Germany Faces Drastic Increase of Fines on Companies for White-Collar Crimes

SUMMARY

On April 22, 2020, the German Federal Ministry of Justice and Consumer Protection (“BMJV”) presented the official draft bill of the Corporate Sanctioning Act (“VerSanG-E” or “Act”) as part of the “Act promoting integrity in business.” The main content of the draft Act corresponds to a preliminary draft by the BMJV that had already been unofficially circulated in the summer of 2019 and had been in part sharply criticized. Despite the restrictions imposed by the COVID-19 pandemic, there is a high probability that the draft Act—subject to further changes in the legislative process—will have been passed by the end of the current legislative period in 2021. The heads of the government factions CDU/CSU and SPD have signaled their general support of the draft Act. The Act would enter into force two years after its promulgation.

The draft Act is addressed to all “associations whose purpose is directed towards a commercial business operation.” In practice, the main addressees will be domestic and foreign commercial enterprises organized as stock corporations, Societates Europaeae, limited liability companies (GmbH), or limited or general partnerships (OHG, KG), or in a comparable foreign legal form.

The law provides a new basis for the relationship between the state and companies in the area of criminal offenses in the economic sphere (especially white-collar crime). The declared aim of the law is, on the one hand, to create incentives for companies to prevent crimes within their sphere of influence and to support the investigations of the public prosecutor’s office through internal investigations. On the other hand, companies will be deterred from failing to implement effective measures to prevent criminal offenses. Penalties of up to 10 percent of the company group’s worldwide turnover can be imposed on large companies (with the latter being defined by a worldwide group turnover exceeding EUR 100 million) if employees, or third parties commissioned with the performance of company tasks, commit company-related criminal offenses. In addition, the draft Act also provides for disgorgement of benefits, i.e., confiscation of benefits from transactions that the company has received in connection with, or because of, a criminal offense.

German companies, including foreign companies with German subsidiaries or establishments in Germany, should give considerable attention to the draft Act. The Compliance Management System (“CMS”) needs to be adapted in consideration of the new draft Act’s provisions. This is of material importance to avoid drastic sanctions or, at least, to mitigate them. If suspicious facts occur, the company should also consider conducting an internal investigation, as courts will consider properly conducted internal investigations to be mitigating factors.

Dealing with the new requirements of the draft Act is a leadership task of the board of management. The supervisory board should closely monitor the execution of this task.

OVERVIEW ON PROVISIONS AND DEVELOPMENTS

The Act particularly defines the conditions under which companies can be accused of company-related offenses as well as the sanctions (including penalties, confiscation of benefits, conditions, and orders) that can be imposed on the company for such offenses. It also contains a large number of procedural provisions that govern investigations by the public prosecutor’s office against companies, the requirements for internal investigations by the company, and the possibility of the prosecutor’s office refraining from or deferring prosecution, for example, in cases of insignificant offenses, in cases in which the company complies with conditions and orders imposed by the prosecutor, in the event that sanctions are to be expected abroad (ne bis in idem), in cases of internal investigations, and so on.

Below we summarize the most important regulations.

• The principle of legality (mandatory investigation) is to replace the principle of opportunity (Section 3(1) VerSanG-E – “will be imposed”). This means that the public prosecutor’s office must start investigations against the company in cases where a company-related criminal offense is suspected and, in contrast to the current situation, may only refrain from such investigation in narrowly defined exceptional cases for reasons of expediency—similar to the prosecution of criminal offenses committed by natural persons. Therefore, companies must expect a significantly higher number of investigations based solely on the (reasonable) suspicion of criminal offenses. The number and intensity of these investigations will likely significantly interfere with companies’ business activities.
• The sanctioning under the draft Act is linked to the committing of a so-called Company Offense (“Verbandstat,” Section 2(1) VerSanG-E), i.e., a criminal offense by which obligations of the company were infringed or the company has been enriched or was to be enriched. The Company Offense can be committed by
  
  • A manager of the company (e.g., executive body, managing director, authorized signatories (Prokuristen) in a managerial position) or
  • Persons otherwise engaged or commissioned with the execution of the company’s business, if management could have prevented or significantly impeded the offense by taking reasonable precautions, e.g., relating to the organization, selection, guidance, and supervision of such persons. Based on the draft Act’s wording, this may even include persons who are not employees of the company, but are merely in a contractual relationship, e.g., third parties working abroad who are engaged by the company for sales activities.

