Compliance & Investigations
Ministerial draft bill for an act to combat corporate crime (Corporate Sanctioning Act)
Germany’s Federal Ministry of Justice has unveiled the draft of a new Corporate Sanctioning Act (Verbandssanktionengesetz), introducing corporate criminal liability in Germany and significantly ratcheting up corporate liability for business-related criminal offences. The draft bill
- significantly raises possible penalties up to 10% of group turnover
- creates incentives to invest in corporate compliance programmes
- facilitates penalty reductions where an independent internal investigation is conducted and the relevant company cooperates with the investigating authorities
- at the same time, significantly restricts protection from seizure (not only for internal investigations)
- offers the alternative of ending proceedings by warning the undertaking, reserving the right to impose penalties and in some cases tied to conditions and directives over the period where such right is retained
- permits a court to order the appointment of a compliance monitor
The Federal Ministry of Justice unveiled a draft act to combat corporate crime last week. Currently, the draft is still under wraps. The draft bill will introduce corporate criminal liability for business-related criminal offences. The Federal Ministry of Justice’s draft is based on a provision in the coalition agreement of Germany’s ruling parties, in which they agreed to step up corporate penalties. The CDU/CSU (Conservatives) and the SPD (Social Democrats) had agreed to increase penalties on undertakings profiting from corporate misconduct (we reported on this in our Compliance & Investigations Newsletter of 14 February 2018). The new Corporate Sanctioning Act is intended to enhance enforcement against corporations for business-related crimes, facilitate appropriate punishment of criminal offences related to corporations, promote internal investigations, and incentivize investment in compliance.
In this article, we provide an overview of the key points of the proposed Corporate Sanctioning Act, which is expected to significantly change future compliance & investigations practice in Germany and possibly beyond. The draft bill brings German legislation more in line with the international standards embodied in US, UK and most recently French legislation and legal practice. But it falls short with regard to legal privilege and protection from seizure.
In recent discussions of legal policy and legal theory, many have argued that the current framework for penalizing company-related criminal offences is insufficient. Some propose introducing separate statutes for penalizing corporations. The arguments in favour of this include the following:
- Regulatory law is subject to the principle of discretionary proceedings. This means that in some cases criminal corporate offences are not prosecuted. Given the significant difference in funding and support for public prosecutors, there are also regional differences in prosecuting misconduct within corporate structures.
- Providing for corporate penalties under regulatory law, in this view, fails to reflect the seriousness of the issue and the damage done to society by corporate misconduct. Criminal law has a stronger deterrent effect than regulatory law.
- It is argued that a specific corporate criminal liability law has since become an international standard. Not only the U.S. but also 21 of the 28 EU Member States as well as half of the OECD countries have established rules and legislation targeting corporate criminal activities.
- The current range of possible fines constitutes a calculable risk for undertakings. The relevant corporate fines are currently limited to EUR 10 million (section 30(2) no. 1 of Germany’s Administrative Offences Act (Ordnungswidrigkeitengesetz)), which is too low for major companies and too excessive for smaller companies. Although disgorgement may result in heavy fines, it is not a penalty as such.
- To date, there are no statutory provisions on how to conduct internal investigations in order to establish the facts and circumstances. There are no standards that take such investigative attempts and cooperative behaviour into account. Furthermore, the German Code of Criminal Procedure does not speak to the circumstances in which corporations might have to grant investigative authorities access to their internal investigation records.
In their coalition agreement of February 2018, the CDU/CSU (Conservatives) and SPD (Social Democrats) adopted the view that corporate offences must carry tougher penalties. Criminal law and compliance practitioners have been expecting the current draft bill since then. The Federal Ministry of Justice’s ministerial draft bill for the Corporate Sanctioning Act may be passed by the German Bundestag following deliberation by the cabinet and possible amendments have been made.
Essentially, the current ministerial draft bill provides for the following:
II. Introducing the principle of legality
In contrast to the rules in the German Administrative Offences Act that have applied to date, under the Corporate Sanctioning Act public prosecutors will be obliged to initiate preliminary criminal investigations against a corporation upon sufficient reasonable suspicion that a criminal offence has been committed. This means that the principle of legality will now apply in prosecuting companies.
Discretionary considerations, understaffed investigating authorities or potentially lengthy investigations – e.g. due to an international context – will no longer constitute grounds for waiving criminal investigations.
