Proposed German Corporate Sanctioning Act: Legislative Procedure is Forging Ahead

EXECUTIVE SUMMARY

The comprehensive reordering of the sanctioning of companies for company‑related crimes through a German Corporate Sanctioning Act (Verbandssanktionengesetz – “VerSanG”) is drawing nearer. The Federal Council (Bundesrat) has expressed its basic consent to the draft act from the Federal Government, and has merely requested with rather moderate changes. The VerSanG could have far-reaching consequences for the Compliance Management System (CMS) of companies (see our April 30, 2020 Client Alert).

The changes requested by the Federal Council would affect German and foreign companies in different ways.

FEDERAL COUNCIL OF GERMANY REQUESTS CHANGES IN THE GOVERNMENT'S DRAFT CORPORATE SANCTIONING ACT

The legislative process for the VerSanG is continuing to gain momentum. The German Federal Government’s Cabinet had accepted the draft act of the German Federal Ministry of Justice and Consumer Protection (Bundesministerium für Justiz und Verbraucherschutz; BMJV; see Client Alert of April 30, 2020 for more details) without changes on June 16, 2020 (“Government Draft” or “VerSanG-E”).

The vast parliamentary majority of the parties in the government coalition makes the approval of the Federal German Parliament (Bundestag) likely. However, the act needs the approval of the Federal Council. The 16 German Federal States are represented in the Federal Council which has a legislative function similar to the upper house or second chamber of the Parliament.

Considerable misgivings about the proposed act have been articulated by professional and business associations. This criticism was echoed by individual Federal States. Two committees of the Federal Council argued in favor of a general rejection. Nevertheless, in its September 18, 2020 meeting, the majority of the Federal Council expressed that it basically consented to the draft act. It determined that only with regard to individual regulations was there any need for changes. Now the Federal Government has to address these changes. Presumably in the next few weeks it will draft a response with suggestions for adjustments. Finally, the statement of the Federal Council and the response of the Federal Government will be forwarded to the Federal German Parliament. The VerSanG-E could – in modified form – be passed during the legislative period extending into 2021.

Taking the statement of the Federal Council into account, changes to the VerSanG are to be expected in the following areas:

Small and medium-sized companies

One core concern of the Federal Council is the protection and relief of small and medium-sized enterprises (SMEs), i.e., enterprises that have less than 250 employees and generate either an annual turnover of no more than 50 million Euro, or show a balance sheet total of no more than 43 million Euro.

The Federal Council highlights three concrete aspects:

• The proportionality of corporate responsibility (Verbandsverantwortlichkeit) and sanctions (Sections 8 et seq. VerSanG-E) should, in view of the particular circumstances of SMEs, be examined.
• There should be an examination of the extent to which SMEs could be excluded from certain “Company Offenses” (Verbandstaten) (Sec. 2 para. 1 VerSanG-E).
• An SME should be expected to meet less high demands with regard to the appropriateness of precautions for the prevention of Company Offenses. For reasons of legal certainty, the different levels of appropriateness should be defined more precisely than before.

Limitations on the international area of application

The Federal Council is requesting a limitation on the international scope of application of the VerSanG. The nature and scope of the link to Germany should be made more specific.

With regard to a potential extension to activities to which German criminal law does not apply, the Federal Council suggests further limitations. An over-excessive dealing with foreign cases on the part of the German law enforcement agencies, which is feared by the Federal Council, should be avoided. According to the Federal Council, the area of application should be limited, for example, through the requirement of a significant business operation taking place in Germany or through the occurrence of significant damage in Germany.

The changes would especially relevant for foreign enterprises with subsidiaries or branch offices in Germany.

Fault-based liability

According to the draft act, the so-called corporate responsibility is the prerequisite for imposing a sanction on an enterprise (cf. Sec. 3 para. 1 VerSanG-E; see our April 30, 2020 Client Alert).

In order to establish corporate responsibility, a subsequent offense committed by a manager of a company or persons otherwise engaged or commissioned with the execution of the company’s business (see our April 30, 2020 Client Alert) is required. This also includes violations of supervisory duties, which are defined broadly in the Government Draft. Unlike under the currently applicable German Administrative Offenses Act (Ordnungswidrigkeitengesetz – OWiG), an objectively determined violation of a supervisory duty by an executive in the form of inadequate organizational and supervisory measures would, according to the Government Draft, suffice in order to establish an offense. In case of an objectively inadequate organization, the sanctioning of the company would be justified if an employee, or a third party subject to directives, were to commit a criminal offense related to the enterprise.

The Federal Council, on the other hand, demands that, in addition to the executive’s objective violation of duty, individual fault by the manager with regard to the violation of a supervisory duty by the executive and in the form of inadequate organizational and supervisory measures is necessary for such sanctioning. Corporate responsibility would thus only be established if the executive caused the inadequate organization or supervision willfully or negligently. Should the change requested by the Federal Council be implemented, the company’s possibilities of defense could, in certain circumstances, actually improve if the company’s CMS was being effectively implemented and continuously developed, and would only prove to be inadequate in retrospect.

No public disclosure of enterprise convictions

The Federal Council requests that the public disclosure of enterprise convictions (Sec. 14 VerSanG-E) be deleted. A public “exposure” or “denunciation” of convicted enterprises is to be avoided.

Legal succession

The Federal Council suggests limiting the amount of a company sanction (Verbandssanktion) to be imposed, i.e., a fine, in case of legal succession. This could increase legal as well as planning certainty with regard to company purchases and/or company sales and with regard to restructuring measures. Liability risks arising from company purchases should be easier to quantify on the basis of objective criteria.

Sanctioning of corporate crimes could also be imposed on a company’s legal successor (Sec. 6 VerSanG-E). With regard to this regulation, the Federal Council fears that the amount of a company sanction to be imposed could be based on the annual turnover of the legal successor and that this could result in a disproportionately high corporate sanction. The Federal Council demands a cap for company sanctions to be imposed on the legal successor, so that a potential corporate sanction could not exceed the value of the assets received and/or the amount of the company sanctions that would be adequate with regard to the legal predecessor.

Change in the rules of procedure

The Federal Council proposes to fundamentally revise the procedure of sanctioning corporations and other forms of business associations (Verbände). The general target is to increase the effectiveness of the sanction procedure and to make it less prone to abuse. This change is meant to avoid overloading the legal authorities, e.g., public prosecutors whose staffing and budget are the responsibility of the Federal States.

Telephone surveillance and rights of refusal to give evidence

The Federal Council intends to considerably extend the powers of investigation for the public prosecutors.

According to the Government Draft, interference in postal confidentiality and confidentiality of telecommunications would be prohibited, but the Federal Council holds the view that telephone surveillance of executives is necessary in order to investigate misconduct. The Federal Council argues that such misconduct is often not recorded in the company’s written documents (such as the minutes of board meetings), which are subject to confiscation.

The Federal Council requests that the right of refusal to give evidence and make a statement for legal representatives of an enterprise be deleted. According to the Federal Council, it is not appropriate to impede the investigation of crimes just because the corporation or business association (Verband) would run the risk of being held responsible for Company Offenses (Verbandstaten) if the legal representative gave evidence.

Entry into force

Finally, the Federal Council proposes to postpone the entry into force of the act by one year to a total of three years after the date of its promulgation. This is to assist companies that are adapting their internal processes and CMS in view of the constant strain caused by the COVID-19 pandemic. In such a case, the VerSanG is expected to enter into force in 2024.