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30.04.2020 | KPMG Law Insights

Association sanctions – The “corporate criminal law” comes even closer

The “corporate criminal law” comes even closer. The BMJV publishes the current draft bill for a law to strengthen integrity in business

According to the BMJV’s presentation, the introduction of a new sanctions law for companies is important and right now because of the current Corona crisis and the prospect of difficult economic times. Against this background, the BMJV published the long-awaited “Draft Law to Strengthen the Integrity of Business” on April 21, 2020, the core of which is the “Law on the Sanctioning of Association-Related Offenses” (Association Sanctions Act – VerSanG). This is the version that has now been agreed between the resorts and the representatives of the governing parties of the draft law on combating corporate crime that was already presented – unofficially – in the summer of 2019. This means that companies are now getting serious. It is expected that the draft will be introduced in the Bundestag this summer after consultation with the associations and, as envisaged in the coalition agreement, will be passed before the end of this legislative period. It is therefore worth taking a look at the new regulations, combined with the question of how companies can best position themselves in this regard in the future.

There are some changes compared to the previous draft. Overall, however, the design has hardly lost any of its sharpness. It introduces the principle of legality, expands the range of sanctioning instruments, and bases the amount of the monetary sanction on the company’s turnover. In addition, the draft creates incentives for compliance and internal investigations and regulates the implementation of sanction procedures.

1. application area

The VerSanG regulates the sanctioning of associations, i.e. legal entities under private and public law, associations without legal capacity and partnerships with legal capacity.

Changes from the previous version:

    • In response to public criticism, the scope of application only covers associations whose purpose is directed at commercial business operations.
    • For other (especially non-profit) associations, the current regulation in the law on administrative offenses is to remain in effect.
    • As an alternative to the version of the text now published, the BMJV is putting up for discussion in the context of the consultation with associations the idea of including all associations in the scope of the VerSanG, but granting the prosecution authority discretionary prosecution powers for the prosecution of non-economic associations.

2. legality principle

Unchanged, the sanctioning and prosecution of associations whose purpose is directed towards an economic business operation shall be subject to the so-called principle of legality. Unlike in misdemeanor law, where the principle of opportunity applies, the prosecuting authorities are to be obliged to initiate preliminary proceedings if there is an initial suspicion. This is to ensure that the applicable law is applied evenly and regularly, contrary to current practice. Corresponding to the introduction of the principle of legality, the draft bill provides for far-reaching possibilities of discontinuation, which are left to the discretion of the prosecuting authorities. Prosecution may be waived, inter alia, on grounds of insignificance, subject to conditions and instructions, and in the case of sanctions imposed abroad.

3. conditions for the sanctioning

The core of the draft is formed by the two elements of association responsibility, which are based on the existing regulations of association fines and breach of supervisory duty in the law on administrative offenses. An association sanction shall be imposed if (1) a management person has committed an association offense, or (2) a nonmanagement person has committed an association offense in the performance of the association’s duties, if a management person could have prevented or substantially impeded that offense by taking appropriate precautions.

Association acts of the management persons are thus attributed to the association without further preconditions. For the imputation of the Verbandstat of non-management persons, a breach of organizational duties is additionally required, whereby this breach must only be objective and not necessarily the fault of the management person.

An act of association is a criminal act by which the association’s obligations have been violated or by which the association is enriched. Association offenses do not include offenses that are directed exclusively against the association itself (e.g., embezzlement of the company’s funds) and so-called excess offenses.

Changes from the previous version:

    • The previous association offense is now called association offense.
    • A subordination relationship is no longer assumed. The non-managerial person can now also be a non-managerial person who is bound by directives and instructions. If the management person fails to justify the required rights of direction and instruction, this may constitute an organizational error subject to sanctions.
    • Definition of excesstat: The perpetrator acts out of motivation outside the association and is firmly determined to commit the act, so that even far-reaching compliance would have to remain ineffective.

4. association sanctions

The current draft provides for two types of association sanctions: The association fine sanction and the warning with the reservation of the association fine sanction.

