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Watershed moment for prosecution of corporate crimes in Germany gets closer

Jan Erik Windthorst
Dr Tim Müller
Dr David Schmid
Laura Jung

Resistance has been futile. Although practitioners and academics strongly criticised a previous working draft, the German Federal Ministry of Justice has now formally published its proposal for a Corporate Sanctions Act (Verbandssanktionengesetz, the Draft Bill). The Draft Bill reflects some of the concerns that were raised about the previous draft (discussed here).  It has become more likely that the Corporate Sanctions Act will be enacted in the current legislative period. If so, it will be a watershed moment for the prosecution of corporate crimes in Germany and also heavily impact the conduct of internal investigations.

Key provisions

  • Significant increase in potential fines: The ceiling for corporate fines will be linked to a company’s turnover. Maximum fines will be up to 10% of global turnover and up to 20% for multiple infringements.
  • Legal obligation to prosecute and sanction companies: Authorities will be required to prosecute corporate misconduct. Under the current regime, there is broad discretion whether to prosecute corporations.
  • Sanctioning guidelines for corporate fines: Sentencing will be impacted by compliance measures implemented before and after the relevant misconduct as well as a company’s cooperation with the authorities, including the disclosure of internal investigation reports.
  • Introduction of new instruments: Courts will be empowered to defer fines subject to the company’s compliance with requirements set by the courts. Courts will have the option to merely issue a warning in less severe cases of misconduct.
  • Naming and shaming: Courts will be entitled to order that a judgment against a company is made publicly available in whole or in part.
  • Seizure of documents: Documents connected to internal investigations will only be protected from seizure by German authorities if they were prepared with a view to defending the company in proceedings relating to the relevant corporate misconduct.

Notable changes since previous draft

The following aspects of the Draft Bill differ from the working draft of August 2019:

  • Corporate Sanctions Act will focus on businesses: Associations with non-commercial purposes (such as charities) will be excluded from the new law’s scope of application.
  • Internal investigations and cooperation will lead to the reduction of corporate fines: The Draft Bill makes it the rule, rather than an option, for the courts to reduce the statutory maximum fine if a company conducted an internal investigation and cooperated fully with the authorities.
  • More specific guidance on cooperation credit: The courts are called upon to take into account the range of facts revealed by the internal investigation, their importance for the authorities’ investigation and the timing of their disclosure.
  • More clarity on the purpose of publication decisions: The Draft Bill states that informing potentially aggrieved parties and allowing them to claim damages is at the heart of the naming and shaming provisions. This highlights the increased risk of follow-on litigation.
  • No corporate ‘death penalty’: The ultimate sanction to dissolve a non-compliant company has been removed from the Draft Bill.

Timing

We expect that the Corporate Sanctions Act will be passed in the current legislative period which will end in September 2021, and may even be enacted by the end of 2020.

As some of the provisions of the Draft Bill have been disputed so heavily amongst legal professionals, it would not be surprising if further amendments are made during the legislative process. One possible area is the issue of seizure of documents from internal investigations. Another area of concern is the stipulation that an internal investigation and cooperation will only lead to a reduced fine if conducted by those other than the company’s criminal law counsel. This would require corporations to engage additional lawyers and force companies to decide early on whether or not they will likely seek cooperation credit.

Outlook

If the Draft Bill is enacted, we expect (i) a significant increase in investigations against companies, (ii) higher corporate fines and (iii) a greater volume of follow-on litigation. At the same time, companies would have greater clarity on how to mitigate corporate sanctions, such as conducting internal investigations and implementing compliance management systems, both before misconduct has been identified and thereafter.

This article appeared on the Allen & Overy Investigations Insight Blog – sign up to the blog to receive updates on important developments in business crime and financial services investigations  – email Investigations.insight@allenovery.com.

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