New provisions regarding internal investigations under new German draft bill to fight corporate crimes

Introduction

After prolonged discussions, the German government together with the relevant ministries issued a draft bill on sanctioning corporate crimes (Verbandssanktionengesetz, “VerSanG”) in summer 2019. Since the German legal system does not yet comprise separate statutory provisions for the criminal liability of legal persons, only the possibility for administrative fines against companies, the draft bill was eagerly anticipated.

Relevant regulatory changes

One of the most striking novelties of the VerSanG is the possibility of imposing extraordinarily high fines in the event that criminal offences are committed outside of a corporate organisation. Apart from the possibility of imposing higher fines (i.e. up to 10 per cent of the annual turnover of a company), the draft bill also provides, in particular, for the abandonment of discretion when combating corporate crime. It also provides incentives for corporations to conduct internal investigations if necessary and to strengthen preventative internal compliance measures.

New provisions concerning internal investigations

The VerSanG includes – for the first time in codified German law – specific regulations concerning the methods for carrying out internal investigations and sets out the rights of the parties involved. In the event that a criminal offence is being committed, the company in question has the opportunity to mitigate potential sanctions, if it:

1. Assists significantly in investigating the corporate crime
2. Fully cooperates with the prosecution authorities
3. Makes available any relevant results and reports of internal investigations to the relevant prosecution authorities (Section 18 VerSanG)

Even though codified regulations on the performance and legal effects of internal investigations are certainly welcomed, the VerSanG also contains a provision which could potentially lead to difficulties implementing them in practice.

Internal investigation vs. defence activities

The VerSanG explicitly states that internal investigations may also be executed by third parties and therefore takes into account that such investigations are generally not carried out by the affected company itself, but by external, independent and highly specialised lawyers (Section 17 VerSanG).

However, the VerSanG also stipulates that those lawyers who are involved in the internal investigation must not simultaneously act as the company's defence counsel. Thus, an internal investigation and the legal defence of a company must be kept strictly separate. In the event that those two tasks are combined, undertaking an internal investigation will not lead to a mitigation of potential fines that might be imposed on the relevant company (Section 18 para. 1 no. 2 VerSanG).

This provision, which is intended to separate internal investigations from defence work, was included to ensure the independence of the results of internal investigations. Any investigation should primarily facilitate an objective assessment and explanation of the facts of the case. Prima facie, from this point of view, it appears reasonable to separate defence work and the undertaking of an internal investigation in order to prevent conflicts of interest, although at the same time this provision disregards the fact that lawyers are subject to high professional standards and are bound by the administration of justice.

Furthermore, acting in accordance with this provision could prove very arduous in practice. The costs to the affected company are increased enormously if the company has to commission an internal investigation and any subsequent defence separately. Aside from costs, it is also important to note that this requirement necessitates the exchange of sensitive information between parties and could negatively impact the efficiency of the defence strategy. Risks could be posed especially to the indictable corporation, as it cannot be excluded that vital insights from the investigation will not adequately or accurately be passed between investigating and defence legal teams. These difficulties, in particular, illustrate that it makes sense not to separate the internal investigation and the company defence, especially as the transition from investigation to defence work might be fluid in practice.

However, according to the explanatory memorandum that was published together with the draft version of the VerSanG it will be possible for a company to engage the help of one law firm with regard to both investigation and defence work, where a strict distinction between investigating and defence legal teams can be made within that firm. This exception would enable law firms to continue working as they have been – provided that the legal teams engaged for the investigation and for the defence conduct their respective roles efficiently and diligently.

Since the regulations on separating internal investigations from defence work were already facing strong criticism, it remains to be seen whether they will actually be implemented. However, where these are implemented, the best way to ensure the fluent process of the separate work streams and, in particular, to reduce the costs for the relevant company, is to engage an experienced and specialised law firm to ensure the necessary separation between internal investigation and corporate defence work. This will ensure the completion of both work streams as efficiently and successfully as possible.

With regards to the intended separation of internal investigation and defence work, it is also worth noting that the German legislator also plans to revise the German Code of Criminal Procedure (Strafprozessordnung, “StPO”), and in particular a provision that prohibits the seizure of certain documents (Section 97 StPO). According to the new version of this criminal procedural provision, all documents which are in the custody of external lawyers may be seized, unless the relevant client is an accused party (Beschuldigter) in a criminal proceeding and there is a ‘relationship of trust’ (Vertrauensverhältnis) with regard to such documents. Based on certain statements contained in the explanatory memorandum to the VerSanG, it stands to reason that the German legislator is of the opinion that documents (e.g. reports) that arise out of an internal investigation (and which therefore are not drafted by the defence lawyer) may under certain circumstances be seized, where they are not covered by a ‘relationship of trust’. On the other hand, documents that are connected to defence work might be protected from seizure, since the work of a defence lawyer is considered to be based on a ‘relationship of trust’. It should be noted that each relationship between lawyer and client is based on trust, given the strong collaboration and the sensitive topics that are discussed between client and lawyer. It should therefore not be in the hand of the legislator to determine which client relationships are deemed worthy of protection.

Practical considerations for companies

If the new provisions are implemented, companies should ensure thorough and effective compliance systems are in place. Failing that, they should update and monitor compliance systems already in place. A robust compliance system is the most efficient way to prevent corporate crimes, potential fines or the necessity of an internal investigation. If a company finds itself in a situation in which an internal investigation appears to be helpful, that investigation should be carried out. If it is conducted correctly and in line with the provisions of the VerSanG, this will be the most effective measure to achieve a reduction of potential fines in case a criminal offence was indeed committed outside of the cooperation.