Changes from the previous version:

  • The association resolution was – as expected – cancelled.

The association fine is up to ten million euros for an association act committed intentionally and up to five million euros for an association act committed negligently. In the case of companies with average annual sales of more than 100 million euros, the maximum sanction for association fines shall be up to ten percent in the case of intent or up to five percent in the case of negligence of the worldwide average annual sales of the entire group.

The warning with the reservation of the association fine sanction may be subject to conditions similar to Section 56b of the Criminal Code. In addition, the court may, in particular, issue instructions to the association if this is necessary to counteract further acts of association. For example, the court may order the association to implement compliance measures and have this demonstrated by a competent body (small monitorship).

In the preliminary proceedings, the prosecuting authority may refrain from prosecuting the association’s act and at the same time issue appropriate instructions to the association.

Depending on the type of measure ordered and the nature of the association, the draft names as expert bodies e.g. auditors, lawyers as well as management consultants.

5. public announcement

In addition to imposing an association sanction, the court may order (as a collateral consequence) public notice of the conviction in the case of a large number of aggrieved persons.

Changes from the previous version:

    • The public announcement is intended solely for the purpose of informing those affected by the Association’s activities.
    • Public notice should generally no longer be required if the proceeding is the subject of extensive news coverage or if the association has recovered the damage.
    • Business, invention or tax secrets may not be published.
    • As a rule, it should also not be necessary to name management personnel.

6. promotion of compliance measures

The fact that compliance measures must be taken into account when deciding on the “whether” and the “how” of sanctioning is in line with current supreme court case law. However, an explicit legal regulation is missing so far. The VerSanG provides regulations for the consideration of compliance efforts by the company. The importance of an effective compliance management system for a company can therefore hardly be overestimated in the future.

Compliance measures (so-called precautions for the avoidance and detection of associational offenses) can already play a role in the question of whether the prerequisites for sanctioning exist at all. Should this be affirmed, the existence of a suitable compliance management system is decisive for the type and amount of a sanction as well as for the question of whether the prerequisites for refraining from prosecution (if applicable, when issuing an instruction) of the association offense exist.

Which compliance measures meet the requirements of the VerSanG in individual cases in order to prevent an association sanction or at least to benefit from a sanction reduction remains largely open. However, for small and now medium-sized companies with a low risk of infringement, even a few simple measures should be sufficient.

7. internal association investigations

For the first time, the VerSanG creates a legal framework for internal investigations and clear legal incentives for conducting them. The draft regulates under which conditions and how internal searches can be taken into account to mitigate sanctions. The current draft explanatory memorandum defines an internal association investigation as “only those measures that serve to systematically clarify the suspicion of a misdemeanor or felony.”

If the internal investigation meets the legal requirements, the penalty range is halved and public disclosure is excluded. This requires, in particular, that the association’s internal investigation contributes significantly to clarifying the association’s facts, that the association cooperates uninterruptedly and fully with the prosecuting authorities, and that it makes available the results, essential documents and the final report.

Changes from the previous version:

  • If the requirements are met, the court “shall” mitigate the association sanction. Thus, the mitigation of sanctions is no longer at the free discretion of the court, but there is a “bound” discretion.
  • The caveat that internal association investigations must comply with applicable laws was removed from the draft text. Corresponding explanations are now only included in the draft explanatory memorandum.
  • The above-mentioned mitigation is excluded if the association discloses the results of the association’s internal investigation only after the main proceedings have been opened.
  • If the prosecution authorities approach the association, it must decide on cooperation “within a short period of time.”
  • The criteria listed in a newly added paragraph, such as the nature and extent of the facts disclosed, their significance for the clarification of the association’s facts, and the time of disclosure, shall be decisive for the decision on the mitigation of sanctions.

If the above-mentioned requirements are not met, the efforts of the association to uncover the association offense may nevertheless be taken into account within the framework of the general sanction assessment.

