In short, according to the draft law, prosecuting authorities must investigate (if they have grounds), the prosecutor’s office has more options to dismiss proceedings, companies face new sanctions and higher fines, offenses abroad may be sanctioned, and legal successors in share deals assume liability.
In August 2019, the German Federal Ministry of Justice and Consumer Protection presented a draft law on corporate sanctions. It brings a range of changes that may affect sanctions and fines for companies.
The practical consequences of the draft law remain to be seen. Going forward, demonstrating the robustness of a company’s compliance system and updating it in reaction to violations will become even more significant.
The status quo
A company can be sanctioned in case of criminal liability of its management and if management has violated its supervisory duties and thereby led to criminal or administrative liability of employees or third parties whose actions are attributed to the company. The supervisory duties include the duty to implement and maintain a robust compliance system.
Fines are currently capped at €10 million. However, in addition, profits can be skimmed, which isn’t capped; in the past this led to sanctions of up to €1 billion.
Generally, proceedings are led by the prosecutor in mostly non-public proceedings and are closed by an order the prosecutor issues. Cases rarely go to court.
Proposed changes to the status quo
Principle of mandatory prosecution
To date, investigations into companies have been undertaken simply at the discretion of authorities. The draft law introduces the principle of mandatory prosecution, whereby prosecuting authorities must start an investigation if there are sufficient grounds for suspicion.
This may lead to more investigations, and it is unclear whether prosecuting authorities will increase their capacity to meet this workload. However, it is expected that they will use newly introduced options for dismissing cases (see below) to manage constraints on capacity. This change means authorities have to open investigations into cases they would currently not investigate, but they can close small cases faster.
Options for dismissing criminal proceedings
The draft law grants the prosecutor’s office more options when it comes to dismissing proceedings. Overall, this is a positive step. Prosecutors can be expected to use this flexibility instead of all cases resulting in formal orders by the prosecutor or in court hearings.
The prosecutor’s office may now dismiss criminal proceedings on the grounds of:
- If the company has suffered serious consequences.
- Expected sanctions abroad.
- If the company complies with certain conditions and directives.
In practice, dismissal under certain conditions and directives will likely become relevant. Conditions and directives may include repair of damages, payments, updating the compliance management system, and appointing a compliance monitor. This will give the prosecutor – and the company – flexibility to close proceedings without a formal closure or even a judgment following a public hearing by a court.
The payments the dismissal can be conditioned on are generally not capped so can be high. The only limitation is the principle of proportionality. The directives most likely to be used are those requiring an update and audit of the compliance system, and possibly the appointment of a compliance monitor.
Compared with a court order or even a judgment following a public hearing, such dismissals may be preferable. One downside, though, is payments made in case of a dismissal are not tax deductible. Today, payments to be made because of profit skimming are tax deductible.
New sanctions and higher fines
As mentioned above, under the current system companies can face high fines when profits are skimmed. If the draft law is passed, they may face additional sanctions and higher fines irrespective of profits.
The draft law raises the upper limit of fines, regardless of whether profit was made. The proposed new calculation of fines is as follows. For companies with an annual turnover under €100 million, the upper limit of €5–€10 million will remain. For those with an annual turnover over €100 million, the fine has been raised to up to 10 percent of the average annual turnover. The date for the calculation will be the date of sentencing.
The proposed new sanctions include the following:
- A judicial warning reserving the right to issue a fine. This may be combined with certain conditions and directives, such as rectifying the damage done. This sanction can best be compared to deferred prosecution agreements. In practice, this sanction will probably require the company to update and review its compliance system.
- Entry into a Corporate Sanctions Register, which the authorities can view.
- The public disclosure of judgments.
- Dissolution of the company (as a last resort).
A sanction will be selected based on factors such as the severity, scope, and consequences of the offense as well as the company’s financial circumstances. Other factors include the severity and scope of shortcomings in the company’s compliance system, whether the company made efforts to disclose and rectify the damage done, and whether an internal investigation is under way.
Under the draft law, sanctions may be reduced if an internal investigation is conducted where attorney-client privilege is waived. This reduction isn’t guaranteed; the sanction might be reduced by 50 percent, if an internal investigation is conducted where the following requirements are met:
- The investigation must make a material contribution to clarifying the misconduct.
- The investigation must be independent, and not conducted by the defense counsel. (This in effect waives attorney-client privilege, as under German law, generally, only communication with and documents from German defense counsel are protected by privilege.)
- The investigation cooperates continuously and unrestrictedly with the public authorities.
- The essential documents and final report are handed to the public authorities.
- The investigation is conducted in line with applicable laws, in particular labor and data privacy laws.
This provision has led to irritation and many discussions about whether internal investigations can no longer be carried out by the defense counsel, who could generate privilege. However, this is not the case: the scope of the provision is limited to decreasing sanctions applied by the court. Even if the above requirements were not met, it would remain at the discretion of the prosecutor and the court to nonetheless recognize an internal investigation and decrease sanctions.
German criminal law applies when the act was committed in Germany, the consequences occurred in Germany, or the act was committed by a German national. The draft law proposes that offenses committed abroad would also be sanctioned as long as the act would be a crime under German criminal law. In this case the act need not be committed in Germany or by a German national to result in jurisdiction of German authorities. So, acts committed abroad with no connection to Germany aside from the company having a seat in Germany will fall under German jurisdiction.
Extended liability of legal successors
The draft law also introduces the principle of extended liability of legal successors. There is a succession of liability in case of share deals. The extension from the draft law introduces a risk, for example, when asset deals are made after investigations have begun: here, the buyer will be liable.
Cooperation with authorities matters
Practical details of the draft law remain to be seen. It is clear that cooperation with public authorities will continue to be important, as dismissing cases, issuing sanctions and fines, and deciding whether a sanction is reduced are at the discretion of the public authorities. Fines may be high, even if the prosecutor cannot show the company has made a profit as a result of the wrongdoing.
However, it is unclear whether the draft law will come into force in 2020. It is based on a provision in the coalition agreement of Germany’s ruling parties, wherein they agreed to increase corporate sanctions. As such, implementation of the draft depends on political developments.