For a couple of years, new proposals have been published for a new legal basis for sanctions to be imposed on companies for legal violations committed by companies. On April 22, 2020, exactly seven months after a first internal draft was leaked, the Federal Ministry of Justice and Consumer Protection (BMJV) finally published its formal ministerial draft bill for a law on the sanctioning of company-related crimes (Corporate Liability Act; in German: Verbandssanktionengesetz (“VerSanG”)). You can download the German draft law via this link.
The changes to the internal draft from August 2019 are only minor. However, the updated draft has been further aligned between the grand coalition parties. The next German federal election ist still more than a year away. Therefore, the chances of the draft becoming law with some minor changes have therefore increased significantly. Companies should familiarize themselves with the ministerial draft bill today and consider the measures they should initiate now.
I. Reasons for the proposed new provisions
The BMJV in particular assumed the following weaknesses that are to be remedied by the new provisions:
- Insufficient possibilities to impose sanctions on large corporations due to a regular maximum liability amount of 10 million euros for monetary sanctions imposed on companies;
- lack of specific and reasonable rules for the attribution of monetary sanctions imposed on companies;
- no legal incentives for investments in compliance;
- inconsistent and unequal prosecution of corporate crime due to the discretionary prosecution principle in the administrative offenses law;
- gaps in the legal prosecution of crimes committed abroad; and
- outdated procedural law.
II. The proposed new provisions
1. Introduction of company crimes
The newly defined company crimes (Verbandstaten) are to be classified somewhere between the crimes covered by the German Act on Administrative Offenses (Gesetz über Ordnungswidrigkeiten; “OWiG”) and crimes committed by individuals. For this purpose, the corresponding provisions are transferred to a new law of its own. A company crime is deemed to be given where an action has “violated obligations on the part of the company or where such action has resulted or was supposed to result in an enrichment of the company.” In addition to acquisitive crimes and tax crimes, company crimes shall also cover, for example, punishable human rights violations, environmental crimes and competition crimes.
A company sanction is imposed where a person of the senior management commits a company crime himself/herself or a person (other than the senior management) commits a company crime that could have been hampered or made substantially more difficult by means of appropriate preventative measures, in particular in the areas of organization, selection, training and supervision.
The term “company” covers all legal persons and associations of individuals, but – while the previous internal draft from August 2019 covered any legal person – the new draft bill expressly limits its applicability to companies “whose object is commercial business operations”. Legal entities whose object is not commercial business operations will therefore not face liability risks under the new law. According to the reasons stated in the draft, the individual group companies rather than the group of companies itself shall be considered a company.
2. Increase of the upper limit of a monetary sanction imposed on companies
The current upper limit of a monetary sanction in the amount of EUR 10 million shall be generally maintained for monetary sanctions imposed on companies. However, for companies with a consolidated turnover of more than EUR 100 million, a turnover-related upper limit of 10% of the worldwide annual turnover of the group shall apply . This mechanism is similar to antitrust and data privacy violations. Irrespective thereof, the instrument of skimming off profits shall be maintained. Using this instrument, it has been possible to claim three-digit million amounts from companies that committed, for example, corruption in proceedings pursuant to the OWiG.
3. More possibilities and flexibility to impose sanctions
Patterned on criminal law, it shall be possible to issue a warning reserving the right to impose a sanction on the company later on instead of imposing a monetary sanction right away. The warning can be made subject to conditions and instructions. Courts may instruct a company to take certain actions to prevent company crimes in the future. Companies may also be instructed to prove its compliance with these instructions by way of a certificate from a competent body. This process is similar to the US practice of imposing a compliance monitor.
The warning is particularly intended to account for compliance measures. This newly introduced procedure for companies is a common procedure under the German Code of Criminal Procedure (Strafprozessordnung; “StPO”) to discontinue the proceedings in the case of individuals.
The previous internal draft from August 2019 included the dissolution of the company as an alternative sanction in exceptional cases. The new draft does not include this option anymore.
Convictions under the VerSanG will be entered into the company sanctions register, which will generally not be public but only available to selected authorities. Where the conduct of the company has caused harm to a large number of individuals, the conviction of the company shall be made public. The aim shall be to make sufficient information available to the harmed individuals so that they can consider their claims.
4. Consideration of compliance programs and internal investigations conducted by the company
With respect to the consideration of compliance programs and internal investigations conducted by the company, the ministerial draft bill offers two different approaches:
4.1 Compliance program as a factor for assessing the monetary sanction
When assessing the monetary sanction to be imposed on the company, the court shall take into account specific circumstances. Partly based on court decisions of the past few years, these include, inter alia, the following factors:
- Precautionary measures taken prior to the company crime to prevent and detect company crimes;
- the company’s commitment to detect the company crime and compensate for the damage; and
- precautionary measures taken after the company crime to prevent and detect company crimes.
