Corporate Criminal Liability and Internal Investigations – Expected Legislative Changes in Germany

In their March 2018 coalition agreement, the coalition partners CDU, CSU and SPD have agreed to establish new rules on criminal sanctions against companies and – for the first time – legal requirements for internal investigations. The agreement already sets out a clear framework and demonstrates a strong political will to tighten the level of sanctions, introduce an obligation to prosecute corporate crimes and create incentives for compliance measures as well as for the assistance in the clarification of criminal offences through internal investigations. The former Federal Justice Minister, Katarina Barley, declared the law reform to be a "priority project". Following her election to the European Parliament, her successor, Christine Lambrecht, made the draft bill available to a small circle of experts in mid-August 2019 and started the consultation process with the other ministries. The legislative proposal is being discussed extensively in legal practice and academia.

Status quo: So far no criminal prosecution of companies

In contrast to most EU member states, which have introduced a "real" corporate criminal law, Germany has so far pursued an extraordinary path and addressed the issue under the Administrative Offences Act ("Ordnungswidrigkeitengesetz", "OWiG"). Sec. 30, 130 OWiG provide for the imposition of fines of up to EUR 10 million (for negligent acts: EUR 5 million) on corporations in case their managing people commit an offence or fail to take appropriate supervisory measures which would have prevented or at least made more difficult criminal acts committed by employees. Since the perpetrator is not supposed to retain the unlawfully obtained benefits, the law also stipulates that the unlawfully acquired benefits shall be skimmed off (see Sec. 17(4) OWiG).

Even though this system does not find its roots in criminal law, it may work out. This was the conclusion reached by the OECD Working Group on Bribery in June 2018 in its evaluation of Germany's legal framework and enforcement approach, thereby referring to the imposed fines in cases such as Siemens, MAN and Ferrostaal. However, in light of the fact that the prosecution of corporate crime is currently at the discretion of the public prosecutor's office (opportunity principle), it is not surprising that the working group criticised that the various prosecution authorities across the different states ("Länder") in Germany pursue a very inconsistent approach to holding companies liable.

Requirements in international law regarding corporate criminal liability

The question surrounding the implementation of a corporate criminal law is not new in Germany. Instead, it has been discussed to a greater or lesser extent in the past decades. Dogmatic concerns regarding the attribution of liability to corporates who cannot act themselves, but only through their representatives, as well as the principle of culpability have been overcome. At the latest since the diesel emissions and cum ex scandals, the question is no longer whether a corporation should be held liable for offences committed within their sphere, but rather how such a law should be shaped.

International law does not require the introduction of a genuine corporate criminal law. The Second Protocol of the Convention on the Protection of the European Communities' Financial Interests, dated 19 June 1997, determines a minimum standard for European sanctions law applicable to legal persons, and has evolved into a model for many other European instruments, framework decisions and directives. However, these do not contain any legislative provisions on the legal nature of the sanctions, i.e. whether they have to be of a criminal law nature or can also be administrative. The instruments only oblige member states to take the necessary measures to ensure that legal persons can be held liable for certain offences and that the sanctions imposed on them are "effective, proportionate and dissuasive".

Recent proposals

In recent years, several proposals have been presented to reform the sanctioning of companies. In 2013, Thomas Kutschaty, the Justice Minister of North Rhine-Westphalia, presented a draft bill introducing criminal liability for companies and other associations. The draft legislation was later withdrawn. In the same year, however, the legislator increased the maximum fine limit from EUR 1 million to EUR 10 million.

In the recent past, particularly the "Cologne Draft of a Sanctions Act for Associations" ("Kölner Entwurf eines Verbandssanktionengesetzes", 2017), which, in some aspects, comes closest to the current plans of the legislator, and the "Frankfurt Theses" ("Frankfurter Thesen", 2018) have been discussed. Although both suggestions pursue the same goal and both require a company to implement measures which, if successful, have the purpose of preventing employees and managing people from committing a company-related offence, they differ in various points.

The Cologne Draft requires a managing person to commit a criminal offence or to refrain from taking measures to prevent such infringements, determines that the public prosecution office has an obligation to investigate and places the burden of proof, regarding the implementation of sufficient compliance measures, on the corporation. In contrast to this, the Frankfurt Theses focus on the company's failure to take (sufficient) precautionary measures to prevent criminal offences, the prosecution remains at the public prosecutor's discretion and the burden of proof is on the public prosecutor who has to provide evidence that the corporation did not implement adequate measures. If, however, the company is already aware that misconduct is possible and does not react, it will be presumed that the company has an inadequate compliance system. The company must subsequently prove that it has improved its compliance system and that the offence nevertheless occurred.