However, the options to discontinue investigations on discretionary grounds under sections 153, 153a German Code of Criminal Procedure (Strafprozessordnung) will apply by analogy.
Other discretionary considerations, such as the fact that the company has already suffered serious consequences or has conducted an internal investigation, may lead to investigations being abandoned.
Naturally, introducing the principle of legality will not change the de facto lack of staffing and expertise in public prosecutor’s offices. It is far more likely that public prosecutors will also face major practical problems when the criminal prosecution of corporate misconduct becomes mandatory. An increase in internal investigations (see IV below) – which is to be expected – will probably only partially “resolve” such problems.
III. Expanding the range of penalties and increasing fines
Essentially, the draft Corporate Sanctioning Act provides for three kinds of penalties for corporations:
- a financial penalty relating to the corporation,
- a warning, reserving the right to impose a financial penalty, and
- as a final resort, dissolution of the corporation.
Future financial corporate penalties will be significantly higher for companies with an annual turnover of more than EUR 100 million. In cases of intent, the penalty will range from a minimum of EUR 10,000 up to 10% of average annual turnover; in cases of negligence it will still be EUR 5,000 up to a maximum of 5% of average annual turnover. The average annual turnover to be set is calculated on the basis of the global turnover of all corporations operating as an economic unit over the last three financial years. The relevant date will be the date of sentencing. This may pose major risks in M&A share deals, at least where the target is (economically) integrated into the infrastructure of the buyer. In the case of asset deals, the Corporate Sanctioning Act also provides for tougher liability rules than apply to date in the case of asset deals.
Evidently, the range of fines available under antitrust law (and to a certain extent under data protection law) is to be adopted in these future penalties – making disproportionately high penalties possible to the detriment of corporations. According to the ministerial draft bill of the Corporate Sanctioning Act, in addition to the financial corporate penalties (Verbandsgeldsanktion), confiscation under sections 73 et seq. German Criminal Code (Strafgesetzbuch) will also be possible (similar to disgorgement under antitrust law under section 34 German Act against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen)), thus creating the risk of excessive and disproportionate corporate penalties.
Mitigation provisions apply if the corporation has materially contributed to clarifying the corporate misconduct by conducting an internal investigation (see IV below for more details).
An alternative way of ending the official proceedings – besides financial penalty – is issuing a warning while reserving the right to impose a financial penalty. This option may apply where it is expected that (i) a warning suffices to prevent future corporate offences, (ii) an overall assessment of circumstances deems the imposition of a financial penalty unnecessary, and (iii) maintenance of legal order does not require the latter. The court may impose conditions and directives for the period in which the right to impose a penalty is reserved, which range from one to five years. In particular, the court may order the implementation of (stricter) internal compliance measures and appoint an expert as compliance monitor to prevent further corporate misconduct.
Should the above requirements not be met, the court may reserve the right to impose up to 50% of the financial penalties if this is sufficient to prevent future corporate misconduct. Moreover, the prosecuting authority may provisionally waive indictment and instead – with the court’s approval – impose conditions and issue instructions. This provision is similar to section 153a German Code of Criminal Procedure (Provisional Dispensing with Court Action; Provisional Termination of Proceedings).
On the whole, the legal situation in Germany is getting closer to that of Anglo-Saxon jurisdictions, where non- and deferred prosecution agreements represent a frequent alternative way of ending criminal proceedings.
Finally, dissolution of the corporation is deemed the ultima ratio. It is, however, restricted to extreme cases, e.g. when senior management “persistently commits serious corporate offences” or when “the continued existence of the corporation increases the risk of serious corporate offences to be committed”.
IV. Mitigating penalties due to internal investigations
The draft Corporate Sanctioning Act allows for a reduction in penalties imposed on corporations in the event that internal investigations are conducted. However, the following qualitative requirements have to be met:
- the internal investigations must make a material contribution to clarifying the corporate misconduct;
- the internal investigations must be “independent” and not conducted by the company’s defence counsel;
- the company must cooperate continuously and unrestrictedly with the prosecuting authorities;
- the results of the internal investigations, the essential documents and the final report on the internal investigations must be disclosed to the prosecuting authorities and
- the internal investigations must be conducted in compliance with fair trial principles , in particular:
- before being interviewed, employees must be informed that the information they provide may be used against them in criminal proceedings;
- interviewees must be given the right to retain their own lawyer or have a member of the works council present during the interviews and be informed of this right before being interviewed; and
- interviewees must have the right to refuse giving evidence if the response to such questions would otherwise expose them or their relatives to prosecution for a criminal or regulatory offence, and the interviewees must be informed of this right;
- the internal investigations must be conducted in compliance with the applicable laws and documented appropriately.
