Draft Corporate Sanctions bill passed by the Federal Government

The draft for a new sanctions law for business entities, which we have already reported on in detail, developed by the Federal Ministry of Justice and for Consumer Protection (BMJV), was passed by the German Parliament in a slightly amended form and now only requires the approval of the Federal Parliament and the Federal Council.

On 16 June 2020, the Federal Government passed the draft Law to “Strengthen Integrity in Business”. It now has to pass through the German Parliament and the Federal Council, which is expected to take place after the parliamentary summer break. Afterwards, business entities should have two years to prepare for the changes and implement the new legal regulations.

The new law, the core of which is the “Law on the Sanctioning of Association-Related Offences” (Draft Corporate Sanctions Act, Verbandssanktionengesetz-Entwurf, hereinafter “VerSanG-E”), is intended to ensure an appropriate response to corporate crime. In this context, the following objectives and requirements in particular are central:

The VerSanG-E is intended to ensure an appropriate response to criminal offences committed out of associations. With the creation of a separate legal basis for corresponding sanctions, the aim is to ensure that even financially strong, multinational corporations can be sanctioned in a sensitive manner.

The scope of application of the VerSanG-E extends to all associations whose purpose is aimed at economic business operations, thus including legal entities under private and public law, associations without legal capacity and partnerships with legal capacity. The law does not apply to associations whose purpose is not directed at an economic business operation or to mere administrative offences.

Associations may be sanctioned under the VerSanG-E if a member of their management has committed a criminal offence in the course of managing the affairs of the association, by which association-related obligations have been violated or by which the association has been or was intended to be enriched ("unlawful corporate act"). If, on the other hand, such an act was committed by an employee below the management level, sanctioning of the association is also possible, but only under the additional condition that the act could have been prevented or made significantly more difficult by appropriate precautions, such as organization, selection, guidance and supervision.

As possible sanctions, the draft mentions on the one hand the sanction of a corporate fine, and on the other hand the warning with the caveat of a fine. The amount of the corporate fine depends crucially on the economic force of the respective association. For example, associations with an average annual turnover of more than EUR 100 million can be fined up to ten percent of the average worldwide (group) annual turnover in the case of intentional unlawful corporate acts (up to five percent in the case of negligent unlawful corporate acts). The assessment of the corporate fine depends on various factors, such as the severity and extent of the failure to take appropriate precautions to avoid unlawful corporate acts. The VerSanG-E provides for conditions and instructions for the warning with the reservation of association fine, which the court can issue to the business entity. In particular, under the regulations on instruction, the courts are given the option of setting up a "compliance monitor". In certain cases, the courts should also be able to order the public announcement of the conviction (e.g. on the Internet). In addition, the draft law provides for the establishment of an association sanctions register, in which legally binding decisions on the imposition of association sanctions according to VerSanG-E as well as association fines according to Section 30 OWiG (Gesetz über Ordnungswidrigkeiten [German Act on Regulatory Offences]) will be entered.

According to the VerSanG-E, the prosecution of unlawful corporate acts is subject to the so-called Legalitätsprinzip (or legality principle). As a result, the prosecution authorities are obliged to initiate an investigation if there is any initial suspicion. This is fundamentally different from the current legal situation in the law on administrative offences, according to which it is at the discretion of the competent authority whether or not to prosecute (Opportunitätsprinzip or ‘discretionary prosecution principle’).

On the other hand, the VerSanG-E provides for wide-ranging options of dropping the corresponding preliminary proceedings, which are left to the discretion of the prosecuting authorities. They may be dropped, for example, if the charges are insignificant, under certain conditions and instructions, or if the sanction is imposed abroad.

Taking measures before and after the fact to prevent and detect corporate crime (so-called compliance measures) is already regularly taken into account today in the decision on the imposition and, if applicable, the amount of an association fine. So far, however, there has been a lack of clear legal regulations in this regard. This is now being changed by the VerSanG-E, according to which, the competent court is obliged, when assessing the corporate fine, to weigh up circumstances and to include in the consideration both the precautions taken in advance of the unlawful corporate act and the precautions taken in retrospect to avoid and detect unlawful corporate acts.

