Germany affirms plans for stricter sanctions for corporate crimes

The German Federal Ministry of Justice and Consumer Protection (BMJV) had published a minister's draft bill of the "Act to Strengthen Integrity in Business" in April. Afterwards the Federal Cabinet submitted a revision of it as a government draft bill to the German Bundestag with only marginal changes.

Dr. Jochen Pörtge, an expert in white-collar crime law at Pinsent Masons, the law firm behind Out-Law, said: "The government draft bill contains only marginal changes compared to the minister's draft bill. The fundamental criticism of the minister's draft bill and suggestions for improvement were ignored. This emphasises the government's determination to pass the bill without any noteworthy changes."

Several business associations and lawyers' associations had said that the planned sanctions against companies were disproportionate and superfluous, and that in particular the regulations on internal investigations were inappropriate.

The bill is intended to increase penalties for corporate crime and create new incentives for compliance. It introduces penalties of up to 10% of the average annual group turnover for companies with annual turnover of more than €100 million. For companies with a lower annual turnover penalties could amount to €10m. The corporation's efforts to detect the crime and compensate for the damage can reduce the sanction. Compliance measures taken to prevent and detect criminal offences in the future can also reduce the sanction.

"The law will lead to a fundamental change in the compliance landscape and the compliance measures to be taken for all companies with subsidiaries, headquarters or business activities in Germany," said Eike W. Grunert, a compliance expert at Pinsent Masons, the law firm behind Out-Law.

Companies can currently only be punished with a fine under the Administrative Offences Act (Ordnungswidrigkeitengesetz, OWiG) for offences committed by employees. The limit is €10m regardless of the size of the company or its turnover.

"This does not allow an adequate response to corporate crime," the BMJV said. The cap "does not allow for a severe sanction, particularly against financially strong multinationals, and thus penalises small and medium-sized enterprises." In addition, the current law 'puts the prosecution of even the most serious corporate crime solely at the discretion of the competent authorities, which has led to an inconsistent and insufficient punishment'.

According to the BMJV, the aim of the draft law is "to put the sanctioning of profit-driven corporations on an independent legal basis, to subject them to the principle of legality and to enable appropriate sanctioning of corporate crimes by means of improved instruments."

The new law will apply only to corporations "whose purpose is to operate economically." Non-profit organisations would therefore not be affected. The new law is not to be applied even in the case of mere administrative offences. In these cases, the OWiG should continue to apply.

The draft provides for two types of sanctions: a warning with a sanction reservation, and a penalty of up to 10% of the average annual turnover or up to €10m for companies with an annual turnover of less than €100m. A planned third sanction, the dissolution of the association, was deleted from the draft. "Despite this, the legal provisions in other laws stipulating the dissolution of companies remain in place," said lawyer Jochen Pörtge, an expert for corporate defence at Pinsent Masons.

The draft bill obliges courts to take into account the degree to which a company cooperated through internal investigations.

The draft bill does no longer require internal investigations to be carried out "in accordance with the applicable laws". "However, this change does not mean that companies can now disregard, in particular, criminal, data protection or labour law limits," said Jochen Pörtge. "In this respect, the legal situation remains unchanged: internal investigations must respect legal limits. This is confirmed in the explanatory memorandum to the draft law."

The sanction-mitigating effect is to depend on the nature and scope of the facts disclosed by the internal investigations "and their importance for the investigation of the act, the timing of the disclosure and the extent of the support of law enforcement authorities."

If a large number of victims has been affected the court can order that the sanctions be published. The draft bill emphasises that the sole purpose of public disclosure of a conviction is to inform injured parties and that the court must be guided by that purpose in deciding on such publication. "The legislator thereby reacts to the criticism against an earlier draft that the publication of a sanction is aimed at naming and shaming companies," Pörtge said. "The court must carefully examine whether other sources of information exist and therefore the disclosure can be waived."

The government parties said in 2018 that they would pursue economic crime more effectively and to sanction companies that profit from employee misconduct.

According to the coalition agreement, the law is to be adopted during this parliamentary term. "The publication of the government draft bill makes it clear once again that, despite the outbreak of the Corona pandemic, the legislator is sticking to its timetable," Grunert said. If the draft bill is adopted by the Federal Council and the Bundestag, a transitional regulation of two years will apply before the innovations enter into force. Grunert: "For companies that have not yet implemented effective compliance measures to avoid potential corporate crimes, the planned two-year transition period may be too short. Organizations should start analysing their compliance risks early and document or update risk-mitigating measures."

[UPDATED on 29 July 2020: This news was updated to include information on the publishing of the second draft.]