New corporate criminal liability in Germany – paradigm shift or evolution?

September 2018 | PROFESSIONAL INSIGHT | FRAUD & CORRUPTION

Financier Worldwide Magazine

September 2018 Issue

The discussion surrounding corporate criminal liability is not new in Germany. Instead, this issue can be seen as ever present background noise of varying amplitudes, rising and falling over the past few decades. Many misunderstandings have had an influence on this discussion, because terminological questions have not been adequately separated from the substantive aspects. Thirty years ago, the Council of Europe’s Committee of Ministers recommended the introduction of criminal liability for offences which are committed during the exercise of company activities. Many European countries subsequently took action. Now almost all new supranational contracts and legislation dealing with commercial criminal law, particularly in the European context, provide for corporate criminal liability and only a handful of states still go without. Germany has so far not addressed this issue within its criminal law provisions, but rather under the Statute on Administrative Sanctions (Ordnungswidrigkeitengesetz). Within the German context, if an offence is committed within a company and certain accountability conditions are fulfilled, then that legal entity is sanctioned with a fine.

Corporate criminal liability – nothing new in substance

This has often been misunderstood, as if Germany was one of the odd ones out, unaware of the concept of corporate criminal liability. This has certainly not been the case. The law of administrative offences currently allows for the imposition of fines of up to €10m per offence, with a disgorgement of profits in addition. Although traditionally, the law of administrative offences was designed to sanction legal infringements with a low level of unlawfulness, today it has developed into a sharp sword, with company fines that are pushing the limits, mainly driven on the European level within competition, capital markets and data protection law. This has clearly led to a blurring of lines within the sanctioning framework. The European Court of Human Rights (ECtHR) and the European Court of Justice (ECJ) have recently clarified the applicability of specific substantive and procedural fundamental rights applicable to criminal law that administrative sanctions can indeed have a criminal law character.

The current classification of companies’ responsibility into this two-track structure, administrative offences on the one hand, criminal level consequences on the other, has been a major stumbling block. Particularly at a time where it is fashionable to single out ‘multinational companies’ or ‘greedy managers’ as the culprits for negative economic developments or crises, the call for ‘real’ corporate criminal liability and, linked thereto or sometimes even masked by it, the call for a tightening of sanctions, can be heard loud and clear. In light of the financial crisis, the ‘cum-ex share transactions’ and the investigations surrounding diesel emissions, the governing parties gave in. Governing coalition agreement Merkel III (2013) had already stated an intention to evaluate the possible introduction of corporate criminal liability for multinational companies. Now, the March 2018 coalition agreement for the current legislative period goes one step further.

Changes expected in the current term

First, it provides for the introduction of corporate criminal liability: looking behind the facade of pure terminology, the real evolutionary substance of the proposal becomes quite evident. There is to be a move away from the opportunity principle typical for the law of administrative offences, which puts the initiation of proceedings to prosecute legal infringements in the due discretion of the competent authority. Instead, the legality principle, the basis of criminal procedural law, will apply in the future. This entails a general obligation to prosecute. Once an investigation has been initiated, prosecutors may only refrain under certain circumstances. German criminal law theory will continue to focus on individuals. Only individuals are capable of acting and can in turn be considered criminally liable for these actions, which is a prerequisite for criminal sanctioning within the conventional model of individualistic liability.

Furthermore, the coalition agreement contains specific details on the new regulation of sanctions against companies. For example, the fine to be set is to be aligned with the economic strength of the company. For companies with a turnover of more than €100m, the maximum level for a fine is to be fixed at 10 percent of their turnover. The coalition agreement even addresses sentencing criteria and in this context picks up on legal requirements dealing with internal investigations within companies. The agreement explains, among other things, the underlying idea of providing incentives for companies to cooperate by way of ‘internal investigations’ and the subsequent disclosure of the findings gained.

Naturally, the coalition agreement does not yet constitute objective law. It does not bind its signatories and is merely a political statement of intent. However, its clear and indicative stipulations do portray a strong political will. There is no longer a need to dust off a crystal ball in order to predict that a law containing comprehensive new rules regarding company responsibility, company sanctions and the procedural aspects connected thereto will become a reality in the coming years. This may take place through the introduction into material and procedural criminal law or the implementation of an overall strategy in the form of a separate law, to run ancillary to the criminal law.

Weak justification

It is undisputed, and therefore not the subject of any further consideration, that it is legitimate to have a legislative desire to adequately allocate responsibility for legal infringements which are closely connected to a company’s actions. There are no rational grounds to assume that only individuals should carry the risk of criminal liability surrounding a company’s actions. The building blocks of the upcoming reforms will need to be discussed one-by-one, to see if they withstand the tests of necessity and proportionality. Criminal law, the ‘strongest weapon’ a legislator has at hand, is the last resort of social control. Precisely due to this ultima ratio function of the criminal law, the legislator has to stipulate the aims of the sanctions and must assess whether it is ultimately necessary in order to accomplish the objective behind it.

