New German legislation on corporate sanctions and internal investigations taking shape

Dr Wolf Bussian
Jan Erik Windthorst
Dr Tim Müller
Dr David Schmid

The German Federal Ministry of Justice has prepared a draft bill of a Corporate Sanctions Act (Draft Bill). If enacted in its current draft form, it will significantly affect the prosecution of corporate crimes and the legal framework for conducting internal investigations in Germany.  We take a look at the Draft Bill’s most important aspects.

Significant increase in potential corporate fines

The Draft Bill links the maximum amount of corporate fines to a company’s turnover. For companies with an annual turnover of more than EUR 100 million, the maximum penalty shall be 10% of the average annual worldwide turnover in the three years preceding the imposition of the fine.

At present, the statutory maximum applied to corporate administrative fines is EUR 10 million. However, the statutory maximum can be exceeded even under the current legal framework in order to confiscate economic benefits generated as a result of the offences. The confiscation of such economic benefits will remain possible under the new regime.

Sanctioning guidelines for corporate FINES

For the first time, the Draft Bill sets out detailed sanctioning guidelines for imposing corporate fines.

For example, the competent court shall consider the dimension and duration of the corporate crime as well as the number of involved individuals and their position within the company. At the same time, the court is to take into account the measures the company has taken to prevent and detect corporate crimes – both before and after the investigation into the misconduct in question.

Furthermore, it is possible to reduce the statutory maximum of the respective corporate fine by up to 50% if the company conducted an internal investigation and made a material contribution to the authorities’ investigation of the corporate crime. The reduction also presupposes that the company cooperated fully and continuously with the authorities. This means that the company must share the internal investigation report and all relevant underlying documents, including any interview notes, for instance. In order to secure a reduction of the corporate fine, the internal investigation must also have been conducted in accordance with the principles of fair proceedings and all applicable laws. This includes in particular that employees were informed about certain procedural rights and aspects, such as the fact that any statement made could be used against them in criminal proceedings. Moreover, any reduction of the corporate fine also requires that employees were granted the right (i) to refuse to answer any questions to which a response could expose the employee or their relatives to the risk of being prosecuted, and (ii) to consult their own legal counsel or a member of the works council. Finally, such reduction requires that the internal investigation was conducted by a third party who is not also acting as defence counsel for the company or any individual defendant.

Under the current regime, German authorities and courts have a wide margin of appreciation when determining corporate administrative fines. The planned sanctioning guidelines will therefore help to ensure a more transparent approach to determining corporate fines.

Introduction of new ways to sanction companies

Along with the significant increase in potential corporate fines, the Draft Bill also introduces new ways to sanction companies.

A court may issue a warning to the company and defer the imposition of all or part of the corporate fine if the court believes this to be sufficient in order to prevent future corporate crimes. The Draft Bill empowers the court to issue instructions to the company for the duration of the deferral period. Notably, the court may require the company to provide evidence in the form of an expert certificate that certain measures have been taken in line with the court’s instructions.

At the other end of the spectrum, the court may even order the liquidation of the company as the ultima ratio in particularly severe cases.

Legal obligation to prosecute and sanction companies

The Draft Bill envisages requiring German authorities by law to prosecute and sanction companies which have derived benefits from the commission of corporate crimes.

Under the current regime, the criminal prosecution authorities only have a legal obligation to investigate potential criminal offences and prosecute individuals. At the same time, the authorities enjoy broad discretion as to whether to also prosecute and sanction companies under the current law.

We expect that this amendment will increase the number of enforcement actions against companies by German authorities.

New possibilities to Resolve proceedings against companies

The Draft Bill introduces new legal provisions regarding the termination of proceedings against companies. These draft provisions refer to legal grounds for terminating criminal proceedings against individual defendants under the German Code of Criminal Procedure. They facilitate inter alia the non-prosecution of petty offences and non-prosecution subject to conditions and directions. Additionally, the competent authorities may, under certain circumstances, suspend the prosecution of the company if it is to be expected that the company will be sanctioned for the same corporate crime by a foreign authority.

Naming and Shaming

If the corporate crime impacted a large number of individuals or entities, the competent court may order that the judgment against the company be made public. At present, the concept of naming and shaming applies only to certain regulatory actions and sanctions taken in response to violations of the Market Abuse Regulation and the German Money Laundering Act and is still relatively new and uncommon in German law.

Applicability to Corporate Crimes committed abroad

The Draft Bill stipulates that the Corporate Sanctions Act will be applicable to foreign actions to which German criminal law does not apply if the following conditions are met: (i) the foreign action would constitute a criminal offence under German law if German criminal law was applicable; (ii) the action constitutes a criminal offence at the locality of its commission; and (iii) the company had a seat in Germany when the corporate crime was committed.

Seizure of documents produced in internal investigations

The Draft Bill clarifies that documents produced by certain external counsel (e.g. in connection with an internal investigation) are only protected from seizure by German authorities if they have been prepared with a view to defending the company in proceedings relating to the relevant corporate crime. The protection of such documents from seizure is still heavily disputed in Germany.

Applicability upon enactment

The Draft Bill provides that the Corporate Sanctions Act will only apply to corporate crimes committed after the Act has entered into force. The current regime will continue to apply to corporate crimes committed before this date.

Outlook

Following a consultation process, the Draft Bill must pass the German Parliament. If it becomes law in its current form, it will have a major impact on the current landscape of proceedings regarding corporate crimes in Germany. We expect that the number of investigations against companies will increase and that typically higher corporate fines will be imposed under the new regime.

At the same time, the law will provide companies with greater clarity on ways to mitigate corporate sanctions and on the legal framework for conducting internal investigations. As corporate penalties are on the rise even under the existing regime, it is crucial to review and continuously improve compliance management systems and to address potential irregularities early and thoroughly. In the event that proceedings are brought against a company, these measures will help to facilitate a significant reduction of potential corporate penalties – in particular once the Corporate Sanctions Act has taken effect.

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