Notably, the draft Corporate Sanctioning Act distinguishes between internal investigations and corporate defence. It justifies this approach by pointing to the greater credibility of internal investigations if separated from corporate defence. However, internal investigations may be conducted by the same law firm that is tasked with corporate defence – provided that the corresponding files are separated by a Chinese wall.
The legal requirements for such internal investigations are high. According to the draft, a penalty may be mitigated in particular only where employee rights are fully observed during interviews. Interviewees have recently also been granted a right to refuse testimony, which is likely to impede success in internal investigations in some cases. It is therefore all the more important, especially in the case of complex internal investigations, to involve a law firm specialising in internal investigations to ensure the likelihood of a penalty reduction as defined in section 18 Corporate Sanctioning Act.
The stipulations effectively provide a framework for conducting internal investigations for Germany. Companies will wish to keep the possibility of a mitigated penalty open by way of internal investigations, even if investigation proceedings into the company have not been initiated.
If companies comply with the aforementioned requirements for internal investigations and cooperation, they have the chance that the prosecuting authority may refrain entirely from prosecuting the corporation until the internal investigation is completed.
V. Provisions on protection from seizure
The proposed amendment of the protection from seizure pursuant to section 97(1) no. 3 German Code of Criminal Procedure is cause for serious concern. Legal privilege and protection from seizure will be diminished through the “back door” by significantly limiting a key provision of the German Code of Criminal Procedure to the detriment of the accused (both for legal and natural persons).
According to the wording of the draft, in the future all records and documents in the custody of lawyers may be seized unless the client in question is formally a defendant in criminal proceedings and a “relationship of trust” exists regarding the documents.
Pursuant to section 97(2) new version German Code of Criminal Procedure, original business records of the company (“raw data”) are explicitly excluded from protection from seizure.
The wording of the law is not clear whether and to what extent attorney work products prepared in the context of an internal investigation (e.g. interview minutes, interim and final reports along with presentations) are protected from seizure. However, the explanatory memorandum does give some indication of how the new regulation on seizure prohibitions is to be interpreted – namely very narrowly:
Firstly, work products should only be covered by the seizure prohibition if they relate to “the protected relationship of trust” between the defendant company and its attorney.
Secondly, in the event of criminal proceedings pursuant to the Corporate Sanctioning Act, the company has the rights of a defendant, meaning that e.g. the records on interviews with management are covered by section 97(1) no. 2 German Code of Criminal Procedure, i.e. that legal privilege and prohibition from seizure apply, at least when the internal investigation runs parallel to the criminal proceedings. It is unclear how this explanation is compatible with the separation between “internal investigation” and “corporate counsel” set out in the draft. It needs to be made absolutely clear that a “relationship of trust” exists regardless of any formal position as defence counsel and hence that legal privilege and protection from seizure covers all attorney work products of an internal investigation, at least when the investigation runs parallel to the criminal proceedings.
This would also be in line with the approach taken in the Corporate Sanctioning Act, where conducting an internal investigation and any corresponding cooperation are substantively part of defending the company’s interests in the same way as safeguarding the (further) rights of the accused. Conducting internal investigations and representing the company vis-à-vis the investigating authorities, although separate, constitute the two pillars of a cooperative corporate defence. Extending protection from seizure to the work products of an internal investigation must apply a fortiori where the undertaking, in full knowledge of the facts and circumstances, opts against making use of mitigation possibilities and instead decides to defend itself against the allegations, taking a confrontational approach if necessary.
One of the key issues remains – what rules will apply where an internal investigation is conducted prior to criminal proceedings (i.e. before the company has been formally deemed a defendant). Here, the explanatory memorandum indicates a “hard-line” approach: it appears that these documents are not protected from seizure and no legal privilege exists because the company is not a defendant (yet).
