Germany’s draft Corporate Sanctions Act

February 2021  |  SPECIAL REPORT: CORPORATE FRAUD & CORRUPTION

Financier Worldwide Magazine

February 2021 Issue

Germany is shortly to introduce a formal criminal liability for corporations. The draft bill of the so-called ‘Act on Sanctions for Corporate Crimes’ is currently being debated in the German federal parliament. It is expected to be adopted in early 2021.

The new law will then come into force after a two-year transition period. The importance of these new provisions for criminal law cannot be overestimated. In essence, this will introduce corporate criminal law in Germany, even if it is not to be referred to as such, because of the principle of culpability under constitutional law, which requires that only individuals can act with culpability – a prerequisite for criminal wrongdoing.

Scope of application

The Corporate Sanctions Act will apply to legal entities under public and private law, associations without legal capacity and partnerships with legal capacity.

Principle of legality

Unlike corporate fine proceedings to date, the so-called principle of legality applies, which means that prosecutors will be obligated to commence formal investigations if there is a suspicion of criminal activity that may be attributed to a company. However, the new rules provide various reasons for proceedings against entities being discontinued, e.g., on grounds of insignificance or in return for the imposition of conditions and instructions.

Prerequisites for corporate responsibility

The Corporate Sanctions Act requires, firstly, that an offence is committed which breaches the obligations incumbent on the entity or which aims to enrich the entity. The entity is deemed to be the perpetrator of offences committed by: (i) a managerial person as specifically defined; and (ii) a person carrying out the entity’s affairs (employees, but also external third parties), provided that a managerial person could have prevented or significantly impeded the offence by means of appropriate arrangements.

The Corporate Sanctions Act is applicable to all entities which are punishable in Germany, even if they were committed abroad. In addition, offences committed abroad but are not punishable in Germany are covered if the entity is established in Germany, the offence would be punishable in Germany, and it is also a criminal offence abroad.

Corporate sanctions

Sanctions framework. The only sanctions provided for are a corporate sanction and a warning with the right to a sanction reserved (suspended fine). The possibility of dissolving the entity, which was still provided for in the previous version, has been abolished. The sanctions framework is between €1000 and €10m for wilful offences and between €500 and €5m for negligent offences. In the case of entities belonging to a group with an average annual turnover of more than €100m, the upper limit is 10 percent of the average group turnover. The relevant turnover is the average group turnover of the last three financial years prior to the date of the imposition of sanctions.

Calculation of the sanction. The basis for the actual calculation of the corporate sanction is the importance of the corporate crime, the seriousness and extent of the breaches of supervisory obligations and the economic conditions of the company. The draft Act contains various perspectives on attribution, in particular the precautions taken before or after the crime to prevent and detect crimes. This allows consideration of the existence or the subsequent implementation of compliance management systems to either increase or reduce the penalty.

Warning instead of a fine. Instead of imposing a sanction on the company, a court may also issue a warning and reserve the right to impose a corporate sanction. This will apply if the imposition of a corporate sanction is not necessary to induce the company to act in accordance with the law in future.

Publication of the corporate sanction. In the case of a large number of damaged parties, the conviction of the entity may be made public for a period of one year (‘naming and shaming’). If the company cooperates with the investigating authorities, no notice shall be published, as in the case of the imposition of a sanction notice.

Compliance management systems

Compliance management systems will be significantly more important in the future. Having such a system in place may mean, in the event that corporate crimes are committed by employees who are not in managerial positions, that these crimes will not even be attributed to the company in the first place. An absent or inadequate compliance system can be seen as a factor increasing the sanction while an adequate system can reduce the sanction, even if it will be introduced after a corporate crime is committed. However, the draft bill does not provide guidance on how a compliance system can be structured in order to be considered a mitigating factor.

Internal investigations

The legislative bill provides for a reduction in corporate sanctions if the entity has made a significant contribution to clarifying the offence, cooperating constantly and fully with the prosecution authorities, carrying out an internal investigation and making available its findings, including essential documents and the final report. In this case, the upper limit of the corporate sanction may be reduced to half of the statutory maximum. In addition, the conviction will not be publicly announced. The Act specifies which conditions must be met in order for an internal investigation to be regarded as a mitigating factor.

Separation of counsel. The Act provides for the separation of the functions of lead investigator and defence counsel in internal investigations by commissioned third parties. This means that the law firm entrusted with an internal investigation cannot at the same time act as defence counsel.

Questioning staff. The Act provides that a mitigation of the sanction is only granted if the principles of a fair trial are respected. This includes employees being informed, before they are questioned, that their information can be used in criminal proceedings against them, that they have a right to refuse to reply to such questions, in response to which they may expose themselves to prosecution, and that they may have a lawyer or a member of the works council present during questioning.

Seizure. If the internal investigation is carried out by the entity itself or by a defence lawyer, the findings thereof shall be exempt from seizure regardless of whether they are with the defence lawyer or at the company. If the internal investigation is not carried out by a defence lawyer, as it must be to qualify as a legally defined mitigating factor, the documents will always be able to be seized, regardless of whether the company decides to share these findings with the criminal investigation authorities.

Sanction notice. The new law also provides for a sanction order, which is a conviction without public hearing if the company agrees. If an internal investigation is carried out, such sanction order is mandatory. In this case, the order also eliminates ‘naming and shaming’; companies carrying out internal investigations can settle the criminal proceedings entirely without becoming publicly known.

Martin Schorn is a partner at Noerr LLP. He can be contacted on +49 (211) 4998 6146 or by email: martin.schorn@noerr.com.

© Financier Worldwide

BY

Martin Schorn

Noerr LLP

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