Overview of the proposed legislation

The German Federal Ministry of Justice and Consumer Protection (Bundesministerium der Justiz und für Verbraucherschutz, the "Ministry of Justice") proposed a new Corporate Sanctions Act (Verbandssanktionengesetz, the "Act"). The Act would replace the currently applicable legislation in the Act on Regulatory Offences (Gesetz über Ordnungswidrigkeiten), which has been criticized as being outdated and insufficient to combat white collar crime in part because large multinational group companies are neither subject to appropriate sanctions for offences committed within Germany nor for those committed abroad. 

The newly proposed Act would

  • significantly increase the amount of penalties up to 10% of a group's annual global turnover,
  • cover crimes committed in Germany and abroad, 
  • create incentives for companies to create corporate compliance management systems,
  • reduce potential penalties by up to 50% in instances of independent internal investigations and full cooperation, 
  • increase employee protections during internal investigations, and
  • permit courts to appoint a compliance monitor. 

The Act would apply to "organizations," which broadly encompasses companies, associations, corporations and institutions under public law participating in economic life. 

While amendments to the Act are expected, organizations should begin preparation for its enactment by identifying potential compliance risks, and implementing necessary and appropriate compliance measures. Organizations can already

  • implement compliance management systems and extend their scope to include domestic and foreign business activities, 
  • ensure that their compliance, audit and legal departments are prepared for internal and external investigations – e.g., development of "emergency schedules," planned cooperation with authorities.

Mandatory prosecution of offenses under the proposed legislation

Current legislation in Germany does not require prosecution. Instead, prosecutors are granted a large degree of discretion in determining when and if to prosecute organizations for compliance offenses. This has led to inconsistent prosecution among the various federal states in Germany and a large degree of uncertainty in the market. 

The newly proposed legislation will require mandatory prosecution of any action that constitutes a criminal offence under German law which is attributable to an organization (Section 3). In doing so, the Act will harmonize the approach taken by federal prosecutors and will, as a result, enable organizations to better understand repercussions for potential compliance violations. 
Under the Act, offences are "corporate offences" and will be prosecuted if 

  1. organizational duties have been violated, or 
  2. the organization benefits from the offence, or 
  3. the organization was intended to benefit from the offense.

The Act also applies to foreign offences committed by German organizations. Foreign offenses will be prosecuted under the Act if (i) an organization has a seat in Germany, and (ii) the misconduct would constitute a criminal offence under German law, and (iii) under the local law. By applying only to organizations having a seat in Germany, the Act is narrower in application than the US Foreign Corrupt Practices Act and the UK Bribery Act. 

Directors, officers and managers in a guarantor position (such as those in compliance functions and data protection officers), should be aware that their actions and omissions will continue to be at the center of investigations under the Act. More than ever, it is in the interest of this group to ensure the existence of a preventive compliance system that effectively prevents criminal and administrative offences. 

Additional grounds for discontinuing prosecution under the proposed legislation

Although mandatory prosecution is required under the Act, it also contains extensive grounds under which prosecution may be discontinued. For example, in less severe cases it is likely that prosecution may be discontinued or fines reduced by imposing conditions and instructions on the organization. Such conditions and instructions may include the payment of money, damages as compensation or the requirement for the organization to implement additional compliance measures. In case of the later, a monitor would be used to oversee the implementation in much the same way is they are used in EU antitrust matters when monitoring "Commitments."

Penalties under the proposed legislation 

The draft Act provides for three types of penalties: 

  1. a financial penalty (i.e., an organizational fine), 
  2. a warning, with the right to impose a financial penalty being reserved, and 
  3. the dissolution of the organization as a final resort. 

It is expected that the main penalty applied under the Act will be the imposition of an organizational fine. Warnings and dissolution are expected to be secondary penalties. 

When a fine is imposed, economic performance is the decisive factor in determining the amount of the fine. Fines for those organizations with an annual global turnover less than €100 million remain unchanged under the Act and totals €10 million. Organizations with an annual global turnover equal to or greater than €100 million, however, are subject to new fines which may reach 10% percent of the total turnover under the Act. In applying a new, larger, fine based on a percentage of turnover, the Act adopts a general trend in the assessment of fines among other regulatory authorities where fines for breaches of antitrust law and the EU's General Data Protection Regulation also equal a percentage of turnover (10% and 4% respectively). 

Sanctions may also be imposed on successor companies in the case of legal successions under the Transformation Act (Umwandlungsgesetz). Under the Act, if a sanction imposed on the organization is no longer feasible because the organization has ceased to exist or because assets have been transferred, it may be imposed on the successor organization(s). 

Calculation of the organizational fine 

The Act does not acknowledge the tremendous compliance efforts many organizations have undertaken in recent years. It penalizes deficiencies of the compliance management system but does not grant corresponding rebates in instances where compliance measures are above average. It remains to be seen whether courts will take the efficiency of an organization's compliance management system into account when calculating fines as they currently do under the Regulatory Offences Act. 

In addition, the draft Act does not define appropriate preventive measures. Thus, it fails to provide legal certainty for organizations and infers a risk of inadequate organizational or supervisory measures in the event of a compliance incident. 

The Act is detailed with respect to internal investigations within organizations as a means of mitigating organizational sanctions. Courts may allow for mitigation if the organization or third party investigators acting on the organization's behalf have made a significant contribution to the investigation of the organization's offence. This is only the case if internal investigations are carried out by the organization in accordance with constitutional standards (e.g. employees shall be informed of their right to refuse to provide evidence although they remain obliged to cooperate according to labor law). If these conditions are met, the maximum level of sanctions imposed on the organization can be reduced by half and the minimum level be dispensed altogether. However, the prerequisite is that not only the results of the investigation but also all essential documents on which the results are based must be handed over. 

In order to reduce the amount of the fine, the third party responsible for carrying out the internal investigation of the organization must remain independent and may not act as defense lawyer for the organization or any of the individuals involved. A reduction in the fine will only result if an internal investigation is carried out in close cooperation with the authorities and without relying on defense privileges

Despite the lack of protection of the results of an internal investigation by an organization, the aim is to create an incentive for companies either to conduct their own appropriate and fair internal investigations or to commission third parties to do so. Members of management bodies should not overlook an essential aspect of self-protection: if executive management bodies fail to take advantage of such an opportunity to reduce liability, this will likely raise the question of civil claims against such members of executive management bodies. The discussion whether managing directors are liable for damages to the company for (cartel) fines will be raised again. If senior management fails to investigate properly, organizations do not benefit from the chance provided by the Corporate Sanctions Act to reduce the maximum fine by up to half. 

Despite all legal concerns regarding privatization of law, the draft Act stimulates organizations to carry out internal investigations on their own or through third parties commissioned by them. First of all, to detect and to respond to corporate offences is an essential element of an effective compliance management system. Furthermore, it is in the self-interest of uninvolved top-level managers or guarantors, like Compliance Officers or the Heads of Audit, to initiate internal investigations. If they miss the chance to investigate, this, later, might result in accusations of omissions and potential damage claims. 

It remains to be seen how the right of the legal representative to remain silent will work in practice. A dilemma for internal investigations could be that such right granted to the legal representative is not also granted to the managers and employees of the company who conduct the internal investigations. 

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