The German Federal Ministry of Justice Submits a Proposal for a Corporate Sanctions Act
Published: August, 2019
Submission: September, 2019
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The German Federal Ministry of Justice and Consumer Protection (BMJV) has submitted its long-awaited proposal for a Corporate Sanctions Act (VerSanG). When corporate crimes are committed, it is making provisions for independently prosecuting the entire organization in addition to prosecuting single perpetrators. The prosecution of organizations where suspicions arise should no longer be at the discretion of the prosecution authorities (facultative prosecution) – as is currently the case – but should be made mandatory (mandatory prosecution). Monetary sanctions of up to 10% of turnover could be imposed, and the organization may even be dissolved in the worst case scenario.
“CORPORATE PENALTY” AS THE CONNECTING FACTOR FOR SANCTIONING THE ORGANIZATION
The new act will apply to legal persons under private or public law, unincorporated associations and partnerships with legal personality. These organizations will be sanctioned if a manager commits a “corporate criminal act” himself, or, in the event that someone else commits the act, if he does not prevent it or does not make it significantly harder to commit the act due to his lack of supervision. In the same way as with individual perpetrators, in the future, legal prosecution will also apply to the entire organization; at present, in the event of company-related misconduct, it is up to the authorities, companies and other associations to decide whether or not to prosecute their managers (facultative prosecution).
A corporate criminal offence is an act through which the organization’s duties are violated, or from which the organization benefits or is intended to benefit. This includes all criminal offences against applicable law – such as tax evasion, corruption, customer or business partner fraud, competition offences, market manipulation or money laundering. Offences committed abroad are also included if the act would also be liable to prosecution under German law and if the organization’s registered offices are domiciled in Germany. Thus, if a company commits an act of bribery in order to obtain orders abroad but the act does not constitute a violation according to German law because it was not committed in Germany, corporate sanctions will nevertheless be imposed.
Managers are members of the management board or the executive committee, chief representatives, authorized signatories, authorized representatives and other persons with managerial responsibilities including supervisors. This includes members of the Supervisory Board.
MONETARY SANCTIONS OF UP TO 10% OF TURNOVER
In the event of an intentional corporate criminal offence, the corporate fine should amount to at least €1,000 and at most €10 million. Thereby, the maximum penalty will comply with the applicable legislation. A new point is that stricter sanctions will apply to commercial enterprises with a turnover of more than €100 million, and the maximum penalty will be proportional to the organization’s economic success. In the event of an intentional corporate criminal offence, the penalty will be at least €10,000 and at most 10% of the average annual turnover from the last three years. In the case of several associations operating as one economic unit, the consolidated turnover will be the decisive factor in determining the amount of the penalty. In particularly serious cases, dissolution of the organization may even be imposed.
NAMING AND SHAMING
If a large number of injured parties are involved, in addition to imposing a corporate sanction, the ruling should also be announced publicly. The court will decide how the announcement should be made. Announcements on the internet are expressly envisaged.
MITIGATING SANCTIONS, INTERNAL INVESTIGATIONS AND COMPLIANCE
The way in which the organization reacts to the corporate criminal offence will determine the amount of the penalty imposed: the organization can mitigate sanctions by endeavoring to expose offences, making up for damages and, after the offence has been committed, taking precautions to avoid and expose corporate criminal offences. If the organization uses the corporate penalty as an opportunity to carry out internal investigations and to introduce a compliance management system or to optimize its existing compliance management system, it can expect a significant reduction of the penalty.
However, internal investigations will only be recognized as mitigating sanctions if they substantially contribute to clarifying the facts, if the organization or the individual commissioned by the organization to carry out the internal investigations works “continuously and unrestrictedly” with the prosecution authorities and hands over the results of the investigation and associated documents to the authorities, and if the internal investigations are conducted in a fair manner. For instance, before being questioned, employees should be made aware that the information they provide could be used against them in criminal proceedings, and that they have the right to request assistance and to withhold information if there is a risk of self-incrimination. While internal investigations are being carried out, the prosecution authority may occasionally discontinue the prosecution.
