Germany takes next step to establish a corporate criminal liability regime

Introduction

In a newspaper interview in August 2019 , Minister of Justice Christine Lambrecht announced that a draft bill to fight corporate crime – the Verbandssanktionengesetz (VerSanG-E (old)) – would be published shortly. The draft leaked to the public; it was not officially published as far the government ministries were concerned and the representatives of the governing parties were unable to reach consensus. For a number of reasons, including the current situation surrounding the COVID-19 pandemic, it seemed rather unlikely that the bill on corporate criminal liability was going to be adopted during the current legislative period but on April 22, 2020, the Federal Ministry of Justice and Consumer Protection (BMJV) published the draft bill to strengthen the integrity in the economy (Referentenentwurf zum Gesetz zur Stärkung der Integrität in der Wirtschaft) (VerSanG-E) on its website.

Unlike the initial “leaked” draft, the revised draft bill is now titled “Gesetz zur Stärkung der Integrität in der Wirtschaft” (Act for Strengthening the Integrity in the Economy). This is to reflect the Act’s purpose: to strengthen the integrity of companies in Germany. In line with this purpose, the Act no longer addresses “corporate crimes” (“Verbandsstraftaten”) but “corporate acts” (“Verbandstaten”). The BMJV stresses that the purpose of the new corporate criminal liability regime is not to put all company actions under a general suspicion per se. Rather, the Act aims to sanction only the few “black sheep” who gain “advantages at the expense of law-abiding companies and their owners and employees” and damage the reputation of the economy as a whole.

Comparison between VerSanG-E and VerSanG-E (old)

Compared to the initial draft, the VerSanG-E provides mainly for minor editorial changes. In particular, the increase in maximum fines which may be imposed on companies remains unchanged. Unlike under Section 30 OWiG (German Act on Regulatory Offences), such fines may now be significant. Corporations with an average annual turnover of more than €100 million may face fines of up to 10 per cent of their average annual turnover. In contrast to the current legal position, the VerSanG-E stipulates that the law enforcement authorities must in the future prosecute every criminal offence committed by a corporation. Further, the draft clearly incentivises investments in compliance systems.

However, the VerSanG-E now provides for only two sanctions, being a corporate fine and a warning with the reservation that a sanction may be imposed (Section 8 VerSanG-E). The third sanction – dissolution of the corporation – which had been provided for in Section 14 VerSanG-E (old) was deleted.

Public announcement of corporate convictions, which had been contemplated as a “side effect” (Section 14 VerSanG-E), has now been restricted in its scope. Publication of a conviction is no longer intended as public shaming or to provide non-monetary satisfaction to a party that has suffered damage. Instead, it is to provide specific and adequate information to damaged parties to enable them to claim damages.

More material changes were made to the provisions on internal investigations in Section 17 VerSanG-E. While the initial draft provided that a court “can” impose mitigated sanctions under certain circumstances, the revised draft stipulates that a court “shall” mitigate a sanction if the prerequisites of Section 17 (1) no. 1 to 5 VerSanG-E are met. Unlike as provided for in VerSanG-E(old), the court now can no longer freely exercise its discretion.

If, in the course of the investigation, the law enforcement authorities approach the corporation and ask it to cooperate, a mitigated sanction is to be granted only if the corporation expresses its decision to cooperate immediately, i.e. within a short period (notes to Section 17 (1) no. 3 VerSanG-E).

The former provision that “the internal investigation is to be carried out in compliance with applicable law” (Section 18 (1) no. 6 VerSanG-E(old)) was deleted. However, the provision is still reflected in the notes where it says that “the state can only reward law-abiding behaviour with mitigated sanctions.” In the end, however, corporations may have gained more flexibility when conducting an internal investigation as a result of the deletion. According to the notes, “internal investigations are only measures that serve the systematic clarification of the suspicion of a regulatory offence or criminal offence”. This implies the obvious: that only investigations carried out based on reasonable planning can benefit from a mitigated sanction.

The provision in Section 17 (3) VerSanG-E is new. It stipulates that the earlier and better the cooperation with the law enforcement authorities is, the more the sanction is mitigated. However, a mitigated sanction is excluded where the company only cooperates with the law enforcement authorities after the commencement of the court proceedings. In this respect, only the catch-all provision of Section 15 (3) no. 7 VerSanG-E applies as a general penalty assessment rule.

Further clarification by the VerSanG-E

The notes give explanations on the scope of the compliance measures required and on what is meant by the phrase “adequate steps”. Firstly, unlike as provided for under the VerSanG-E (old), the revised draft makes clear that a compliance management system (CMS) must be effective and not only efficient. This means that a CMS must be designed to control steps in order to be able to assess whether such measures are also suitable to avoid compliance incidents. Depending on the circumstances, only a few compliance measures may be sufficient as “a perfect protection against criminal offences cannot be obtained and compliance measures reach their limits where the offender acts for corporation-remote reasons and is absolutely determined to commit the act”. Therefore, “compliance XXL” is not necessarily required. However, the CMS must be risk-based, adequately tailored to the respective company and be effective.

It is also made clear that a corporate act is not deemed to have occurred if the actions of management are directed exclusively against the interest of the corporation. The same holds true for any “excessive acts” committed by management.

According to the notes, a corporate act has, however, occurred if the management fails to set up the necessary supervisory measures as this is deemed an organisational fault.

The Act does not apply to entities that do not have a commercial business purpose (Section 1 VerSanG-E), such as non-profit entities, e.g. associations (Vereine). In this respect, punishment under the OWiG continues to apply.

Conclusion

Unlike in the 2019 summer, the BMJV, the Federal Ministry for Economic Affairs and Energy (BMWi) and the representatives of the governing parties have now reached consensus on the draft bill. It can therefore be expected that, following the consultation of the Länder and Associations, the draft bill will be endorsed by the Cabinet before the German 2020 summer break and then submitted to the Federal Parliament for voting. However, the exact timeline depends on the current situation around COVID-19 pandemic. We can assume, however, that the draft will be passed before the end of the legislative period in October 2021.

In view of the significantly higher sanctioning framework and because of the expected major increase in corporate investigations, companies are well advised – despite the current COVID-19 pandemic – to take appropriate steps now and not to rest on their laurels. Companies should establish and expand effective compliance systems and not ignore the potential need to conduct internal investigations in order to improve their prospects of benefiting from mitigated sanctions in the event that a compliance incident or corporate act occurs.