In Spain and Germany, we are witnessing movement towards greater alignment with U.S. and other European jurisdictions when it comes to the criminal liability of companies. The enactment of new laws is either imminent or within sight, and companies operating in these territories would be well advised to review and enhance their compliance frameworks. Monitoring and the use of settlements is increasing across the continent, as is the prevalence – and importance – of internal investigations.

Germany – corporate criminal exposure likely to be overhauled

Companies should prepare for the likely enactment of a bill shaking up corporate criminal liability in Germany – the so-called Act to Strengthen the Integrity of Business (Corporate Sanctions Act). For the first time, companies – and not just the individuals involved – will be the accused in criminal proceedings, and the addressees of criminal sanctions.

The draft bill aligns with international developments. In particular, it provides for the introduction of an instrument that has been used in a similar form for some time, primarily in U.S. legal practice, but also in Europe – for example, in England and in France: monitorships and the use of settlements.

Despite the current pandemic crisis, Germany’s grand coalition government has cleared all hurdles, and the Corporate Sanctions Act should be enacted in 2021. Companies should therefore start reviewing and potentially enhancing their compliance management system, so as to mitigate future criminal exposure.

We explore the new bill below:

1. Scope

The Corporate Sanctions Act would apply to all legal persons based or doing business in Germany. Foreign companies and associations with operations in Germany would be required to comply with the Corporate Sanctions Act’s provisions, and would be subject to liability for failing to do so. Most notably, the Corporate Sanctions Act would introduce the principle of corporate criminal responsibility, and permit the criminal prosecution and conviction of a corporate entity in two circumstances: (1) when the entity’s directors or officers committed corporate crimes; or (2) when the entity did not take reasonable precautions to prevent employees or agents from engaging in criminal wrongdoing within the scope of their employment or agency.

Companies would face criminal liability when committing a criminal offense that infringes the company’s duties, or by which the company has been enriched. Alongside corruption, money laundering, and tax offenses, this would also include human rights violations, and economic or competition crime.

2. New principles

The draft bill introduces the principle of mandatory prosecution, whereby prosecuting authorities must start an investigation if there are sufficient grounds for suspicion. This change means authorities have to open investigations into cases they would currently not investigate.

The draft bill would also cover offenses committed abroad, whereas current German criminal law would not apply.

3. Sanctions

The draft bill differentiates the maximum sanctions incurred depending on the size of the defendant company, regardless of whether profit was made. For companies with an annual turnover under €100 million, the upper limit of €5–€10 million will remain. For those with an annual turnover over €100 million, the fine has been raised to up to 10 percent of the average annual turnover over the past three years. The date for the calculation will be the date of sentencing.

4. Deferral of prosecution and monitorships

The Corporate Sanctions Act allows for prosecutions to be deferred, provided that the company satisfies certain judicial conditions (e.g., rectifying the damage done) and directives. Such directives can best be compared to deferred prosecution agreements, with the option to impose what the legislator is calling a “competent body” – a process very similar to the U.S. practice of imposing a compliance monitor.

The draft bill accords with other major foreign laws, such as the U.S. Foreign Corrupt Practices Act, the UK Bribery Act and the French Sapin II law. We expect that the competent body instrument will be greatly used, encouraging companies to be good corporate citizens. In practice, it will mean that a culpable company will need to update its compliance program, which will be monitored by the competent body. When it has been certified, the charge will be dismissed.

5. Mitigation of penalties

The Corporate Sanctions Act also innovatively includes internal investigations as part of a statutory criminal defense, with a mitigating effect. Although not guaranteed, the sanction might be reduced by 50 percent if:

  • the investigation makes a material contribution to clarifying the misconduct;
  • the investigation is independent, and not conducted by the defense counsel;
  • the investigation cooperates continuously and unrestrictedly with the public authorities;
  • the essential documents and final report are handed to the public authorities; and
  • the investigation is conducted in line with applicable laws – in particular, labor and data privacy laws – and employees are given advance notice that they (1) could be subject to personal criminal liability based on information they provide; (2) may refuse to answer questions from internal investigators if they were to incriminate themselves in doing so; and (3) have a right to be accompanied by their own counsel or a member of the works council.

However, the draft bill also expressly states that there shall be no reduction in sanction for conducting an internal investigation if the company does not disclose the findings of its internal investigation before the opening of official proceedings against it.

Time to review your compliance program

It is very important to highlight that the new bill will not just penalize misconduct attributable to corporate entities, but also attach great significance to having a robust compliance framework.

The Corporate Sanctions Act would allow the sentencing court to take into consideration whether the company in question had implemented an adequate compliance program before the criminal wrongdoing, even if that system did not prevent the violation of criminal laws. As such, companies are advised to ensure they have an effective and well documented compliance program in place – probably by far the most effective mitigating factor when it comes to corporate criminal liability.