Where the compliance program failed to prevent or substantially hamper the company crime, the commitment to compliance shall nevertheless be taken into account when assessing the monetary sanction. Incentives shall be granted where the company contributes to the clarification, takes measures to close the gaps identified in the compliance program or voluntarily discloses the company crime.
4.2 Internal investigations as a mitigating factor
The company sanction shall be reduced if the company has itself or through third parties contributed significantly to the clarification of the company crime. The reduction shall amount to up to 50% of the contemplated amount. In this respect, the following requirements apply:
- The company must continuously and fully cooperate with the enforcement authorities;
- if the company entrusts a third party with the conduct of an internal investigation, such third party must not be the legal counsel of the company or any accused person in this context;
- following completion of the internal investigation, the company will provide the enforcement authority with the final report including the findings and any essential documents;
- the internal investigation must have been conducted in compliance with the principles of due process (Grundsätze eines fairen Verfahrens) (cf. below). The previous internal draft further expressly required that the internal investigation be conducted in compliance with “applicable laws”. The new draft does not include such language anymore. Nevertheless, the reasons stated in the draft emphasize that courts may only reward behavior that complies with applicable laws. Therefore, the requirement still applies even though it is not expressly mentioned anymore. The two most important areas of law to be taken into account within the scope of internal investigations are data protection law and employment law.
Above listed requirements have to be documented vis-à-vis the enforcement authority, i.e., in most of the cases, the district attorney’s office (Staatsanwaltschaft) and there shall be no reduction as a reward for conducting an internal investigation if the company did not disclose the findings from the internal investigation prior to the opening of main proceedings against the company.
The ministerial draft bill stresses that the internal investigation must be conducted independently. The investigation must identify both exculpatory and incriminating facts and circumstances. In order to avoid weakening the credibility of internal investigations, the conduct of the internal investigation and the legal defense of the company are, thus, to be kept functionally separate. While the same law firm may conduct the investigation and represent the company, it must not be the same individuals. Moreover, security measures must be implemented in order for the legal counsels to not have access to the findings made within the scope of the internal investigation.
5. Principles of due process for internal investigations
In order for the company to benefit from the mitigating factor of having conducted an internal investigation, certain requirements must be fulfilled. In particular, some of the aspects according to which the internal investigation conducted by the company must have been conducted in compliance with the principles of due process have been discussed for a very long time. Some of these aspects are now to be legally clarified:
- Prior to being interviewed, employees must be made aware of the fact that the information they provide may be used against them in criminal proceedings;
- interviewees must be informed in advance that they are entitled to have a legal counsel or a member of the works council present;
- interviewees may refuse to testify in case they would have to incriminate themselves or close relatives.
6. Introduction of the principle of legality
Due to the discretionary prosecution principle in the administrative offenses law, prosecution of crime was practiced in an inconsistent manner. This led to an unequal treatment. In the future, the prosecution of company crimes shall no longer depend on regional particularities or the staffing situation and workload of the police and judiciary system. Therefore, the principle of legality shall apply to company crimes based on the reference in the StPO. This means that the enforcement authorities have to start their investigations as soon as a corresponding initial suspicion arises. At the same time, they would be provided with the possibility to discontinue proceedings for discretionary reasons. In addition, company-specific reasons for discontinuation will be introduced. The objective of such possibilities of discontinuation is to find an appropriate solution in the individual case.
7. Adjusted procedural law
The corporate liability act would officially put the companies in the position of the accused. This position, inter alia, affects the confiscation protection (Beschlagnahmeschutz) of documents. In recent years, the scope of such confiscation protection has been the subject matter of intensive discussions and partly conflicting court decisions. However, also in the future, this protection shall only apply once the company has been put in the position of the accused. This means that measures for internal compliance or investigative measures independent from the position of the accused will not be protected. Moreover, protection will not apply on a group-wide basis.
III. What companies should do now
The draft bill provides that the law should enter into force two years after its publication on the first day of the following quarter.
The most important task for legal and compliance departments will be to get acquainted with the proposed new provisions. Many of the new provisions will only apply in the event of misconduct,. Nevertheless, it should be clear to companies which requirements will have to be fulfilled when conducting internal investigations and cooperating with enforcement authorities in order to be able to benefit from the planned advantages. We are pleased to see that some of the key aspects within the scope of internal investigations are now to be legally clarified.
In addition to correct conduct in critical cases, companies should re-check their preventive compliance programs for their effectiveness already now. Due to the increased sanctions framework, an effective compliance program can even be more valuable in the future. Substantial sanctions can be avoided through a thoroughly designed compliance program and proper documentation of its implementation. The ministerial draft bill points out that larger companies will be required to implement and maintain a risk-adequate compliance program. They have to investigate suspicions thoroughly and remedy identified weaknesses to improve the compliance program in a sustained manner. In return, the compliance investments already made and yet to be made will pay off because there is a measurable bonus now.
It remains to be seen whether the increase in penalties will have a significant impact on sanctions for multinational groups in practice.
Since the draft law is only available in German, we have translated the provisions of the new Corporate Liability Act. Click on this link to access the translation.