bogus invoice networks: When the subcontractor becomes a trap

Service companies that appear reputable but conceal undeclared wage payments can jeopardize the livelihoods of honest tradespeople. An expert explains how businesses can protect themselves.

This article is part of the special feature " Offensive against undeclared work".

Many tradespeople are familiar with this scenario: order books are full, their own teams are stretched to capacity, so they call in a subcontractor . The subcontractor provides a proper invoice, a business registration, perhaps even a tax exemption certificate. Why exactly this seemingly innocuous situation turns into a nightmare for a growing number of trades businesses, one that later culminates in a search by customs, frozen bank accounts, or even insolvency , is explained by Dr. Florian Neuber, a specialist lawyer in criminal law , in an interview with the German trade journal "Deutsches Handwerksblatt".

DHB: Dr. Neuber, quite a few craft businesses work with subcontractors. In your practice as a criminal defense lawyer, however, you are experiencing a worrying trend?
Neuber: This concerns so-called bogus invoice or service company networksFor years, law enforcement agencies have been increasingly targeting an established Business Model before, in which specially founded "service companies" act as vis-à-vis companies in the construction and finishing trades subcontractors appear, without ever even a Construction work to provide. They submit formally correct, but substantively flawed documents. incorrect invoices from those who solely serve the accounting purposes of concealing undeclared wage payments or generating Black money It is not uncommon for a significant portion of the transferred invoice amount, after deduction of a commission, to be returned in cash to the client, who then uses it to pay his own unregistered workers.

DHB: Does this mean that only those companies that deliberately generate black money should be worried?
Neuber: The Dangerous The problem with these designs is that they can also affect businesses that nie had the intention, black money to generate! Anyone who hires a subcontractor can generally not just like that early in the, whether the company actually provides the agreed services with its own or properly registered staff, or whether it is itself only part of a larger cover chain system. Service companies These types of people deliberately appear on the market as if they were completely normal Construction companies, with business registration, commercial register entry, letterhead and sometimes even with employees registered on short notice. camouflage during construction site inspections.

DHB: How can you tell that something is wrong?
Neuber: For the tax authorities and the Tax investigation Certain patterns are considered to be typical risk signsThe company was newly founded, has frequently changing managing directors, a short lifespan, and often relocates its headquarters. Further indicators include low operating expenses, no discernible use of tools or materials, and no company vehicles. Payment flows where large deposits into the subcontractors' accounts are quickly withdrawn in cash also raise suspicion.

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If such a pattern is uncovered during a tax audit , an inspection by the Financial Control Unit for Undeclared Work, or an investigation against one of the subcontractors, all of this company's clients can also come under investigation – regardless of whether there was actually any deliberate cooperation in the individual case!

DHB: What specific consequences does a craft business face if it falls victim to a network of shell companies? 
Neuber: The consequences of such a suspicion can also affect honest craft businesses are at risk of going out of business This could result in the tax implications of disallowing the deduction of business expenses and input tax credits from the relevant invoices, leading to significant consequences. Tax arrears plus interest. The criminal charge is... Tax evasion to Section 370 of the Tax Code in the room, often supplemented by the accusation of withholding and Embezzlement of wages according to § 266a of the Criminal Code, if social security contributions for undeclared workers have not been paid.

A particularly drastic measure, which often occurs before a verdict or even an indictment, is the so-called asset seizure under Section 111e of the Code of Criminal Procedure.

DHB: What does this asset freeze mean? 
Neuber: It is – figuratively speaking – a kind of Pre-trial detention for the assets. Law enforcement authorities can thus provisionally seize funds that the company may ultimately have to repay. This requires initial suspicion that the invoices were knowingly used to conceal undeclared income and that a corresponding balance exists in the relevant account.

DHB: How does this affect things in practice?
Neuber: business accounts will happen overnight blocked, demands impoundedIn some cases, vehicles or real estate may also be subject to seizure. Since the asset freeze can be based on the total suspected proceeds of the crime, the secured amounts are often significantly higher than a business can realistically absorb in a worst-case scenario. For a craft business that relies on ongoing liquidity for wages, materials, and supplier liabilities, such an account freeze can lead to financial ruin within just a few weeks. insolvency lead to this, even if the accusation ultimately proves to be unfounded or is significantly downplayed.

