Compliance & Investigations

Green light for the Corporate Sanctioning Act (Verbandssanktionengesetz)

The CDU/CSU and the SPD came to an agreement last Friday (6 March 2020) on final changes to the draft Corporate Sanctioning Act (VerSanG). It is therefore very likely that it will actually be enacted.

The Grand Coalition had already agreed in the coalition agreement of 12 March 2018 on an amendment of the laws governing the sanctioning of companies in order to ensure “that white collar crime is effectively prosecuted and appropriately sanctioned”. Ever since then, the Federal Ministry of Justice had been working on a draft of this statute. The draft had apparently already been completed in 2018 and was presented to the press in the summer of 2019 (we had reported on this in our Client Update Compliance & Investigations of 27 August 2019). To date, however, it has not been possible to complete the interdepartmental consultation process due to an objection by the Federal Ministry for Economic Affairs to the dispatch.

Last Friday (6 March 2020), the CDU/CSU and the SPD came to an agreement on final changes to the draft VerSanG, thus taking it one step further politically and in the legislative proceeding. Following the participation and notification of federal states, associations and other bodies, the draft can be approved by the cabinet and then brought into the parliamentary process.

Naturally, it is very difficult to assess how long this parliamentary process will take. But it is possible that the VerSanG could be enacted and promulgated before the summer break. Pursuant to Article 15 of the current draft bill, the VerSanG would then enter into force on the first day of the quarter two years after the promulgation. According to the explanatory memorandum, this two-year period is meant to give the companies sufficient time to adjust to the new provisions. In particular, companies should be able to examine their internal procedures and take any (further) compliance measures that are necessary.

It is possible that details of the VerSanG draft could still be amended in the course of the legislative process. Nonetheless, the essential key points of the draft bill will most likely remain as they are:

  • The range of fines for companies will be increased considerably from the present maximum of EUR 10 million to up to ten percent of the group turnover. However, there is apparently still no determination system with specific criteria (e.g. the amount of the turnover achieved from the infringement) to guide the procedure of assessing fines within this very broad framework of sanctions. An additional disgorgement/confiscation would still be possible.
  • In the future, the principle of mandatory prosecution will apply for investigations of companies. Unlike the present law on administrative offences, if a reasonable suspicion of company-related criminal offences exists, the investigating authorities will no longer have any discretion to decide whether or to initiate an investigation of a company.
  • The draft states in its explanatory memorandum that the results of internal investigations can be seized – in any case if the company has not (yet) been accused of an offense by the investigating authorities. This provision runs contrary to the objectives of the VerSanG as a whole, since it would inhibit any incentive to conduct a (comprehensive) internal investigation of possible irregularities. An amendment would be urgently necessary, but is not very likely to occur.
  • The draft VerSanG provides for a reduction in penalties imposed on corporate groups in the event that internal investigations are conducted: However, this applies only if the company cooperates in full, discloses its findings to the authorities, and the internal investigation meets substantial qualitative requirements. In particular, the investigation must comply with the applicable laws, as well as the principles of a fair proceeding. Additionally, the investigation must be independent of the corporate defence and may not be conducted by the attorneys entrusted with the defence.
    This separation appears to be artificial, since (already today), any corporate defence has to be based on a comprehensive understanding of the facts of the matter. Moreover, a “double engagement” of law firms would subject the affected companies to a substantial additional financial burden for the internal investigation on the one hand and for the corporate defence on the other. This could appreciably inhibit the incentive to conduct internal investigations as intended by the Corporate Sanctioning Act. The Grand Coalition has apparently not yet arrived at an agreement about this point. The responses from the corporate groups and the practice on this should be awaited.
  • According to the compromise of last Friday (6 March 2020), the new statute is presumably supposed to create stronger incentives for cooperation with the investigating authorities and the introduction of compliance measures than exist at present.
    • Accordingly, the draft up to this point had provided that a cooperation with investigating authorities “can” be taken into account when calculating the fine. But under the revised draft, a cooperation “should” be taken into account. This change is to be welcomed since it gives the company greater certainty with regard to the question of whether its cooperation will be taken into account in the calculation of the fine. However, it should be clarified that the cooperation may not be subjected to excessive requirements (for example if the company, despite serious efforts, cannot present any “new” findings to the authorities, perhaps because (former) employees) were not prepared to testify).
    • It is still not clear what the increased incentives to introduce compliance measures are supposed to look like. According to the former draft, preventative compliance measures will be taken into account when deciding on the conclusion of the proceeding (e.g. discontinuation subject to conditions), selection of the penalty and amount of the fine. However, there are no specifying indicators that could serve as guidelines for investigating authorities and companies.

This stands in particular contrast to foreign legal systems (e.g. in the U.S., UK and France), in which (federal) authorities can provide guidance as to which compliance measures could be advisable for which risk profile, whereby the individual case must also be taken into account. From the standpoint of both the public prosecutor's office and the companies, such indications would be important to avoid a local patchwork quilt in Germany, which for its part would be contrary to the objective of a uniform enforcement of the new law. It is additionally to be feared that if the German legislature or the German authorities hold back on this point, then foreign legal systems (U.S., UK and France) will de facto set the framework for determining what compliance measures – including those of German authorities and courts – will be deemed to be appropriate.

It will presumably remain the case in the new draft as well that the court can order an official announcement of the corporate group penalty if a large number of injured parties might be able to assert claims under civil law. This is supposed to make it easier for injured parties to assert claims. In that case, a further increase of civil law mass actions following compliance violations by companies can be expected.

  • The “dissolution of the corporate group”, which is still contained in the draft bill as an ultima ratio penalty, is no longer supposed to be part of the new draft.

Summary and conclusion

The Corporate Sanctioning Act has overcome an important political hurdle and may yet be enacted before the summer break. It is to be hoped that it will be further adjusted at some central points in the course of the hearing which is to be conducted soon. This applies above all to the protection of the results of internal investigations if the company – justifiably – decides not to cooperate at all, or not fully, but rather to defend itself. This provision is constitutionally extremely problematic and runs counter to the statutory purpose, which is to crease incentives for compliance measures (which is commonly understood to include internal investigations to clarify and prevent compliance violations as well).

The artificial separation of internal investigations and defence must be removed; it imposes substantial additional financial burdens on companies, since several advisors and law firms might have to carry out the same tasks in duplicate. Here, at least a clarification would be necessary that the advisors of the company may openly communicate and share information with each other.

Finally, in the further proceedings, specific guidelines should be worked out by the legislature or the authorities as to what compliance measures are generally expected from companies, but are also sufficient. Otherwise there is a threat of considerable legal uncertainty and a locally divergent interpretation practice. In the international context, there is a threat that Germany could lag behind, since it is to be feared that authorities in other countries (e.g. U.S., UK and France) could de facto set standards without Germany having any influence over the further developments.