German Legislative Initiative on a Stricter Corporate Sanctions Law

Against the background of the Diesel affair, the German Federal Government aims at a comprehensive reorganization of the sanctions law for companies and has therefore included this objective in its coalition agreement. The German Federal Ministry of Justice and Consumer Protection (Bundesministerium der Justiz und für Verbraucherschutz “BMJV”) has now adopted this issue and has currently presented the long-awaited "Draft of a Law Against Corporate Crime".

To date, the sanctioning of companies for violations of the law has been governed by the Administrative Offences Act (Sections 30, 130 Administrative Offences Act (Ordnungswidrigkeitengesetz “OWiG”)). Criminal law only provides for the prosecution of the accused (natural) persons. According to the plans of the German Justice Minister Lambrecht, company sanctioning will be considerably increased in future and finally cast into an independent "Association Sanctions Act". The new regulation aims at adequately punishing associations for offences committed. Analogously, compliance measures should be promoted and incentives created for internal investigations to resolve criminal offences. In particular, the draft law provides for the following changes:

I. The Prosecution Duty of the Public Prosecutor's Office

Currently, the competent authority has to decide whether a company itself shall be prosecuted for violations of law committed by its employees. In other words, companies can be prosecuted, but do not have to be. This so-called opportunity principle has resulted in inconsistent company sanctioning throughout Germany. Empirical studies within the framework of a research project at the University of Cologne have revealed a significant difference between Northern and Southern Germany:

In Northern Germany, significantly fewer fines are imposed under Section 30 OWiG than in Southern Germany. Many public prosecutors had not imposed any company fines at all during the five-year period under review (cf. Cologne Draft of an Association Sanctions Act, 2017, p. 15 f.).

The draft law therefore provides for a shift from the principle of opportunity towards a principle of legality. If, in the future, the public prosecutor's office learns of violations of the law from within a company, it must not only initiate proceedings against the employees concerned, but also against the company if there is a corresponding initial suspicion.

Initially, an association will be sanctioned for an “offence committed by a manager of the company". Furthermore, the company is to be sanctioned if one of its employees has violated the law and "the executives of the association could have prevented or substantially aggravated the criminal offence by taking appropriate precautions to avoid association crimes such as, in particular, organization, selection, instruction and supervision".

All in all, compared to the previous legal situation the changes are not significant. In practice, the most important reference to Section 30 OWiG has always  been the violation of management’s "proper supervision" in accordance with Section 130 OWiG, i.e. an inadequate (compliance) organization.

II. Tighter Sanctions

1. Amount of the Fine

Currently, according to Section 30 OWiG, fines amounting to a maximum of ten million euros for intentional acts or five million euros for negligence are possible. The fine is also intended to skim off the economic advantage which the association has gained from the act and may also exceed the maximum amount of ten million euros. Thus, for example, the fine of one billion euros imposed on VW in the course of the Diesel affair for negligent violation of supervisory obligations consisted of the maximum legal penalty of five million euros and the absorption of economic benefits of 995 million euros.

In future (in contrast to the previous penalty under Section 30 OWiG), the association fines sanction is not intended to include the skimming off of the assets acquired from the association offence; rather, the skimming off is to be carried out separately in accordance with Sections 73 et seq. of the German Criminal Code (Strafgesetzbuch “StGB”). The existing fine amounts of ten million euros (intent) and five million euros (negligence) are to remain the same. However, there is one major exception:

For companies with an average annual turnover of more than one hundred million euros (based on the last three financial years), an upper fine limit of 10% of the average annual turnover, or half in the case of negligent offences committed by the association, is intended. As in antitrust law, the decisive factor is not the revenue of the company from which the infringements originated, but the worldwide turnover of the "economic unit", i.e. the group as a whole. The introduction of a sales-related upper limit is intended to ensure that companies with high turnover are sufficiently sanctioned.

2. "Naming and Shaming"

If a large number of individuals have been harmed, the draft provides for the public announcement of the conviction as a further sanction. The vague legal term "large number" requires a situational  interpretation. According to the explanatory memorandum to the law, the offence committed by the association "must  affect a larger number of persons  and therefore  go beyond the individual case". In which situation this should be the case or not remains open.

