Organisational models: when the ‘blanket’ is too short

July 2014  |  EXPERT BRIEFING  |  FRAUD & CORRUPTION

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Recent Italian jurisprudence has shed light on the long-debated topic of the roles played by supervisory bodies in corporate entities – particularly in ensuring the responsiveness of corporate actions to ethical principles and compliance to organisational models adopted in view of avoiding corporate responsibility under the principles of Legislative Decree no. 231 of 8 June 2001.

This law establishes that corporate entities may be held liable for criminal violations performed in their interest by top managers or reporting figures acting in authority, unless a clear violation by such managers or figures of the adopted protective organisational models may be proven. If the comapny’s model appears responsive and aligned with legal principles, and the violation is proven to have avoided or bypassed the model and relevant procedures, corporations may not be held responsible for criminal violations, if they can demonstrate that they have adopted models and procedures capable of upholding corporate compliance to ethical and lawful principles.

This debate has much to do with the general role of corporations in the overall environment, or, said another way, the reflection and impact of corporate behaviour and activities on the values relevant to the general collective interest. In fact, Legislative Decree no. 231/2001 establishes first and foremost the need for companies to be willing to draft an ethical code, within which the legal entity should define and determine its primary values, visions and general objectives, to address primarily its general interests and monitoring behaviour.

A recent interpretation by the Supreme Court sheds a fundamental light on the role of the supervisory body, the compulsory professional body envisaged by Legislative Decree no. 231/2001, responsible for overseeing corporate actions, ensuring consistency between procedures, behaviours and objectives, and monitoring potential criminal violations (the list of which is quite varied, ranging from environmental law principles to privacy constraints, corporate violations, corruption, labour protection measures, etc.).

On 30 January 2014, the Italian Supreme Court of Cassation, Criminal Section no. V, issued judgment no. 4677. The case involved the crime of market manipulation (aggiotaggio, under Article no. 2637 of the Italian Civil Code), a crime forming part of the lengthy list of criminal violations listed by Legislative Decree no. 231 of 8 June 2001 under the title of corporate violations, and able to trigger the direct administrative liability of legal entities for activities performed in the execution of their duties.

In the criminal proceeding pending against Impregilo S.p.A, a company awarded public tenders to treat urban solid waste, the preliminary merit judgment held before the Court of Appeal of Milan had discharged from allegations that both the president and the chief executive officer engaged in the offence of market manipulation.

The allegations referred to disseminating to the press distorted information with the intention of altering the recognised value of listed titles. During the procedure it became clear that the two top managers had wilfully modified the contents of the draft versions of press releases with the aim of ensuring a different perception and altering the company’s market value.

The Court of Appeal upheld the acquittal decision issued by the Court of First Instance on the grounds that the organisational model adopted to ensure the lawful behaviour by managers appeared to be suitable for the purposes of avoiding the sanctioned behaviour. The Court stated that senior management had fraudulently breached the organisational model, bypassing its procedures governing the release of information to the press.

Yet the Supreme Court of Cassation set aside this judgment. First and foremost, for the Court, the company’s senior management did not appear to have fraudulently breached the organisational model.

Instead, the Court of Cassation ruled that the organisational and management model adopted by Impregilo appeared not to be able to prevent, in general terms, the crime of market manipulation, allowing the chairman and the chief executive officer to draft press releases in total autonomy and without any checks or monitoring activity by third parties. In that respect, the organizational model did not appear suitable, regardless of how the events had unfolded, to comply with the stringent principles of protection and avoidance set by Legislative Decree no. 231/2001.

The Supreme Court also clarified that, although the organisational model had appeared to define the expected role of the supervising body, the supervising board did not appear to possess the necessary independence, autonomy and professional characteristics required by Legislative Decree no. 231/2001.

For the Supreme Court, the sole definition of the role and power of the supervising body is not sufficient in itself to exempt the company from the general principle of liability, in particular if the supervising body is not in a position to perform the required activities of monitoring and overview, given its de facto subordination to the hierarchical powers of the senior managers it is supposed to control.

The Supreme Court highlighted that if “…the Body in charge of supervising is not even allowed to express a dissenting opinion on the ‘finished product’, it is clear that the Model cannot be considered suitable to prevent the performance and consummation of a crime of particular skill, such as market manipulation”.

In addition, the Supreme Court clarified that, under article no. 6 of the Legislative Decree, the company can be exempt from liability if the organisational model is fraudulently breached, through misleading or false conduct intended to avoid the stringent protocols set out by the company. However, for the Supreme Court, a mere violation of the organisational model cannot be considered in itself a fraudulent breach.

Regarding the organisational model implemented by Impregilo, the Supreme Court set out that the role of the supervisory body requires in itself a stringent and effective possibility of action and control; in the case at hand, the drafting of a press release statement drawn up by the chairman and the chief executive officer should have been previously submitted to the supervisory body prior to its release. For the Supreme Court, in the absence of an explicit provision in the organisational model regarding an express ‘control and supervision’ issue, “ the principles of necessary control set out by Article no. 6 of Legislative Decree would be de facto irrelevant, since they would imply the possibility of an operator to avoid responsibilities simply by ensuring control of a draft press release, but not on the final version”.

The role of the supervisory body, is thus to supervise “the operation , compliance and updating of organizational Models “ (Article 6 Legislative Decree no.231/2001 paragraph 1, letter b ) in an effective and proactive manner, such that its exercise must confirm the “autonomous powers of initiative and control” given to the board and ensured in an effective way, to prevent the execution of crimes.

Fabrizio Cugia di Sant’Orsola is a partner and Silvia Giampaolo is a lawyer at Cugia Cuomo & Associati. Mr Cugia can be contacted on +39 06 960 38 103 or by email: f.cugia@cugiacuomo.it. Ms Giampaolo can be contacted on +39 06 960 38 106 or by email: s.giampaolo@cugiacuomo.it.

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BY

Fabrizio Cugia di Sant’Orsola and Silvia Giampaolo

Cugia Cuomo & Associati