Corporate criminal liability in Germany?

The debate over whether the criminal law should apply to the actions of companies has ratcheted up, following publication of a draft Corporate Penal Code.

The German legal system does not provide for criminal liability for corporate entities. Only the acts of an individual can be subject to criminal sanction. The reason for this is that a criminal verdict is tied to the ethical question of whether an individual’s conduct presents an autonomous decision to violate rules and duties. There is a basic assumption that only individuals can take such autonomous decisions and therefore only individuals can be held liable for their behaviour. Companies as legal persons, on the other hand, are by definition incapable of taking autonomous decisions or of developing a sense of personal responsibility. Where the inapplicability of the German Criminal Code on legal persons would hinder prosecution, the individuals acting on behalf of the legal person will be held liable instead.

Sanctions for companies outside the criminal law

Notwithstanding the lack of criminal liability of companies under German law, sanctions can still be imposed on companies under the German Code of Administrative Offences. This states in section 30 that fines can be imposed on companies if:

  • a company representative or a member of a corporate body has committed a crime or administrative offence and
  • by committing the crime/administrative offence
    • a legal obligation of the company was infringed by the criminal action and
    • the company was enriched or
    • the company was intended to be enriched.

Where the criminal act of the individual can be attributed to the company the administrative fine may amount to up to €10m.

According to section 17 of the German Code of Administrative Offences, additional fines can be imposed upon the company until no (gross) benefit is left. There is no cap for these kinds of fines.

Alternatively, the German Criminal Code as well as the German Code of Administrative Offences provides that a forfeiture order of the enrichment can be issued for the responsible individual as well as for the company.

The reform debate

In November 2013 the Department of Justice of North Rhine-Westphalia presented a first draft of a Corporate Penal Code (CPC = Verbandsstrafgesetzbuch) . The introduction of corporate criminal liability has been subject to debate for several decades. The most commonly cited points of criticism of the administrative offence system in current use are the following:

  • authorities do not have to investigate administrative offences, therefore making committing crimes a calculable risk for companies.
  • corporate organisational structures can be tailored in a way to create plausible deniability for the acts of company representatives.
  • representatives can be scapegoated to assume full responsibility while companies are able to avoid a criminal conviction, and the reputational implications.

Since the publication of the draft CPC, the debate about corporate criminal liability has reached a new level: After the mention of the possible introduction of corporate criminal liability in the coalition contract of the two governing parties, the CDU and the SPD, and the discussion of the draft at the annual forum of Departments of Justice, the draft CPC represents a further step towards changing the legal situation at the federal level.

The draft Corporate Penal Code

The definitions of “decision makers” and “organisation-related infringements” in section 1 of the draft CPC lie at the heart of the proposed new law. Decision makers are legal representatives or members of a corporate body, and employees in managing positions. Organisation-related infringements are breaches of German criminal law which violate corporate duties or lead to advantages for the organisation or at least have the aim of creating an advantage for the organisation.

The draft CPC lays down two criminal offences in section 2:

  1. Organisation-related infringement by a decision maker while pursuing the organisation’s affairs, and
  2. Failure to take supervisory or organisational measures by decision makers when organisation-related infringements were committed.

For these criminal offences to be committed does not require the guilt of an individual perpetrator to be established. On the contrary, it is sufficient that organisation-related infringements were known about at a decision-making level. In contrast to the status quo, where the act of an individual is attributed to the company, the draft CPC would impose criminal liability on companies for organisational faults which encourage, or at least tolerate, criminal behaviour.

Possible punishments and sanctions are set out in section 4 of the draft CPC: high criminal fines, warnings, public announcement of the conviction and the exclusion from tendering for public contracts, as well as procurement procedures and ultimately the possible dissolution of the organisation. Fines may be levied up to 10% of the organisation’s total global turnover.

The court may refrain from imposing sanctions in cases where the company has taken adequate organisational measures to prevent further infringements in the future and either no significant harm has occurred or full redress has been made. It remains to be seen whether sophisticated internal compliance systems set up prior to the criminal offence will give a company the benefit of this exception and to what extent courts will be willing to use their discretionary powers to mitigate sentences in these cases.

It should also be noted that the draft CPC provides for a duty to prosecute in section 14 if sufficient cause for suspicion exists. This regulation contrasts with the status quo where administrative offences do not have to be prosecuted ex officio, but only where a conviction seems plausible.

What next?

The draft CPC has provoked a wide range of responses, from the very positive amongst anti-corruption groups such as Transparency International, to those expressing severe concerns, such as the Chamber of Industry and Commerce. Whether it will ultimately enter into force remains to be seen. However, it has made corporate criminal liability in Germany a far more realistic prospect and placed renewed emphasis on companies’ internal compliance policies and procedures.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.