The type and scope of the publication are determined by the court. The chosen medium should be one from which it is to be expected that it can best guarantee a targeted approach to those affected by the offence - i.e. regularly the internet, newspapers and/or radio. According to the draft explanatory memorandum, the publication should not denounce the company, but should inform the injured parties of the relevant facts in order to be able to decide on the assertion of claims if necessary. Nevertheless, the damage to the company's image could  be significant. However, a publication should only be necessary in the event of a necessary court clarification if the proceedings are already the subject of extensive media coverage.

3. Ultima Ratio: Dissolution of the Association

The most severe punishment the draft law provides for is the dissolution of the company from which the violation of law originated. However, the requirements for such means are appropriately high. The prerequisite is a particularly serious case, such as violations committed by a company manager, as well as "persistent" substantial offences by an association, and the expectation of further future violations.

III. Compliance Measures and Internal Clarification as Factors Mitigating Sanctions

1. Compliance should pay off

With regard to the administrative offence law the Federal Court of Justice had already determined in 2017, that when assessing a fine against a company, it had to be taken into account whether it had installed an appropriate and effective compliance system at the time of the infringements. In addition, the assessment of fines should also include post-compliance behavior, i.e. whether the company has remedied any apparent shortcomings in the compliance organization and taken measures to prevent or at least significantly complicate comparable breaches of standards in the future.

The draft law explicitly takes up these requirements in the context of the allocation of sanctions.  For example, "precautions taken to avoid and reveal association offences" - in other words: compliance measures which were taken prior to the offences  must be taken into account in the calculation of fines.

Furthermore, the efforts to avoid criminal offences should not be doubted if, despite an appropriate compliance system, an association offence has nevertheless occurred. Even an ideal compliance system cannot prevent individuals from committing criminal offences. Therefore, according to the draft law, the required precautions depend in particular on the type, size and organization of the company, the nature of the company’s business with regard to risk proneness, the number of employees, the regulations to be observed and the risk of their violation.

The draft also provides for mitigating sanctions by taking into account compliance measures taken after the offence, in particular in order to eliminate any compliance deficits identified in the course of the investigation.

The draft law also addresses the company's compliance efforts in another context. For example, the company may be sentenced to a kind of "suspended sentence" - combined with the instruction to take concrete compliance measures. The court may demand that the company  prove to the court that such compliance measures have been implemented by means of certificates issued by competent third parties, such as lawyers. In addition, the proceedings can also be discontinued, for example if it is foreseeable that extensive compliance measures will be imposed on the association in proceedings abroad and which from a German perspective would also be suitable to redress the public interest in the prosecution.

2. Framework and Incentives for Internal Investigations

The association sanctions law not only aims at tightening sanctions, but at the same time at creating an incentive system and a legally secure framework for internal investigations. In the recent past, there has been great legal uncertainty, which could not be dispelled by the "Jones Day" ruling of the Federal Constitutional Court.

If the company concerned actively cooperates in clarifying the violations of law in accordance with defined guidelines and cooperates comprehensively with the authorities, a reduction in the imminent sanctions is promised. In addition to observing a fair trial, it is required that the employee questioning  be conducted in such a way that their probative value is not reduced in the criminal proceedings. In addition, the draft provides for a clear separation of internal investigation and the defense of the company. The sanctions may only be reduced if the internal investigators (usually external lawyers) are not at the same time company counsel or the persons concerned. Only documents that are required for the preparation of the defense are exempt from confiscation. Moreover, the results of internal investigations must be disclosed.

IV. Register of Associations Sanctions

Finally, the draft provides for the introduction of a new register of association sanctions, which is kept by the Federal Office of Justice and can only be inspected by courts, public prosecutors' offices and certain authorities. Injured parties or journalists have no right of inspection. Legally binding decisions on the imposition of an association sanction and on the imposition of a fine of more than 300 euros pursuant to Section 30 OWiG shall be registered.

V. Outlook

Presumably, the draft bill will not be passed as a law for some time. Nevertheless, companies should take the planned law on association sanctions as an opportunity to review their own compliance organization.

The emerging discussion is expected to impel both the authorities and the public to expect a significantly higher sensitivity to compliance issues and the issue of corporate sanctions. However, the implementation of an effective compliance organization is not sufficient; it is also important to document the measures taken in such a way that they can be taken into account in future proceedings to mitigate penalties.