Compliance & White Collar Crime

Breach of Trust – A Sword of Damocles for Decision Makers?

Due to recent precedent of the Austrian Supreme Court, granting a loan has become a risky business.

The Sword of Damocles – the Jurisprudence of the Austrian Supreme Court

Only recently the breach of trust provision found its way back into the limelight by two prominent criminal proceedings: BAWAG and Styrian Spirit (the latter related to the crash of Hypo Alpe Adria). Both cases involved the trial of banking executives who had permitted the granting of loans to economically weak debtors and without sufficient securities backing up the loans. In the following appellate proceedings, the Austrian Supreme Court took the chance to elaborate on the objective and subjective prerequisites of liability for breach of trust according to Art 153 ACC.

Interestingly enough, the Supreme Court inferred the abuse of authority from an overall economic analysis of the loan deal, ruling that a lack of sufficient securities and the weak economic position of the debtor (“mangelnde Bonität“) qualify the loan as “economically unreasonable”. In the view of the Court, granting such an economically unreasonable loan constitutes an abuse of authority, irrespective of any internal guidelines or mandatory provisions.

With regard to the required element of a financial harm, the Austrian Supreme Court took up a similarly rather strict stance. It held that the harm is caused the moment an economically unreasonable loan is granted. Thus, a later repayment does not exculpate the defendant, but would rather be qualified as a subsequent mitigation of (the already-existing) harm.

Additionally, one should note that criminal liability for breach of trust rests mainly on the objective side of the offence, the qualification of a loan deal as “commercially unjustifiable”. Following the argumentation of the Austrian Supreme Court, a defendant who “re- cognized” (“trotz erkannter wirtschaftlicher Unvertretbarkeit“) that the granting of the loan is commercially unjustifiable cannot circumvent criminal liability by pleading that he/she merely hoped that the debtor would gain economic momentum and would eventually repay the loan.

How to escape the Sword of Damocles?

Unquestionably, criminal liability for risky loan deals is lurking more than ever before. Consequently, banking executives must abide by all relevant legislative provisions. In borderline cases or in cases where there are neither external nor internal provisions, a transparent and detailed documentation of all related measures will help provide arguments against a deal being viewed as economically unreasonable.

Unquestionably, criminal liability for risky loan deals is lurking more than ever before.