In the case of a mere administrative (and not criminal) offense, this provision does not apply and the company remains subject to a potential sanctioning under Section 30 of the Administrative Offenses Act (“OWiG”).

• In addition to domestic companies, sanctions can also be imposed on foreign companies, provided that the company can be held responsible for a Company Offense that is subject to German criminal law. Under certain conditions, cases in which criminal acts are committed abroad that would constitute a criminal offense under German law are also covered. If, however, German criminal law is not applicable to such an offense committed abroad, the draft Act is only applicable if the committed offense is punishable abroad and would also have presented a criminal offense under German criminal law and if the company has its seat in Germany (Section 2(2) VerSanG-E).
• Company sanctions (Section 9 VerSanG-E) of up to ten percent of the average worldwide group turnover can be imposed on companies whose annual worldwide group turnover exceeds 100 million euros. In determining the average annual turnover, the worldwide turnover of all persons and companies of the last three financial years preceding the conviction shall be taken as a basis, if these persons and companies operated within the company group as an economic unit. The average annual turnover may be estimated.
• The sanctions against companies with a lower turnover correspond in scope to fines under the OWiG and can amount to up to ten million euros for intentional offenses and up to five million euros for negligent offenses.
• When determining the company sanction (Section 15 VerSanG-E), the significance of the offense, the severity and extent of violations of supervisory duties, and the economic circumstances of the company play a decisive role. The court is provided with a number of criteria for its assessment of the aspects in favor of and against the company.
  
  • Considerable sanction rebates (up to 50%) can be expected if the company’s internal investigations contribute significantly to the clarification of the offense (Sections 16 and 17 VerSanG-E). The mitigation is not in the discretion of the court; rather, the court is generally obligated to reduce the sanction if certain requirements are met (“shall mitigate”). In order to benefit from the rebate, the company must provide the prosecuting authorities with all relevant investigation documents. Furthermore, the internal investigation may not be conducted by the company’s defense counsel, i.e., a different person must be conducting the internal investigation (Section 17(1)(ii) VerSanG-E). The currently still applicable law does not provide for such a separation between “internal investigators” and the company’s “defense counsel.” From the BMJV’s perspective, this should lead to work product of lawyers who carry out the investigation on behalf of the company not being protected from seizure (amendment to Section 97(1)(iii) StPO). This is strongly criticized by the bar and companies alike. With regard to compliance with all requirements of the draft Act relating to internal investigations, there is a comprehensive documentation obligation.
  • The company’s efforts to uncover or prevent Company Offenses shall be taken into account as a mitigating factor for sanctions. The company’s CMS is of particular importance in this context (Section 15(3)(vi) and (vii) VerSanG-E)—if it is effective. In addition to the existing CMS, a CMS that was set up or improved after the offense was committed can also have a mitigating effect. The draft Act does not contain any concrete requirements for such a CMS.
• Instead of imposing a monetary sanction, the court may also issue a warning and reserve the right to impose a monetary sanction against the company (Section 10 VerSanG-E). This is, based on an assessment of the quality of the offense, conditioned on measures like a warning being sufficient to avoid further Company Offenses in the future. Such warnings and reservations may be combined with orders and conditions, e.g., with the condition of the company taking certain precautions to prevent Company Offenses and the company’s obligation to prove it has taken these precautions by having them certified by a competent body (Sections 12 and 13 VerSanG-E). Lawyers, management consultants, or auditors are to be regarded as competent bodies. Whether conditions and orders will be designed in a way similar to U.S.-style monitorships will be determined by legal practice.
• If the company will likely be subjected to a sanction for the same offense abroad, German prosecution can refrain from further investigations if the sanction abroad achieves the same purpose as a sanction in Germany would (Section 38(1) VerSanG-E). The termination of prosecution is possible, for example, if compliance measures imposed abroad also constitute appropriate measures from a German perspective.
• As an equivalent to the Federal Central Register of Criminal and Court Records (Bundeszentralregister), a company sanctions register will be introduced (Sections 14 and 54 ff. VerSanG-E), in which the company’s offense is made public if there are a large number of injured parties. In this respect, the register primarily functions as an information system for the judiciary. However, it is to be expected that other authorities will also be able to retrieve information from the register. Companies conducting a proper internal investigation are exempt from publication of their names (and corresponding “naming and shaming”) in the register.
• Despite strong criticism, the current draft maintains a high level of protection for employees and grants them the right not to have to incriminate themselves during internal investigations (Section 17(1)(v) VerSanG-E), as would also be their right during criminal law proceedings. In practice, this will hinder internal investigations.
• Companies shall be prevented from avoiding a sanction by restructuring their company group. For this purpose, and under certain conditions, the draft Act allows the sanctioning of a company’s legal successor and provides for a third-party liability for default (Sections 6 and 7 VerSanG-E).
• The draft Act provides for the possibility of a so-called sanction notice (“Sanktionsbescheid,” Section 50 VerSanG-E), for example, in some cases of an internal investigation, which eliminates the requirement of a trial as well as the public announcement in the company sanctions register.

