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Introduction of corporate criminal law – What companies can expect in the future

Up to now, while it has been possible to impose fines against companies, nevertheless, only individual members of companies could be liable to prosecution. In this connection, the Federal Ministry of Justice presented a draft of the “Act to Combat Corporate Crime”, on 15.8.2019. The core element here is the Corporate Sanctions Act (Verbandssanktionengesetz-Entwurf, VerSanG-E), which we discuss in the following section.

Current legal situation

Up to now, there has been not been consistent punishment for corporate crimes. Prosecution has been left to the discretion of the competent authorities. Currently, criminal offences may be punished by the imposition of a fine of up to € 10 million, which is regarded as being disproportionately low in relation to large corporations. In addition, up to now, there have also been no incentives that could provide legal certainty for implementing compliance measures or for conducting internal investigations, something that has likewise been criticised in some cases.

Key points of the draft law

The principle of legality

According to the draft of the VerSanG, the sanctioning of organisations would be subject to the so-called legality principle. Accordingly, if initial suspicion exists then the competent authorities would be obliged to initiate a preliminary investigation. The aim of this is to ensure that prevailing law is applied evenly and consistently.

Sanctions for organisations

The addressees of the Act are organisations in the general sense, thus for instance, legal persons under public or private law (e.g. an AG, joint stock company, or a GmbH, German limited company), associations and partnerships (an OHG, German ordinary partnership, or a KG, German limited partnership). Sanctions would then be imposed on organisations if the duties of the organisations had been breached or (possible) enrichment of the organisation had occurred. All categories of offence under German criminal law would qualify as offences by organisations, e.g. crimes against property, tax offences, environmental offences, or criminal acts against free competition.

The above-mentioned offences could be committed by leaders of organisations. Besides leaders in the narrow sense – e.g., managing directors, board members or shareholders/partners authorised to represent a company – this also includes other persons to whom management authority has been delegated. Moreover, a breach of supervisory and organisation duties has also been included in the catalogue of potential offences by leaders. In this way, incentives should be created for companies to set up compliance management systems (CMS).

Types of sanctions

Possible sanctions for organisations include fines for organisations, warnings and the dissolution of an organisation. In future, fines will be differentiated and based on revenues. For organisations with commercial business activities and average annual revenues of more than 100 million, the maximum penalty would be 10% of average annual worldwide revenues. Estimating annual revenues will be allowed. In especially difficult cases the organisation could even be dissolved and a fine imposed on the organisation.

Please note: In accordance with the principle of ‘naming and shaming’ the sentences will be made public. A sanctions register will be set up for this purpose.

A functioning compliance system

A key objective of the draft law is supposed to be the promotion of compliance initiatives. In the future, setting up a functioning CMS will be regarded as being an almost obligatory precautionary measure to help organisations avoid committing offences.

Please note: In particular, CMS would be regarded positively when determining sanctions. Ultimately, setting up such systems could in effect be enforced through a requirement by a court.

Internal investigations

A softening of sanctions on organisations could be brought about by conducting an internal investigation of the organisation. The maximum potential amount of the sanction could thus be reduced by half. The dissolution of the organisation would then not be possible and public notification of the sentence would be ruled out.

Such internal investigations of organisations that reduce the severity of the punishment have to contribute considerably to clarifying the facts and may not be conducted by the defence lawyer for the company or by the accused. The organisation would have to cooperate fully with the prosecuting authorities. What exactly this would mean is not yet clear. Reports about the internal investigations and all the important documents obtained would have to be submitted and compliance with the principles of a fair trial would have to be observed.

Particularities in the context of the future application of the law

The introduction of the so-called legality principle (see above section 2.1) will, in future, create an obligation to investigate an initial case of suspicion and, if an offence has been committed by an organisation, to impose a sanction on it. Offences committed by an organisation do not have to fall under the German criminal statutes. Consequently, a domestic (German) organisation can also be sanctioned for an offence in a foreign country if the crime would have been punishable under the application of German criminal law.

Anyone acquiring the essential assets of an organisation could be held liable for the sanctions on the organisation incurred by the legal predecessor. In M&A transactions, in particular, the additional risk stemming from any liability for deficiency would have to be taken into account. This will have to be borne in mind when carrying out due diligence checks.

The previous legal provisions of the Administrative Offences Act (Gesetz über Ordnungswidrigkeiten, OWiG) relating to offences committed by organisations (Section 30, Section 130 OWiG) will continue to exist.

Recommendation: Companies should concern themselves, in particular, with setting up a functioning CMS in order to minimise the risk of criminal acts and to be able to get to the bottom of breaches of duty that have been committed. The lack of a precautionary system, in practice, will be regarded as a shortcoming – a greater one than previously.

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