Germany toughens up on corporate sanctions

Out-Law Analysis | 05 Dec 2019 | 4:29 pm | 7 min. read

Businesses operating in Germany should begin updating and documenting their compliance risk assessments and measures in preparation for stricter corporate sanctions laws being introduced in the country.

The proposed new German Corporate Sanctions Act, first published in August 2019, promises to fundamentally change the compliance landscape and defence strategies for all companies with subsidiaries, headquarter functions or business operations based in Germany when finalised. In particular, it will significantly strengthen the enforcement regime and set higher standards for businesses to meet when conducting internal investigations.

Out with the old and in with the new

The draft Bill aims to address international criticism that the current corporate sanctions regime in Germany is inadequate and ineffective.

Eike Grunert

Dr. Eike W. Grunert

Rechtsanwalt, Partner

What constitutes appropriate precautionary measures will vary from business to business. Each corporation is expected to take into account the type, size and structure of their organisation, and the risks involved in its operations and the areas in which it operates, to determine what compliance measures it needs to implement. 

Currently, German law does not recognise the concept of corporate criminal liability. The consequence of this is that corporations involved in misconduct in Germany cannot be charged in criminal proceedings.

Instead, regulatory fines can be imposed under the German Administrative Offences Act for misconduct by leading personnel in connection with business operations, or failure to implement adequate control measures that would have prevented or made significantly more difficult criminal or administrative offences committed by employees.

Under this administrative regime, however, enforcement action is discretionary – known as the 'opportunity principle' – and in practice it depends on whether the respective local enforcement authorities have the resources, time, expertise and interest in pursuing the matter.

In line with commitments made by the coalition government in Germany in March 2018, the draft Bill seeks to do more to hold corporates to account for their misconduct. As drafted, it will abolish the opportunity principle, raise the upper limit for corporate fines and incentivise businesses to implement corporate compliance measures, and to investigate and disclose corporate crimes. In comparison to current administrative offences law, the extra-territorial reach of the draft Bill is expanded.

Offences within scope of the new law

Under the proposed new legislation, corporations would be sanctioned if either a manager has committed a corporate offence, or someone has committed a corporate offence in the exercise of the corporation's affairs and its managers could have prevented the offence or made it significantly more difficult by taking appropriate precautionary measures.

In this regard, the failure to take appropriate precautionary measures will no longer require managers' negligence or intention. While the draft Bill does not expressly require compliance measures to be put in place, it regulates incentives to do so.

The type or level of seriousness of corporate offences that will result in investigations and potential sanctions against the corporation are neither defined nor limited in the draft Bill. This stands in contrast to, for example, the Italian Decreto Legislativo No. 231/2001, which includes a list of criminal offences or specific anti-bribery laws such as the US Foreign Corrupt Practices Act or the UK Bribery Act. The German draft Bill as currently proposed is therefore much broader in scope: any misconduct that is penalised by any criminal law will qualify as a corporate offence, as long as obligations of the corporation were violated or the corporation was enriched or should have been enriched.

The sanctions businesses could face

Three types of corporate sanctions are proposed under the draft Bill. These are:

  • a monetary penalty'
  • a warning with a monetary penalty, in whole or part, deferred, and;
  • if serious offences have been committed persistently and there is a risk of repetition, the liquidation of the company, although it is expected that the final, published version of the draft Bill will not include this sanction;

The level of fines that businesses could face under the new regime will depend on the turnover they generate. For corporations with an average worldwide group annual turnover of more than €100 million over the three years prior to the sanction, the fine levied could be up to 10% of the average annual turnover over that period in cases of intentional misconduct. For corporations whose turnover falls below this threshold, a maximum fine of €10m could be imposed – the same as is the case currently under the German Administrative Offences Act.

Businesses found in breach of a corporate offence may also be subject to forfeiture orders requiring them to give back profits gained through the illicit conduct.

