Significance of the draft law regarding collective sanctions for foreign associations

By Dr. Bernd Federmann and Michael Pohl

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The German Federal Ministry of Justice (BMJV) has drawn up a draft of a “law to combat corporate crime,” the most essential part of which is the “draft of a Corporate Sanctioning Act” (Verbandssanktionengesetz or VerSanG-E). The draft has not yet been published, but it is available to certain associations for review purposes. The VerSanG-E aims to create an independent legal framework for sanctioning associations and thus to subject them to the principle of legality (Legalitätsprinzip), according to which proceedings must be initiated if there is suspicion of wrongdoing. Compared with the current German legal situation, the VerSanG-E also contains some changes for foreign associations.

Offense and scope
An association sanction will be imposed if a leader of the association has committed an association-related crime or a nonleader has committed an association-related crime in the performance of the association’s tasks, provided that a leader of the association could have prevented or substantially impeded the crime by means of appropriate preventive measures. An offense committed by an association may include property or tax crimes as well as all categories of crimes within German criminal law, particularly environmental crimes, personal injury crimes (for example, as a result of defective products) and crimes related to certain competition regulations.
An association within the meaning of the VerSanG-E can be a legal entity under public or private law, an association with no legal capacity or an incorporated partnership. New to the current legal situation is the extension of the scope of the VerSanG-E to include crimes committed abroad, as up until now, multinational corporations have been able to evade responsibility for violations abroad by hiring foreign employees. This gap will now be closed: The VersanG-E is intended to cover offenses committed abroad where German criminal law does not apply if the relevant association has a seat in Germany at the time of the offense, the offense is punishable in Germany and the offense also constitutes a criminal offense at the place of wrongdoing or is not subject to criminal enforcement there. It is not necessary for the legal seat of the association to be located in Germany; the existence of a German administrative seat is enough. However, due to the required existence of a seat in Germany, the VerSanG-E still clearly falls short of the “long-arm jurisdiction” of the FCPA or the UK Bribery Act.

The possibilities contained in the draft law regarding association sanctions go far beyond the existing instruments of German administrative offense law. The draft bill provides for the following association sanctions:

  • financial penalties for associations (Verbandsgeldsanktion),
  • warnings reserving the right to impose a financial penalty (Verwarnung mit Verbandsgeldsanktionsvorbehalt), and,
  • as a last resort, the dissolution of the association (Verbandsauflösung). ­

Depending on the size of the company and the degree of fault, sanctions can total up to 1 10 million. If a large company (average annual turnover of more than ­1 100 million) is to be sanctioned, the sanctions can be calculated as a percentage (5%-10%, again depending on the degree of fault) of the annual turnover of the entire group of companies.
The draft includes the possibility to warn a company of an impending financial penalty, provided it is to be expected that such a warning is sufficient to prevent future offenses (for example, if a warned company establishes a compliance management system).
Finally, as a last resort, the dissolution of the association will be applicable as a sanction. However, this will only be possible in exceptional cases — inter alia, if “persistent and considerable offenses committed by the association” have been committed by managers and it is to be expected that considerable offenses will continue to be committed by the association in the future. However, the dissolution of foreign associations is excluded due to the German courts’ lack of jurisdiction. This is also the reasoning behind the draft.
In general, the draft bill states that associations may not be prosecuted if sanctions are to be expected against the association abroad and the sanctions that might be imposed in Germany are not significant.

Contingent liability
Another aspect of the draft bill is contingent liability (Ausfallhaftung). If the association becomes defunct after the announcement of opening proceedings or if its assets are moved to such an extent that the enforcement of the sanction is impeded, the VerSanGe-E provides avenues of recourse. To this end, a separate liability amount may be established against associations, which, at the time of the offense, formed an economic unit with the association in question or took over its essential assets.
In case of doubt, contingent liability could also apply to foreign group parent companies not domiciled in Germany but that could be held liable for subsidiaries domiciled in Germany. The text of the draft bill does not exclude the possibility of such claims. It is particularly doubtful whether the limitation to associations domiciled in Germany also applies to contingent liability, as contingent liability does not constitute a formal sanctioning of the foreign holding company but rather represents a recourse liability for the group subsidiary. Additionally, the respective section of the draft bill does not contain a corresponding exclusion of associations not domiciled in Germany with regard to contingent liability.

Encouraging compliance measures
At various points in the draft, it is expressed that the aim of the VerSanG-E is to promote the improvement of compliance measures. The existence of a suitable compliance management system, for example, should be enough to prevent the fulfillment of conditions for sanctioning. Should a sanction nevertheless be imposed, the existence of a suitable compliance management system should be relevant in the determination of the sanction type and amount. A compliance management system should also be taken into consideration when a warning is issued with the suspension of a financial penalty and when behavior is assessed after an offense has been committed. It is still unclear, however, which specific measures must be taken to establish an appropriate compliance management system. The FCPA Sentencing Guidelines and the Guidance Document on the Evaluation of Corporate Compliance Programs issued by the US Department of Justice, Criminal Division, for example, are much more precise in this respect.

Internal investigations
The VerSanG-E also aims to create a legal framework for internal investigations. Internal investigations can lead to a reduction in penalties only under certain conditions, including that the association genuinely contributes to clarifying the facts, cooperates fully with the prosecuting authorities and fully respects certain newly introduced employee rights. The prohibition of seizure is to be limited to the relationship of trust between the defendant and defense counsel and shall not protect records made prior to the initiation of the investigation proceedings or records that served other purposes.

Register of sanctions
The draft provides for an association sanctions register, which is not open to public inspection. All legally enforceable court decisions issued against an association are to be entered there.

The law will not come into force until two years after its publication, and the respective legislative process will likely not be completed until next year. As a result, companies now have time to prepare for the new law, particularly by means of compliance measures.

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