Should the current draft pass the German Bundestag, it would constitute a major deterioration in the current legal situation, and will lead to an unacceptable weakening of the rights of corporations to defend themselves. In this version, the draft Corporate Sanctioning Act is in urgent need of amendment. In addition, it completely ignores the fact that under corporate law management is obliged to conduct internal investigations if there are suspicions that compliance violations have been committed. Without the accompanying protection from seizure, the corporation will be compelled to create a basis of facts that may incriminate the corporation itself and which be used in full against it. The result would be to counteract the incentive to initiate internal investigations that the draft bill aims to achieve. It is likely that in practice internal investigations will only continue to be conducted once investigation proceedings have been commenced. It remains doubtful whether this will entail a more uniform regime of penalties on corporations.
VI. Incentives for investments in compliance
The fact that the draft Corporate Sanctioning Act seeks to create legally certain incentives for investment in compliance should be welcomed. The draft attempts to achieve this with the help of various approaches.
Under the draft, compliance measures can initially be taken into consideration when assessing the amount of a penalty. The draft thus logically implements the most recent rulings of the Federal Court of Justice on the Administrative Offences Act (we reported on this, see Newsletter Compliance & Investigations of 21 September 2017).
Moreover, a company’s compliance programme is decisive for choosing the type of penalty to be imposed. Warning the corporation, while reserving the right to impose penalties, will only come apply if it is expected to be sufficient to avoid any future corporate misconduct. Pursuant to the draft, this will in particular be of interest if the criminal offence in question was an “outlier” (according to the explanatory memorandum of the draft) and the corporation is taking, or has taken, compliance measures to avoid similar misconduct in the future.
Finally, the court can issue instructions if the right to impose a financial penalty is reserved. These instructions serve special preventative objectives and are particularly meant to remedy weaknesses in the company’s compliance programme.
The Corporate Sanctioning Act is to enter into force two years after its promulgation. This is supposed to give corporations sufficient time to review their internal processes and implement additional compliance measures as necessary.
VII. Reservation period as “deferred prosecution” and compliance monitor
If the court warns the corporation and reserves at least to some extent the right to impose a penalty, it can issue instructions for the reservation period. In particular, the court can instruct the corporation to implement compliance measures to avoid future corporate misconduct and to provide proof of such measures by means of a “certification by an expert”. Thus, following the US, UK and France, Germany has also introduced the position of a “compliance monitor” in order to enable “deferred prosecution”.
The corporation is supposed to select the compliance monitor. However, such appointment requires the consent of the court. The compliance monitor concludes the engagement with the corporation; the costs of the monitor are borne by the corporation. It is to be assumed that the tasks and scope of the monitor’s activities – similar to those in the US, UK, France and monitorships of the World Bank and other development banks – will be coordinated in detail between the corporation and the public prosecutor or the court prior to the actual appointment. In this way, the court can determine the frequency and intervals of the compliance monitors’ reports to the court. Generally, the monitor has to prepare a (brief) expert opinion. According to the draft, compliance monitors can be attorneys, auditors or corporate consultants.
The court orders the corporation to pay the reserved financial penalty if a corporate crime is committed during the reservation period, and thus the expectations of the reservation were not met, or if the corporation grossly or persistently violated conditions and instructions.
VIII. Corporate criminal offences committed abroad
If a criminal offence is committed outside of Germany, German prosecution authorities will have jurisdiction, provided that the (i) corporation has its registered office in Germany, (ii) the misconduct would be considered a criminal offence under German law and (iii) under local law. The new law will not introduce a “long-arm jurisdiction” as established under the US FCPA or the UK Bribery Act, since its scope will be limited to corporations with registered offices in Germany.
The Corporate Sanctioning Act will also address the issue of double jeopardy. It provides that German authorities have to take the penalties imposed by foreign prosecuting authorities into account when setting a penalty to avoid double jeopardy. This is a welcome provision given that the principle of “ne bis in idem” is not applied outside the EU. Against the background of increasing international cooperation between prosecution authorities, this would be a highly appreciated provision.
IX. Register of penalties for corporations
In the future, final decisions on imposing penalties or fines on corporations are to be entered into a register kept by Germany’s Federal Ministry of Justice. Alongside the data required to identify the corporation, the criminal or administrative offence in question and the applied provisions are also to be recorded. Under the latest draft, only public authorities and courts are set to receive unlimited access to the register, and only upon express request. However, unlike the recent draft amendment to Germany’s Anti-Money Laundering Act (Geldwäschegesetz) with regard to the Beneficial Ownership Register, the draft does not contain a provision under which the notification of the public is mandatory (no “naming and shaming”).