When considering what sanction is appropriate, courts will have to consider, particularly, the corporation's efforts to uncover the offence and to compensate damages as well as the precautionary measures taken to prevent and detect future offences. The new law would, as drafted, provide courts with the power to impose obligations and instructions on businesses in cases where it has issued them with a warning with a deferment of a fine.

Obligations in these cases could include an order to compensate the victims of their conduct. The court could also instruct the company to take certain precautionary measures to prevent corporate misconduct. Authorised evidence, provided by an external expert, showing that such steps have been taken may also be required. In all cases where a fine is deferred, courts will have the power to set the period of deferment between one and five years.

There is also a reputational risk to businesses found to have committed a corporate offence under the new regime, as courts can order the publication of the sentence it issues against a company. This has the potential to attract media attention.

Matters of procedure

The proposed new legislation addresses a number of procedural issues that businesses operating in Germany will want to consider.

Firstly, corporations will have the same status as other accused persons within the meaning of the German Code of Criminal Procedure under the draft Bill. The legal representative of the company will have the right to refuse to testify in sanction proceedings initiated against the corporation. However, this right to silence depends on the timing of any such testimony – it is available only to legal representatives at the time of testifying and is not available, for example, to someone who has resigned or been dismissed by that point.

Sanction proceedings may be discontinued or suspended in certain circumstances including:

  • where the matter is deemed insignificant;
  • where obligations and instructions are imposed;
  • in the event of serious consequences for the company.

In addition, prosecution may also be temporarily suspended if it is expected that a sanction for the offence in question will be imposed on the corporation abroad.

Incentivising compliance

Although not an express requirement, the draft Bill incentivises the implementation of compliance measures.

Where compliance measures are in place, the court may still limit any sanction to a warning with deferment of monetary penalty, rather than imposing a monetary penalty directly or even terminate the investigation proceedings.

The existence of precautionary measures might also be taken into account as a mitigating factor in determining the level of any fine.

The draft Bill gives little by way of guidance on what will be considered to amount to appropriate precautionary measures except to provide that such measures will be expected to go beyond the current requirements of "supervisory measures" aimed at preventing criminal or administrative offences in terms of the German Administrative Offences Act. No reference is made to recognised national or international compliance management standards.

What constitutes appropriate precautionary measures will vary from business to business. Each corporation is expected to take into account the type, size and structure of their organisation, and the risks involved in its operations and the areas in which it operates, to determine what compliance measures it needs to implement.

In the absence of express guidance from the legislature, practical guidance on what will amount to appropriate measures is likely to evolve from case law over time.

Redefining internal investigations

According to the draft Bill, internal investigations can be carried out both by the corporation itself or by third parties. There are incentives for businesses to carry out or commission internal investigations written into the proposed new legislation.

Internal investigations followed by full disclosure, including the final report and all relevant documents, to the investigating authority could result in a 50% reduction of the maximum sanction those authorities might issue in certain circumstances. A discount could be applied provided:

  • the disclosure in effect clarifies the misconduct and contributes to the investigating authority's investigation;
  • the internal investigation was impartial – it cannot be conducted by defence counsel for the corporation or by an accused individual – and it is conducted in accordance with the requirements of a fair trial;
  • the corporation or the third party cooperated continuously and without restriction with the investigating/prosecuting authorities;

Only correspondence and other work products that are created within the relationship between defence counsel and the accused corporation are exempt from seizure. Other information sitting with the corporation, its in-house lawyers or external lawyers instructed to investigate the conduct will generally be subject to seizure.

Time to comply

The currently available draft Bill to date has not been published, but only presented to the press. A revised draft is expected to be published if the SPD does not resign from the coalition government with the CDU. A Corporate Sanctions Act would be scheduled to come into force two years after publication, once it has passed through the legislative process in Germany. This transition period would give businesses the opportunity to review their compliance measures and make necessary adjustments.

However, unless businesses already have in place effective compliance management measures to adequately address all legal risks that might result in corporate offences, a two-year transition period could be challenging. This is particularly so for businesses with complex structures operating in several jurisdictions, and so it is important businesses begin to review their current measures now in anticipation of the new law being finalised.