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Harry Cassin
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Andy Spalding
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Jessica Tillipman
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Cody Worthington
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Julie DiMauro
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Thomas Fox
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Marc Alain Bohn
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Bill Waite
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Shruti J. Shah
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Russell A. Stamets
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Richard Bistrong
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Eric Carlson
Contributing Editor

Proposed German corporate legislation introduces respondeat superior, compliance defense, and cooperation credit

The upcoming German Corporate Sanctions Act (Verbandssanktionsgesetz aka VerSanG) draft represents a major change for businesses. Originally drafted by the German Federal Ministry of Justice and Consumer Protection in 2019, it introduces the idea of non-natural persons being subject to criminal liability, which is a firmly established concept in many other jurisdictions.

Currently, German authorities deal with delinquent companies through the Administrative Offense Act 1968 (Ordnungswidrigkeitsgesetz or OWiG, which is sometimes translated as the Regulatory Offenses Act) by way of fines against the management personally or the company.

The introduction of stricter corporate sanctions was included in the Coalition Agreement between the German ruling parties (CDU/CSU and SPD) in 2018. The proposed new approach is supposed to fundamentally change accountability under German corporate criminal law.

Billed as an “act for strengthening integrity in the economy,” it would have far-reaching implications for Compliance Management Systems (CMS), such as the role of internal investigations.

According to the draft, which would apply to legal entities under public and private law, companies will be liable and punishable for any offense committed by management or agents (including third parties acting on behalf of the company), assuming that the managerial person could have prevented or considerably impeded the offense through precautionary measures. The current draft has taken some of the edges off the more controversial aspects – the country’s sports and social clubs are no longer within its ambit, and the so-called “corporate death penalty” (Auflösung) will no longer be in the authorities’ arsenal. But the proposals would still herald a sea change.

For example, according to current laws, corporate misadventures can be punished only with a fine of up to €10 million ($12 million) under Article 30 of the Administrative Offenses Act. The new draft enables financial sanctions of up to five percent of the global annual turnover in the case of negligence and up to 10 percent of the global annual turnover for intentional offenses, applicable to companies with an average annual turnover of more than €100 million ($122 million).

Further, the draft law would introduce a publicly available sanctions register in which legally binding judgments and corporate sanctions imposed under the new VerSanG or current OWiG would be recorded.

Additionally, the new law draft would apply the so-called legality principle, replacing the opportunity principle. As a result, the public prosecutor’s office would be obliged to open an investigation against companies in case of a corporate criminal allegation. It is a major change compared to the currently applicable provisions of OWiG, which give authorities discretion whether to open an investigation after the initial allegation.

It is in the compliance-related provisions that the new law comes into its own. Despite potentially high, turnover-based penalties, an existing CMS and an internal investigation conducted up front could significantly decrease the level of fines imposed. Even if German courts had already considered an effective CMS until now, there have been no clear legislative guidelines on this in the past. The new law draft would change this and give a legal framework that would oblige courts to consider a well-functioning CMS while assessing penalties.

The draft law also gives businesses an even more important incentive to improve their internal investigation mechanism and ensure a well-functioning whistleblower reporting channel. If an internal investigation uncovers a corporate offense, and authorities are notified and cooperation given, a court can reduce monetary penalties by half.

For the results of the internal investigation to be a mitigating factor, the company has to meet additional criteria.

First, the person(s) conducting the internal investigation cannot be the company’s defense lawyers.

In addition, the potential reduction of the sanction is only granted if the interviews are carried out in accordance with the principles of a fair trial, in particular that

a) respondents are informed before the interview that the information provided by them can be used against them in criminal proceedings,

b) they are given the right to consult legal counsel or a member of the Works Council during the interviews and

c) they are given the right to refuse to answer questions.

It should be noted that 2021 is an election year in Germany. Doubts remain as to whether the draft new law will be passed in the current legislative period.

Despite a two-year transition period proposed in the draft, the center-right CDU/CSU parliamentary group has voiced its concerns about the proposed high penalties causing an additional financial burden for companies still reeling from the pandemic and its economic pressures.

But with the Greens competing in current polling with CDU/CSU to be the biggest bloc in the new parliament, companies should assume that greater corporate accountability will stay on the agenda, regardless of which parties form the next government.

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