This is precisely what is repeatedly observed in practice : Asset freezes have an economic effect similar to enforcement proceedings, even though they are explicitly neither a punishment nor a conviction. Particularly in complex white-collar crime cases involving a so-called fictitious invoice network, investigations can sometimes drag on for months or even years without the company gaining access to the seized assets during this time. In legal practice, account freezes of up to three years have been considered proportionate as long as the investigations are ongoing.

My experience as a lawyer also shows that for public prosecutors who are in charge of the proceedings at this time, it sometimes doesn't matter whether livelihoods built up over decades are at stake – at least not as long as the initial suspicion of involvement in a fraudulent invoice network persists.

DHB: How can craft businesses protect themselves against such risks?
Neuber: Businesses cannot completely protect themselves against the criminal activity of third parties, but they can protect themselves against it. Document your own diligence in this waythat in a serious situation they can be identified as deceived clients and not as participants on the system. Several are recommended for this. Activities:

1. Check subcontractors before the first engagement and again at certain intervals: business registration, extract from the commercial register, certificates of good standing from the employers' liability insurance association and the social security institutions, exemption certificate according to § 48b EStG and, where applicable, registration in the trade register.

2. Be wary of suspicious signs such as a very young company, frequently changing managing directors, unusually low prices, flat-rate invoices instead of invoices based on performance, or a company headquarters that clearly does not support its own business operations. Be critical when subcontractors contact you or when you are working with them for the first time.

3. Document each construction site in such a way that you can prove, if necessary, that the subcontractor's personnel were actually working on site. This can include attendance lists with the names of the workers deployed, a comparison with the personnel registered with the subcontractor, site diaries, photographic documentation of the construction progress, and, where possible, recording the workers upon entering the construction site.

4. Insist on detailed, performance-based invoices with a comprehensible description of the service provided, the period of time, and the personnel used, instead of accepting flat-rate cover invoices.

5. Always pay electronically and exclusively to an account that is clearly in the name of the invoice issuer.

This documentation does not replace legal or tax advice in individual cases. However, it often makes the crucial difference between a company being able to credibly present itself as a deceived victim in an investigation or being suspected of complicity or at least gross negligence.

DHB: What can companies do to remain operational when an asset freeze has been issued? 
Neuber: An asset seizure regularly covers all accounts, which are directed at the company or the accused person. Whoever his total liquidity Concentrating all funds in a single company account risks having no money left for wages, materials or ongoing liabilities from one day to the next – even if the accusation ultimately proves to be unfounded!

Obvious and legally permissible measures to take in advance include:

• Clearly distinguish between operating capital that is actually needed for day-to-day business operations and additional reserves that do not necessarily have to be held in the same account as the operating business.

• Maintain multiple accounts at different institutions for different purposes, such as a separate salary account , so that in the event of a garnishment, not all payment flows necessarily come to a standstill at the same time.

• Coordinate with your bank and tax advisor in good time regarding credit lines or overdraft reserves that can secure short-term liquidity if needed . And keep up-to-date documentation of your own financial situation.

• Realistically assess what proportion of the company's assets must be kept liquid for daily operations so that wages and urgent liabilities can continue to be paid even in the event of a partial account freeze.

• Seek legal advice early on as soon as an investigation , a company audit focusing on subcontractors, or an inquiry from the Financial Control Unit for Undeclared Work becomes apparent. Despite everything, there are legal remedies against an attachment order – particularly regarding proportionality, the need for security, and the amount of damages claimed.

But beware: None of these measures is a license to shield assets from the authorities in a crisis! The sole purpose is to structure your business in such a way that a single seizure of assets doesn't immediately cripple the entire operation. Anyone who moves assets after learning of an investigation risks having this considered an act of obstruction of justice ! This typically exacerbates the situation rather than mitigating it. Such measures should only be implemented in consultation with a specialized lawyer to avoid creating further risks.

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