Law to combat corporate crime

19 Sep 2019

Law to combat corporate crime

Dr. Sebastian J. M. Longrée, Partner, Kümmerlein Rechtsanwälte & Notare

Current topic

On 22 August 2019, the Federal Ministry of Justice and Consumer Protection (BMJV ) presented its draft of an “act on combatting corporate crime”. The draft bill, which has not yet been published, contains new provisions on sanctioning companies. The aim of the law is twofold; firstly, for corporate crimes to be prosecuted and sanctioned more severely in future. However, incentives are also to be created to mitigate penalties through targeted compliance measures in cooperation with the investigating authorities.

This article will begin by offering a cursory glance at the current legal situation, with particular attention given to the regulatory offence legislation invoked against companies in the past. It will then take a look at the most important and known innovations of the draft bill.

Current legal situation

Sanctioning of enterprises (used here as a generic term for legal persons and associations of persons) is currently primarily enforced under section 30 of the Act on Regulatory Offences (Gesetz über Ordnungswidrigkeiten - OWiG). Under this provision, fines can be imposed on enterprisesif their representatives (e.g. managing directors, board members, attorneys-in-fact (Prokuristen) and other management members) have committed a criminal or regulatory offence and as a result either the enterprise’s duties have been violated or the violation has led or is intended to lead to an enrichment of the enterprise.

The criminal or regulatory offence committed by a manager can result in different sanctions for the enterprise. Apart from the imposition of a fine, there is also the threat of confiscation of the value of proceeds from an offence, products of an offence and instruments of an offence. The amount of the fine depends on whether the offence in question is a criminal offence or a regulatory offence. For intentional offences, the fine is up to ten million euros.

It should be noted that both the prosecution of the regulatory offence and the setting of the fine are at the discretion of the competent regulatory authority.

No more scope for discretion

This could soon change. The provisions of the planned German “Corporate Sanctions Act” (Verbandssanktionengesetz) are to no longer fall under regulatory offences law, but criminal law. This is accompanied by the introduction of the principle of mandatory prosecution, which obliges the investigating authorities to initiate an investigation if there is initial suspicion. Unlike in the past, it would no longer be at the discretion of the administrative authorities to initiate proceedings.

The term collective criminal offence

The term corporate criminal offence or collective criminal offence is defined in the draft bill. According to this definition, collective criminal offences are criminal offences “which have violated duties incumbent upon the company or through which the company has been or was intended to be enriched”. Reference to the sanction provision in section 30 OWiG is evident. Offences committed abroad are also to be sanctioned if the offence would be a criminal offence under German criminal law, the offence is punishable at the scene of the offence, the company has a registered office in Germany at the time of the offence and the offence has led to a corresponding violation of duty or to enrichment.

Tougher sanctions –naming and shaming

The newly planned sanctions framework is likely to have a significant impact. Similar to anti-trust and data protection law to date, this is to be raised from a maximum of ten million euros to up to ten percent of annual revenue, although this will only apply if the company's annual revenue exceeds one hundred million euros. The option of disgorgement of the profits of the offence is expected to be retained – in addition to the actual fine. As an ultima ratio, the draft also provides for dissolution of the company, which should, however, only be carried out if the main purpose of the company precisely involves committing criminal offences.

Similar to the recently amended Money Laundering Act (Geldwäschegesetz), the draft bill also provides for the introduction of a Corporate Sanctions Register, which, although not intended to be open to the public, can be used to “name and shame” in the event of a large number of injured parties.

Reducing sanctions through internal measures

Completely new is the option provided for in the draft bill permitting companies to conduct internal investigations that can be used in the company’s favour in sanctioning and can reduce the sanction by up to 50 percent. However, such investigations should only have a mitigating effect if they are conducted fairly, transparently and in cooperation with the investigating authorities. The criminal defence and the internal investigation conducted must be functionally separate, although both can be handled by the same law firm.

The demands placed on companies are high. The company must “(have) made a material contribution to resolving the corporate misconduct”. In addition to “continuous and unrestricted cooperation with the prosecuting authorities”, the draft bill requires that “all documents essential to the internal investigation of the company” be made available to the investigating authorities after completion of the internal investigation. The internal investigation be also be “conducted in accordance with the principles of a fair trial” (in particular: (e.g. employees must be informed that the information they provide may be used against them in criminal proceedings; that they have the right to retain their own lawyer or have a member of the works council present during the interviews, that they have the right to refuse to give evidence) and “in compliance with applicable laws”.

The demands placed on companies are high and meeting them will require precise planning and targeted implementation. In particular, the General Data Protection Regulation (GDPR) requirements can be expected to present particular challenges for internal investigations.

Outlook and criticism

The Dieselgate scandal in particular, which is often cited as evidence of the need for new corporate criminal legislation, actually allows the conclusion to be drawn that the existing tools of the trade are sufficient to sanction companies. This applies in particular to the recently reformed law on asset forfeiture. For example, the VW group alone had to pay a total of around 2.5 billion euros to the tax authorities as a result of Dieselgate.

In particular, moreover, the deterrent effect at company level intended by the Federal Ministry of Justice is questionable. According to the current version of the draft bill, internal compliance measures are only acknowledged if a criminal offence has already been committed. Unfortunately, the draft bill does not provide any incentives for general establishment and implementation of compliance structures, which could possibly already have an effect on the existence of all conditions for a criminal offence being met (Tatbestandsmäßigkeit) enabling attribution of the punishable offence against company obligations (Bezugstat) to the company. If, by establishing and maintaining a certified compliance system, a company proves that it has done everything in its power to prevent crimes within the company, the company should only be sanctioned in exceptional cases.

This is particularly true given that, particularly in the case of sanctioned stock corporations, the actual sanction does not affect the legal entity as such, but rather the shareholders, who, pursuant to the German Stock Corporation Act (Aktiengesetz), cannot exert any influence on day-to-day business at all. The prevention of such conduct by controlling corporate conduct as intended by the Federal Ministry of Justice can hardly be effectively achieved in this way, as sanctioned shareholders have no means whatsoever to modify their conduct to meet the requirements of criminal law. Such hardship should be compensated by creating a normative possibility, in the sense of a “business judgement rule”, that everything the company considers necessary has already been undertaken so that the allegation of corporate criminal offence is avoided.

The author

Dr. Sebastian J.M. Longrée specialized in the fields of corporate law and mergers & acquisitions. He provides professional advice to companies and their shareholders, executive and subsidiary boards on all their corporate and group law queries. Dr. Sebastian J.M. Longrée has a particular focus on corporate and commercial litigation as well as on arbitration. Professional advice on complex (international) M&A transactions forms a second focus of his activities. His clients include large and mid-size corporations as well as private equity and venture capital investors.