcome the liquidity shortage and remedy the economic situation that is threatening the company's existence. This means that the subsidy may only be used for current operating expenses (e.g. rent, leasehold, loan and leasing instalments) but not for private living expenses (such as renting a private apartment) (see BMWi LINK). In this context, the restrictions related to emergency aid should also be kept in mind and the benefits received should be used solely within this framework. Particular attention must also be paid, for example, to all decisions relating to distributions to shareholders.

2.3 Intention is not required - gross negligence is sufficient!

The high risk of criminal liability arises above all from the fact that the offence of subsidy fraud does not necessarily require intent but that the offences of the relevant section 264 (1) nos. 1 to 3 StGB can also be committed recklessly (cf. section 264 (5) StGB). Recklessness is an increased form of negligence and is characterised by a particular indifference or gross carelessness. Thus, when applying for emergency aid, particular care must be taken to ensure that the facts from which the prerequisites for the application are derived are carefully examined. While the intentional fulfilment of the criminal offence under section 264 (1) StGB can be sanctioned with imprisonment for up to five years or a fine, the threat of punishment for reckless committal is still imprisonment for up to three years or a fine (section 264 (5) StGB). In addition, there is the personal liability of managing directors or board members (as corporate body (Organ)) towards the company itself.

2.4 Possibility of a withdrawal from the offence with exemption from punishment

As long as the emergency aid applied for has not yet been granted, the applicant acting intentionally or recklessly can avert a criminal liability if it prevents the emergency aid from being granted (section 264 (6) sentence 1 StGB), e.g. by withdrawing the application. If the emergency aid is not granted without the offender's intervention, it will become punishable if it voluntarily and seriously tries to prevent the grant of the subsidy (section 264 (6) sentence 2 StGB).

The time slot given for this is, however, only small due to the rapid disbursement of the emergency aid.

3. Practical advice

Even though the awarding authorities currently only carry out regular plausibility checks, and sometimes even no checks whatsoever on the content, so that aid can be disbursed quickly and unbureaucratically, ex-post checks have already been announced for the future. These refer both to the existence of the prerequisites for application and the appropriate use of the aid (see for instance Saxony-Anhalt LINK). In this context, requests for information may also be made to tax offices and tax authorities (see for instance Hesse LINK).

Companies that want to apply for assistance today should therefore be aware of the situation tomorrow: The competent authorities, including their departments focusing on the areas of sanctions, will closely examine numerous applications in the next few years as part of the "handling" of the crisis situation and will check information for its plausibility. In doing so, these authorities will be able to draw on a substantial pool of experience from previous review situations. Due to generous statutes of limitations, we expect that applications will be reviewed over many years and that the detailed reviews missed at the beginning be "wound up" eventually. In such situations, there is no reason why authorities should not immediately report to the public prosecutor's office any facts which, in their opinion, give rise to initial suspicion of subsidy fraud. For instance, the "Brief Facts on the Federal Corona Emergency Aid Programme" expressly states that applicants must expect criminal prosecution for subsidy fraud if they make false statements intentionally or through gross negligence (see BMWi LINK).

In order to minimise the risks associated with the application and use of emergency aid, both the existence of the prerequisites for emergency aid and its verification and the appropriate use of the funds received should be carefully and comprehensibly documented in the event of a subsequent review and a subsequent charge of criminal liability.

Jörg Bielefeld

Timo Handel

Alexander Schmid