This explicit regulation makes the relevance and scope of the conception and implementation of corresponding measures clear. This is because establishing an appropriate and effective compliance system can not only ensure that sanctionable violations are prevented in the best possible way in advance, but can also contribute decisively to the mitigation of a sanction to be imposed, should an unlawful corporate act nevertheless occur. The fact that an unlawful corporate act occurred in the first place does not necessarily speak against the seriousness of the effort to prevent unlawful corporate acts. Even the best compliance system cannot completely prevent individual company members from committing criminal offences. However, if there are recognisable deficits in compliance and an unlawful corporate act could have been prevented or made significantly more difficult by proper compliance, an association cannot expect any significant mitigation of sanctions in this regard. At most, it should be possible to take into account the basic efforts of the association to ensure compliance in its favour.

The VerSanG-E also sets considerable incentives for conducting investigations within associations to uncover and ascertain criminal offences in associations and is intended to create an explicit legal framework for this for the first time.

If the investigation contributes significantly to clarifying the unlawful corporate act the association’s responsibility, and if the investigation is carried out in accordance with the further requirements of VerSanG-E, the competent court should mitigate the corporate fine, reducing the envisaged maximum sanction by half and excluding the public announcement of the conviction. In addition, the corporate fine is imposed in this case by way of a sanction notice, which means there is no public main hearing (which often attracts a lot of media attention).

The requirements of the VerSanG-E to be observed by the association or by external investigators commissioned for this purpose are intended to provide a legally secure framework for the conduct of internal investigations and ensure the evidentiary value of the results in criminal proceedings. In particular, the current draft law stipulates that the persons acting on the internal association investigation must not be part of the defence team of the association. When conducting interview, the respondents should also be granted the right to refuse to provide information in the event of possible self-incrimination as well as the right to consult a lawyer or a member of the works council and be informed in advance.

In addition, an association should only be able to benefit from the aforementioned mitigation of the corporate fine if it has contributed significantly to the clarification of the unlawful corporate act and the association’s responsibility. For this purpose, the association must not only cooperate comprehensively with the prosecuting authorities, but also make a substantial contribution of its own to shedding light on the matter. For associations, the question will arise regularly in this context as to when disclosure to the prosecuting authorities is possible and expedient. In addition, the rationale for drafting the law indicates that sanctions can only be mitigated if the internal investigation is conducted in accordance with applicable laws. This means that data protection and labour law regulations must be complied with in particular.

The fact that the association must not only have contributed to the clarification of the unlawful corporate act itself, but also in a significant way to clarifying the responsibility of the association, is one of the few changes in the government draft compared to the draft bill. As a result, it would no longer be sufficient to “only” clarify the offence itself and investigate the perpetrators. Rather, if the perpetrator(s) do not belong to the management level of the association, it would also be necessary to determine whether the offence was made possible by insufficient organizational, control and/or monitoring measures or was facilitated in any case.

If the German Parliament and the Federal Council agree to the current government draft, the VerSanG (Verbandssanktionengesetz [Corporate Sanctions Act]) is expected to take effect at the beginning of 2023 after a two-year transition period. It is to be expected that changes will still be made in the course of the parliamentary proceedings. However, the fact that the VerSanG will come with the described sanctions levels as well as the incentives for compliance measures and internal investigations can already be considered a certainty. In the meantime, business entities should use the time to continually review and further optimize the appropriateness and effectiveness of their existing compliance measures. After all, what was applicable before the VerSanG will apply even more afterwards: Investments in good compliance always pay off in the long run.

In cooperation with KPMG Law Rechtsanwaltsgesellschaft mbH*, you can contact the following person for support:
Dr Konstantin von Busekist

* Legal services are provided by KPMG Law Rechtsanwaltsgesellschaft mbH.