Regarding the sanctioning framework, proponents of the reforms often stress the alleged deterrent effect that corporate criminal liability would have. However, this point is highly disputed. The theory of the general deterrent effect of high criminal sanctions is itself controversial. Criminological analyses indicate that the potential offender’s perceived risk of being caught has much more of an influence on his decision to commit the crime than the level of the fine to be expected. Moreover, applicable law already provides for highly deterrent sanctions – a recent case saw a fine of €1bn imposed. Furthermore, the framework applies per case, meaning that multiple offences lead to the addition of individual fines. Lastly, it must also be taken into account that, according to the already applicable law, the state can seize the assets acquired as a result of the offence.

Another argument brought forward by the proponents of the intended reforms, and which is sufficiently convincing at first sight, is legal certainty. They point out that a move away from the opportunity principle will ensure consistent application of the law throughout the country. Practitioners know that there are substantial differences in regional prosecution and sanctioning, which leaves it up to chance whether and, if so, with what intensity, a company will be investigated in cases of misconduct. This poses a risk for the competitive equilibrium of companies. In this regard, legislative intervention is reasonable. However, it seems more than questionable whether the planned reforms are the right path to take here. There are already guidelines in place for fine proceedings, which unambiguously urge public prosecutors to assess the possible imposition of fines against companies while dealing with the misconduct of employees. The fact that compliance with this aspect is limited is partly due to differing mentalities, but mostly a result of a lack of resources and their incorrect application. The criminalisation of companies and the extension of public prosecution will not affect these practical issues. On the contrary, there is a real fear that the existing deficits will only worsen, not in the least because the intended alignment of the fine to be imposed with the economic strength of the company will ultimately result in much more intense investigative efforts.

Real benefits to be expected

The many advantages that the reforms – depending on their ultimate design – can have for companies are mainly of a procedural nature. If legal certainty is to also mean a strengthening of the procedural position of a company within the investigative proceedings, this would have to be seen as progress. In the current legal situation companies are regularly not formally involved in the proceedings until a very late stage, and often not until the investigation is completed, and long after the involvement of individually accused employees of the company. Unlike the employees, companies therefore for a while do not benefit from any information and participation rights, such as the right to examine case files or the right to apply to take evidence. Effective case defence then becomes very difficult, as does the structuring of any internal investigation. If companies were to be granted their own position within the proceedings, independent of any formal involvement, there would be two accompanying effects: an upgrade of their procedural subject status and, at the same time, a power shift within the proceedings.

The legislator is faced with complex questions here. Should the principle of freedom from self-incrimination, which states that nobody is obliged to contribute to their own conviction during criminal proceedings, also apply to companies? If the principle is considered an element of the rule of law and therefore a procedural right of defence, just as the ECtHR sees it, then it should apply. Alternatively, if it is considered merely a part of material law, at its core a concept protective of human dignity, the thought could be neglected if the indirect effect on the individual is ignored. If the right against self-incrimination were to apply, who would be able to rely on it? Is it everyone on a managerial level or just representatives and certain bodies? Would it not be the correct approach to give all employees the ability to invoke this right, because, after all, they are part of the company and a sanction against the company could disadvantage its employees as well?

The greatest opportunities arise from the announcement that there shall be legal provisions and incentives for internal investigations and the subsequent disclosure of the findings gained. The legislator faces a balancing act here between overregulation, in which case, even the use of the term ‘internal’ investigation would be incorrect from the start, and the creation of legal certainty. While so far it is still the case that companies can more or less decide freely whether they want to use the findings from internal investigations solely for compliance purposes or whether to also pass them on to investigative authorities, sanction-related incentives may lead to a de facto

obligation to cooperate. The legislator must achieve a solution that encourages companies to effectively run their self-cleaning processes while simultaneously maintaining some freedom of choice.

It would be a desirable outcome if these reforms would help to mitigate friction with other jurisdictions. Problems in this regard typically arise during internal investigations with a transnational aspect. One conceivable and company-friendly approach would be the implementation of so-called ‘blocking statutes’, or rules that limit the application of foreign law, which could, in turn, weaken the obligatory force of requests for the disclosure of documents coming from foreign courts.

With a view to seizures of documents from internal investigations, it also remains to be seen whether there will be major reforms in this regard. The German Federal Constitutional Court, employing a strictly formal approach, recently asserted a simplifying, and, in the long-term, potentially even self-disproving priority status for effective prosecution. In this regard, the legislator will have to newly define its state interests, which will also need to account for the fact that the protection of the lawyers’ work in the context of dealing with companies can equally serve the establishment of the truth in criminal proceedings, as it should, in fact, according to the legal concept of the new law on corporate criminal liability.

Wolfgang Spoerr is a partner and Mathias Priewer is an associate at Hengeler Mueller. Dr Spoerr can be contacted on +49 (0)30 203 74 159 or by email: wolfgang.spoerr@hengeler.com. Mr Priewer can be contacted on +49 (0)30 203 74 248 or by email: mathias.priewer@hengeler.com.

Wolfgang Spoerr and Mathias Priewer

Hengeler Mueller