Cornerstones of the new draft bill

As of today, the legislator is in the process of preparing the draft bill "Act to Combat Corporate Crime" ("Gesetz zur Bekämpfung der Unternehmenskriminalität") that is currently being commented by the ministries and is supposed to be published in the coming months. We have taken a look at the plans of the legislator and the expected legislative changes. The introduction of a new statute called "Act on the Sanctioning of Associations-Related Offences" ("Gesetz zur Sanktionierung verbandsbezogener Straftaten") and new regulations in the field of substantive and procedural law as well as the first rules on internal investigations are to be expected.

There will be no enactment of a "genuine" corporate criminal law, but the current model of mere administrative offences should not continue to stand either. The legislator is pursuing a middle path by introducing corporate sanctions or – literally translated – "association sanctions" ("Verbandssanktionen"). Following the model of Sec. 30 OWiG, the law dogmatically ties in with the individual act of a managing person and, under certain conditions, attributes it to the company. The new law will generally affect all businesses, whether private or public, large or small.

The legislator also plans an extraterritorial extension of German sanctions law. Also criminal acts committed entirely abroad, to which German criminal law is not applicable, shall be punishable as a corporate offence under certain conditions if the company has its registered seat or administrative headquarter in Germany. This approach will certainly lead to further conflicts of jurisdiction with other states which entail serious problems of double prosecution and will challenge the principle of ne bis in idem in the context of corporate crime. For cross-border cases, therefore, a new provision will be introduced according to which prosecution in Germany may be waived if punishment abroad is to be expected, in addition to which the German sanction would not have a significant weight or which appears sufficient to have an impact on the company and to defend the legal system.

The main cornerstones of the new law are most likely to be the following:

Procedural law issues

In the future, the public prosecutor will be required to launch an investigation if there is an initial suspicion of a company-related offence (principle of legality).

Law enforcement authorities may conduct uniform proceedings against the natural person and the company, but this is not mandatory. They may also prosecute the natural person and the company independently from each other. If the managing person and the company are economically identical, the prosecution of both must, of course, not lead to a factual double punishment.

The prosecution of the company is basically governed by the general principles of the Code of Criminal Procedure ("Strafprozessordnung", "StPO"). Most importantly, the company is to be given the status of a defendant in the proceedings, so that it is granted the corresponding rights under the Code of Criminal Procedure. In the proceedings, the company is represented by its legal representatives, such as board members or directors, whereby the draft law provides extensive possibilities for negotiation in absentia. However, if the company's legal representatives are being accused of the offence, and may thus refuse to provide information, the court will appoint a special representative for the proceedings.

Tougher sanctions

As a matter of principle, the maximum amount of monetary sanctions provided for in Sec. 30 (2) OWiG (for intentional acts: EUR 10 million / for negligent acts: EUR 5 million) remains unchanged. But to ensure that the threatened monetary sanctions also have a deterrent and preventive effect on economically significant companies, those with an annual turnover of more than EUR 100 million, can expect the maximum fine for intentional acts to be increased to 10% of the company's annual turnover (for negligent acts: 5%). Similar to the model in antitrust, data protection and money laundering law, this turnover refers to the average worldwide group turnover of the last three financial years, i.e. it is supposedly not going to be relevant if an offence was committed only in some widely branched subsidiary. Irrespective of the size of the company, the lower limit for fines will also be raised.

In the future, the monetary fine will be separated from the confiscation of criminal proceeds. In contrast to the current system of monetary fines pursuant to Sec. 30 OWiG, under the new law the fine should not also skim off the benefits gained through the offence. The confiscation of criminal proceeds, which, according to the legislator, has no punitive character, is to be ordered separately in accordance with the provisions of Sec. 73 et seqq. of the Criminal Code ("Strafgesetzbuch", "StGB"), which have recently been revised in July 2017. This approach obviously intends to avoid confusion between the penalty and the confiscation part of the fine, since experience has shown that a large proportion (in the opinion of many, too large of a proportion) of the fine is related to the mere confiscation of unlawfully obtained profits. In connection with the diesel emissions scandal, for example, the public prosecutor's office in Braunschweig imposed a fine of EUR 1 billion on the car manufacturer Volkswagen, which consists of the statutory maximum fine of EUR 5 million and a confiscation of criminal proceeds amounting to EUR 995 million. The fine imposed on Audi by the Munich public prosecutor's office for fraudulent emissions manipulation amounted to EUR 800 million, of which EUR 795 million related to the confiscation of benefits.

In particularly severe cases, e.g. if the corporation has repeatedly been involved in serious economic crimes, the dissolution of the association can be considered as ultima ratio. If, in an individual case, a company is used solely for the purpose of committing criminal offences, its dissolution absolutely makes sense; otherwise, if it – as in most cases – conducts a legitimate business, the appropriateness of the dissolution might be doubtful, since uninvolved employees and shareholders would suffer.