The provisions on carrying out internal investigations as a means of mitigating sanctions contain points for discussion: it is unclear, for instance, how the right of the employee to remain silent when questioned as part of internal investigations, as provided for in the draft, will allow for the company’s unrestricted (i.e. not limited by the right to remain silent) right, under employment law, to demand information from its employees. And the question remains unresolved as to how the (albeit voluntary) “continuous and unrestricted” work along with the handing over of documents will operate without legal enforcement, without the organization violating data protection laws or disclosing sensitive secrets from business relationships and thereby forfeiting contractual penalties. The draft only provides for a regulation governing the power of the authorities to use personal data from internal investigations.
If the organization conducts the internal investigations according to the measures provided for by law, this will reduce the maximum penalty of the corporate fine by half; the minimum amount will no longer apply. Dissolution of the organization and “naming and shaming” will then be dispensed with completely.
In certain cases, the draft provides for discontinuing prosecution of the organization, namely in less severe cases, if the organization is itself likely to suffer serious consequences as a result of the criminal offence, in the case of insolvency and if penalties abroad are to be expected. In addition, prosecution may be discontinued by imposing certain conditions and instructions if their fulfilment is likely to compensate for the public prosecution interest. The provisions that already exist in this respect in the Criminal Code render the Corporate Sanctions Act applicable. In the case of less severe cases or if the organization is likely to suffer serious consequences as a result of the offence, the imposition of a corporate sanction may be disregarded.
SETTING UP A CORPORATE PENALTY REGISTER
Similarly to the Federal Central Criminal Register, of which the public part (known as the police certificate of good conduct) discloses certain criminal offences, a Corporate Penalty Register is to be introduced in which legally binding judicial rulings on the imposition of corporate penalties in accordance with the Corporate Sanctions Act are to be entered along with corporate fines in accordance with article 30 of the German Regulatory Offences Act (OWiG) (which is to remain applicable alongside the Corporate Sanctions Act).
LEGAL POSITION OF COMPANY DEFENSE COUNSELS, LEGAL INTERNAL INVESTIGATORS AND CORPORATE BARRISTERS
The draft uses the intensive discussions on the searching of solicitor’s offices in connection with the emissions scandal as an opportunity to adjust the legal position of solicitors in the jurisdiction of the Federal Constitutional Court in the so-called “Jones Day” ruling: only lawyers who have a client relationship with an “accused party” should expressly benefit from the prohibition on the confiscation of evidence stated in article 97 of the German Code of Criminal Procedure (StPO). In principle, these are criminal defense lawyers. From now on, the company defense counsel should also be included in the scope of protection, which the Corporate Sanctions Act draft expressly mentions. Accordingly, the company defense counsel may not be commissioned with the internal investigations. In current sanctions proceedings, this clear distinction between internal investigations and company defense counsels means that companies not only commission a contractor specialized in internal investigations – in particular a solicitor’s office – but also entrust another solicitor with their own defense.
Companies and other organizations must come to terms with the fact that it will soon become the general rule that they will be prosecuted due to company-related criminal acts committed by their employees. Operating compliance management systems also already help, under the current law, to avoid corporate fines within the meaning of Article 30 of the German Regulatory Offences Act – and that should also remain the case under the new Corporate Sanctions Act. Conducting internal investigations according to special standards which are very close to the requirements of the Federal Law Society’s (BRAK) Criminal Law Committee concerning corporate solicitors, and their sanction-mitigating effect, is welcome – and indeed also demands that the company in question is demonstrably committed to exposing its own misconduct.
Already today, companies should be well advised to fully investigate any suggestions of misconduct by their employees. The exposure of such offences forms part of the commercial duty of care – anyone who closes their eyes to misconduct may themselves be liable and is already liable according to applicable law – as the ruling in the Siemens/Neubürger case impressively goes to show.
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