Amendments to the previous version of the draft Act

With the current draft Act, the BMJV has only partly responded to business associations’ and the bar’s criticism of the former version of the draft bill that was unofficially released in August 2019:

• Section 1 of the VerSanG-E now expressly clarifies that the applicability of the draft Act shall be limited to legal persons and associations without legal capacity, as well as partnerships with legal capacity whose purpose is directed toward an economic business operation.
• The term “criminal company offense,” as originally used in Section 2(1)(iii) of the VerSanG-E, is replaced by the term Company Offense. The new terminology, as well as the new title of the draft Act, is intended to express that companies are not placed under the general suspicion of enabling criminal offenses.
• The dissolution of the company, originally provided for in Section 14 of the VerSanG-E as an ultima ratio sanction, is deleted in the current draft.
• According to Section 17(1) of the VerSanG-E, internal investigations within the company and cooperation with the prosecuting authorities “shall” lead to sanction rebates under the current draft. In the previous draft, the term “may” was still being used. While internal investigations do not automatically lead to sanction rebates, the new wording underlines that rebates in the case of internal investigations shall be the rule rather than the exception. This would have a binding effect on courts, leading to their mitigation of sanctions if the requirements of the draft Act regarding internal investigations and cooperation with the prosecutor’s office were complied with. A deviation from this would require exceptional circumstances.
• The new draft Section 17(3) of the VerSanG-E provides the court with a non-exhaustive list of criteria for its mitigation decision. In particular, the time of disclosure as well as the extent of the support of the prosecuting authorities by the company shall be decisive.
• Section 18(1)(6) of the previous draft was deleted. According to this former provision, only those internal investigations within the company that were carried out “in accordance with the applicable laws” were to be taken into account for the purpose of mitigating sanctions. The deletion of this provision addresses criticism that such a limitation could have been used to waive sanction rebates for costly and time-consuming internal investigations for the slightest violations, e.g., violations of data protection law.

OUTLOOK

In view of the current uncertain situation, it is not possible to predict when the draft Act will finally pass the legislative process during the current legislative period. The German government, German parliament (Bundestag), and German federal council (Bundesrat) remain operative despite the COVID-19 crisis. The draft Act would enter into force two years after its promulgation. Companies should use this time to review their existing CMS against the background of the changed requirements set out in the draft Act as well as with regard to others risks arising under the draft Act. When assessing a Company Offense in retrospect, it will be of material importance to determine which CMS existed at the time the alleged Company Offense took place.

We are happy to answer any questions regarding the aforementioned or relating to the general impact of the draft Act.