The exclusion of the companies from subsidy or award procedures, however, is not mentioned in the draft bill.

Public announcement of the conviction

The legislator also intends to introduce a sanctions register at the Federal Office of Justice and, if the crime has caused harm to a wide spread of victims, the court may order the publication of the conviction (e.g. via print media or internet). This will put additional pressure on companies and encourage them to comply with the requirements in order to protect their reputation. Even though this measure, according to the lawmaker, is not intended to have a pillory effect and should instead inform the affected people, the fear of being publicly condemned will have a considerable threatening effect. Whether the publication of the sanction imposed on the company is appropriate is particularly questionable if the company is not accused of a systematic deficit in its corporate culture that promotes criminal behaviour, but the offence instead is only attributable to the misconduct of individual employees.

Incentives for compliance measures

The legislator pursues a clearly preventive objective by creating incentives for the implementation of compliance measures. If, due to special circumstances, a monetary sanction is not necessary in order to encourage the company or its personnel to behave lawfully in the future, a warning with reservation of sanctions can be issued. This may concern the full monetary sanction or only parts of it. The court may also impose conditions and directions ("Auflagen und Weisungen") for a reservation period of one to five years.

In this context, the implementation of effective compliance measures may be taken into account. This is in line with the Federal Court's landmark decision of 9 May 2017 (1 StR 265/16). Here, the court found that not only an existing compliance management system, in place at the time of the misconduct, can constitute a mitigating factor when assessing the amount of a fine, but that the criminal court can also take into account the company's subsequent efforts to identify deficiencies and gaps in the system and to enhance its respective internal processes if these efforts are deemed suitable to prevent similar violations in the future.

The draft law stipulates that the court may instruct the company to take compliance measures to avoid future corporate crimes and to prove these measures by certification from an expert body (lawyers, auditors, management consultants). The appointment of the expert ("sachkundige Stelle") by and at the expense of the company requires the consent of the court. The court may determine how often and, if necessary, at which intervals such certificates are to be submitted.

Incentives and guidelines for internal investigations

The legislator will, at least partially, eliminate the uncertainties in the conduct of internal investigations that continue to exist even after the Federal Constitutional Court's decision in the Jones Day case. If the company assists in the processing of facts through internal investigations and continuously cooperates with the competent law enforcement authorities by disclosing its findings, the legislator intends for this to have the effect of resulting in a reduction of sanctions or in a waiver of prosecution. Such cooperation includes the sharing of all underlying documents relevant to the investigation as well as the final report.

The prerequisite for the reduction of sanctions is that the internal investigation is in line with all applicable laws and conducted fairly, i.e. inter alia, employees are informed before their interviews that they can involve a lawyer and that their statements can be passed on to the prosecutor and might be used in criminal proceedings against them. The employees will be free to decide whether to testify against the company if there is a danger of self-incrimination.

Strict separation between internal investigation and defence

In this context, the separation between activities of internal investigations, on the one hand, and defence, on the other, must be strictly observed. This may lead to the unwelcome consequence that the costly clarification of facts through internal investigations must be carried out twice – albeit from different perspectives.

Only the defence lawyer's documents will continue to be exempted from confiscation, but not the documents from internal investigations if they are produced by the staff of the corporation or external (legal) counsel without a defence mandate. There is no legal privilege for in-house counsel or external lawyers, who are not acting in their role as defence counsel.

The question of whether the prosecuting authorities may seize documents from internal investigations depends on whether these documents are subject to the protected relationship of trust between the defendant and his lawyer. Thus, documents from internal investigations that have taken place before the company is formally accused or, for example, only serve the purpose of internal compliance, will not be subject to the prohibition of seizure. Then the company, which can be obliged under corporate law to clarify the suspicion of compliance violations, might be forced to compile possibly self-incriminating factual information which the law enforcement authorities can seize and use against the company. There is a risk that this could discourage companies from carrying out internal investigations as long as they are not yet formally accused, thereby undermining the legislator's intention to create more transparency through enhanced internal investigations. The other possibility is that companies will in future structure internal investigations in cross-border cases in such a way as to coordinate and conduct the investigations from abroad, where they are protected by legal privilege, so that the documents are not accessible to the German law enforcement authorities.

Conclusion

German law is now facing fundamental changes that will pose new challenges to businesses as well as overloaded law enforcement authorities and courts. The draft law is already being discussed in detail by experts, with the tougher sanctions in particular encountering criticism. Nevertheless, it is not expected that the draft will be subject to major changes during the further legislative process ahead. An evaluation of the law is planned after five years. It will then be examined whether the new law offers sufficient sanction mechanisms to react to corporate crimes, so that the German law can stick to its special non-criminal law approach, or whether the transition to a "real" corporate criminal law might be necessary.