by Ralf van Ermingen-Marbach and Finn Zeidler
While corporate criminal liability has become the standard in many countries, as of today, companies in Germany can only be fined under regulatory offense law. German criminal law does not provide for corporate criminal liability.
Now, the coalition parties are seeking to establish a corporate sanctions law addressing corporate criminal conduct. The draft of the Corporate Sanctions Act (“Verbandssanktionengesetz” or the “Act”) introduces a hybrid system of criminal law and regulatory offense law. Companies would be prosecuted and sanctioned under the Act if (i) one of their managers committed a corporate criminal offense (e.g., fraud or bribery) or (ii) if another person committed such an offense while performing duties on behalf of the company when management could have prevented this by taking appropriate compliance measures. After a long and tough debate, the coalition parties have recently agreed on the draft law and are pushing ahead with the legislative process. According to statements from the governing coalition, the German Bundestag could therefore pass the Act even before summer recess.
How the Corporate Sanctions Act Would Change German Law
Today, German law grants the prosecution discretion on whether to prosecute a corporation for a regulatory offense—in contrast to the legal obligation to prosecute individuals for criminal wrongdoing if there are sufficient factual indications of a criminal offense. This has resulted not only in an inconsistent application of the law, in particular among different federal states, but also in a perceived advantageous treatment of corporations over individuals. The Act now intends to introduce mandatory prosecution of corporations, imposing an obligation on the enforcement authorities to justify non-prosecution. The new law shall also apply to—hardly controllable—criminal offenses committed abroad if the corporation is domiciled in Germany and if the misconduct would constitute a criminal offense under German and local law. However, the future practice of prosecuting companies remains to be seen, as there is already a considerable shortage of personnel in the German law enforcement agencies, and the mandatory prosecution of corporate offenses would require even more human resources.
The Act’s main changes to current law would be to establish corporate criminal liability (including for misconduct occurring outside of Germany) and to oblige prosecutors to prosecute companies in case of corporate criminal conduct (in contrast to the current legal situation where corporations can only be prosecuted under the regulatory offense law and where the prosecutor has discretion whether to pursue the case or not), tighten the sentencing framework, and formally incentivize the implementation of compliance measures. In addition, the new law specifies the legal requirements under which internal investigations can have a mitigating effect on the size of sanctions, and may alter how documents are protected from seizure by the authorities.
The Justifications for the Act
According to the governing coalition, regulatory offense law does not allow for sufficient sanctions for corporate criminal misconduct. Under the current legal regime, corporations can only be fined up to a maximum of EUR 10 million which is often deemed insufficient, particularly where large corporations are concerned. The Act therefore plans to increase fines to a maximum of ten percent of the annual—worldwide and group-wide[1]—revenues, provided the group has average annual revenues of more than EUR 100 million. Additionally, profits from the crime could be disgorged (as they could be under the current legal regime).
Introducing Deferred Prosecution and Monitorships
The governing coalition is also planning to introduce deferred prosecution: in appropriate cases, the company would be only admonished to commit no further corporate criminal offense and not fined, so long as they fulfilled certain conditions. For example, if the company implemented an effective compliance management system that was certified by a competent body (monitor), the company would be eligible for deferred prosecution. This provision would introduce monitorships into German criminal law. The “corporate death penalty,” namely the liquidation of the company to combat persistent and serious criminal behavior, also was included in an earlier draft of the law, but was dropped in light of opposition in parliament, where critics claimed that it would work to the detriment of innocent employees or creditors. Finally, convictions could be made public if the misconduct damaged a large number of people. Hitherto, courts publish, if at all, only anonymized judgments.
The Importance of a Compliance Program
When a company has an existing and adequate compliance system, the Act would allow the authorities to refrain from prosecution, or to only admonish the company. Even if the authorities decide to impose a fine on a company that has violated the law, compliance measures may be taken into account as a mitigating factor in the calculation of fines. However, the new law fails to provide guidelines on how a compliance system should look. In addition, law enforcement authorities would still have broad discretion as to what extent sanctions should be reduced as a result of a compliance system.
The Act’s Consideration of Cooperation and Internal Investigations
If a company cooperates with law enforcement and conducts an internal investigation in accordance with the conditions set out in the Act, the maximum applicable fine will typically be reduced by 50%, and the public announcement of the conviction might be precluded. In order to receive this mitigation, the law requires: (i) substantial contributions to the official investigation, (ii) organizational separation between internal investigation and criminal defense, (iii) uninterrupted and unrestricted cooperation, (iv) disclosure of the investigation results to the prosecution, and (v) adherence to fair trial standards (e.g. the interviewee’s right to remain silent in internal investigations).
Critics note that this mitigation rule would force companies to decide at a very early stage whether to cooperate with the law enforcement authorities, and de facto would oblige them to pursue cooperation. International companies would be faced with the dilemma that cooperating with German prosecutors was a prerequisite to their benefiting from the mitigation rule, but might result in a privilege waiver in U.S.-related cases and provide plaintiffs in class actions with information that they might otherwise lack. Moreover, it is unclear how the organizational separation between counsel conducting the internal investigation and defense counsel can be achieved in practice, in particular in an international context where the division of labor foreseen by the Act is unknown, and—quite to the contrary—defense counsel is often expected to conduct the internal investigation.
Uncertainty Regarding How Documents Would Be Protected
Last but not least, it is currently unclear to what extent documents from the defense of the company or the internal investigation would be protected against seizure. The new law requires that the documents be part of the “relationship of trust” between counsel and defendant in order to receive protection from seizure. Therefore, documents related to the criminal defense of the company or concerning interviews with executives of a company under investigation would likely be privileged. Other documents, however, such as those related to corporate affiliates or from defense work from the time before the company became a defendant would probably not be protected. It is likely that a separate planned amendment to the German Code of Criminal Procedure will not clarify how to distinguish between documents with and without protection against seizure.
Conclusion
While the final details of the new law remain to be seen, its introduction would imply one of the most essential shifts in German criminal law of the last decades. Academics, practitioners and business leaders will have to adapt to a dramatically different legal environment.
Footnotes
[1] We use the term ‘group’ in this context as referring to all natural persons and legal entities which together operate as a ‘single economic unit’ (“wirtschaftliche Einheit”). Sec. 9 (2) sentence 2 of the Act is based on this understanding which most likely corresponds with Sec. 18 of the German Stocks Corporation Act (“Aktiengesetz”) that defines a ‘group of enterprises’.
Finn Zeidler is a partner in the Frankfurt office, and Ralf van Ermingen-Marbach is of counsel in the Munich office, of Gibson, Dunn & Crutcher.