The new Corporate Sanctions Act will have a tremendous impact on corporations’ criminal exposure in Germany. The emphasis put on an efficient and effective compliance program, as well as the importance of conducting serious and thorough internal investigations, should urge companies to take this opportunity to review (and potentially enhance) their current compliance arrangements.

Spain – corporate monitoring on the agenda

As of January 2021, there is little practical experience of independent corporate monitoring in Spain, but steps are being taken towards a system that resembles those of the United States and some European jurisdictions.

Since 2010, when the criminal liability of legal entities was included in the Spanish Criminal Code (SCC), the way of assessing responsibility for offenses committed by a company has evolved. The implementation and proper functioning of compliance programs has been put at the heart of the company’s criminal liability, and although there is no specific regulation regarding internal investigations, there is a clear tendency to conduct them when possible misconduct is detected within legal entities (e.g., Iberdrola and BBVA cases).

The judicial authorities have on several occasions expressed a desire to reform the system, so it is reasonable to expect that in the next few years, the Spanish criminal procedure will be transformed – and may end up including agreements between the authorities and the legal entities and independent corporate monitors.

Signs of reform

By way of example, there are three specific milestones that may define the future for the Spanish system.

  • First, internal investigations have become more important since the reform of the SCC in 2015, and the subsequent Public Prosecutor’s Communication 1/2016. A two-tier system of incentives has been established, in which a company may enjoy exemption or mitigation of criminal liability in certain cases. The existence of an effective compliance system; demonstrating that the company has sought to detect the illicit behavior; and reporting the criminal behavior and cooperating with the authorities will be important criteria for the Public Prosecutor’s Office to take into account when evaluating possible exemptions.

    It is particularly relevant that under Communication 1/2016, prosecutors must give outstanding special value to the fact that the entity detects the crime on its own. Thus, when a company detects and reports a criminal offense, prosecutors should ask the court to exempt the company from criminal liability. This is because the company’s conduct demonstrates the effectiveness of the compliance system and the existence of a compliance culture – among core management at least.
  • Second, in line with the above, the chief anti-corruption prosecutor in 2018 clearly stated that the system needed a change with regards to the judicialization of companies’ criminal liability. His view was that Spain needs a new, different, more dynamic, more agile, and more balanced procedural system, which grants the investigation to the Public Prosecutor’s Office, and thus allows more flexibility when it comes to reaching agreements – with legal entities in particular. 
  • Third, the Council of Ministers has recently approved the draft bill for the comprehensive reform of the Criminal Procedure Law, which would entail profound modifications to the criminal procedure as we know it.

    What’s important here is that the Law’s reform allows the investigative work in criminal cases – which until now has been the exclusive responsibility of investigating judges – to be transferred to the prosecutors. In this way, it will be the Prosecutor’s Office that, with the supervision of the judge as regards rights and guarantees, will lead the criminal investigations. Additionally, there is an intention to promote extrajudicial solutions for conflict resolution.

    This reform shows a clear trend to facilitate the possibility of agreements being reached with the authorities – and taking into account the Public Prosecutor’s communications and statements, the focus will be on compliance programs, internal investigations, and commitments acquired by companies in agreements, which could eventually imply the inclusion of independent monitors.

Penalties and punishments

Taking all this into consideration, it seems that independent corporate monitoring is not far from being incorporated in Spain. Now, the question is what legal basis corporate monitoring might have in the Spanish system.

According to the SCC, companies can be held criminally liable for the misconduct of other individuals (its employees, officers, or directors) acting on its behalf. When a legal entity is criminally punished, the main penalty is an economic fine. Other penalties may be imposed additionally, including suspension of activities, closure of premises, prohibition to develop the activities through which the offense was committed or concealed, prohibition from receiving public subsidies, and public procurement debarment.

Among the penalties that companies may be subject to, there is the possibility of judicial intervention in the company, to safeguard the rights of workers or creditors for as long as deemed necessary (up to a maximum of five years). As provided by the SCC and developed by the Public Prosecutor’s Office in Communication 1/2011, this penalty is intended for cases in which the rights of workers or creditors are at stake and need to be safeguarded. Therefore, judicial intervention may occur when the priority is to put an end to criminal continuity when social interests are at risk, and intervention is preferable to the suspension of activities. This measure may also be imposed as an interim measure during proceedings.

The intervention may affect the entire organization, or be limited to some of its facilities, sections, or business units. The judge or court will determine the precise nature of the intervention, and will determine who will take control and in what timeframe they will have to draft follow-up reports for the judicial body. This “controller” will have the right to access all the company’s facilities and premises, and to receive any information deemed necessary for the tasks entrusted to them. The specifics should be provided for in a regulation that, at the time of writing, has not yet been drafted. Moreover, at present, this penalty has not been imposed at all.

As you can see, the controller is very similar to the corporate monitor, as defined in the Morford Memorandum. Although the purpose of the judicial intervention isn’t quite the same as the compliance monitoring, the existence of a legal figure so similar to the independent monitor makes it easy to envisage this type of control reaching Spain sooner rather than later.

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