Despite loud criticism, the draft still maintains the requirement of functional separation between the defense and the conduct of the internal association investigation. However, this does not exclude the possibility that the internal investigation of the association may be entrusted to a law firm to which the defense counsel of the association or the accused also belongs. However, the latter must not have participated in the internal association investigation, as otherwise a reduction of the sanction via the internal association investigation cannot be considered. However, the discussion about the conceptual separation of defense and conduct of corporate internal investigations is not yet over. The associations were explicitly asked to comment on this.

Finally, mitigation of sanctions is granted only if the principles of a fair trial are observed. Before being questioned as part of an internal investigation, employees must be informed that the information they provide may be used against them in criminal proceedings, that they have the right to consult a lawyer or a member of the works council, and that they have the right to refuse to answer questions that would incriminate themselves or a member of their family.

8. prohibition of seizure

With regard to the new regulation of the prohibition of seizure in criminal proceedings, there was regrettably no change compared to last year’s draft of the VerSanG. By amending the Code of Criminal Procedure, the scope of the prohibition of seizure is to be limited to those items that are attributable to the relationship of trust between the accused in the specific proceedings and the person subject to professional secrecy.

Accordingly, the prohibition on seizure does not apply to records from a fact-finding investigation that takes place before a defendant is named, i.e. before preliminary proceedings are initiated. Only as soon as a preliminary investigation has been initiated and the association has the status of a defendant, at least the communication with the defense counsel is not subject to seizure. If the internal association investigation is not conducted by defense counsel, the draft argues that records of interviews with non-management personnel should arguably be subject to seizure.

9. association sanctions register

The association sanctions register to be created (similar to the Federal Central Register) is to contain the final court decisions on the imposition of association sanctions against an association as well as final decisions on the association fine pursuant to Section 30 OWiG if the fine imposed exceeds EUR 300. This register is not open to public inspection by anyone. It is an information system designed primarily for the judiciary. The information from the association sanctions register is intended in particular to support public prosecutors and courts in the assessment of sanctions.

Changes from the previous version:

  • Information from the register of association sanctions may not be provided for purposes within the scope of a procurement procedure; in this respect, the information from the competition register is conclusive.

10. further amendments to the draft

  • A waiver of prosecution on the grounds of insignificance is no longer always excluded in the case of a serious case, but only in the case of an act of association by the leader if the act of association is punishable by a custodial sentence increased to a minimum and if it was preceded by other acts of association by leaders.
  • According to the draft, if the association’s act also fulfills the elements of a cartel offense, the sanction proceedings must be discontinued if the cartel authority intends to impose a cartel fine on the association or to discontinue such proceedings. The same is now to apply to investigations by the EU Commission. In addition, it is now expressly regulated that the prosecuting authority must inform the cartel authority “even before the first formal investigative action is taken”. In contrast, the prosecuting authorities under the VerSanG are exclusively responsible for offenses under antitrust law.
  • Jurisdiction of the higher regional courts in the first instance is also established for the sanction proceedings if the underlying association act belongs to the jurisdiction of the higher regional courts.

11. schedule

The draft is in the associations’ consultation phase until summer 2020. It can be assumed that the federal government will decide before the end of the summer of 2020 whether to introduce it into the formal legislative process. The legislative process is then expected to last into next year. And even then, the law is not to enter into force immediately, but only two years after its promulgation. This should give associations sufficient time to review internal procedures and take further compliance measures if necessary.
This includes, in particular, the establishment or updating of a compliance management system in order to minimize the risk of criminal acts in the company and to be able to make breaches of duty that have been committed transparent. Two years does not seem excessively long for this, because there is no such thing as an “off-the-shelf” CMS. A CMS can only be effective and have a sanction-reducing effect if it fits the organizational form and size, the risk areas and the industry of a company and, above all, if it corresponds to its culture.

You are also welcome to contact the experts at KPMG AG Wirtschaftsprüfungsgesellschaft:

Barbara Scheben

Jan-Hendrik Gnändiger

Timo Purkott

 

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