Tenfold Increase of Corporate Fines for Compliance Violations in Germany

July 9, 2013

Effective June 30, 2013, the German Administrative Offences Act ("OWiG") was considerably sharpened.  Its changes were part of the most recent Amendment of the German Act against Restraints of Competition (on the anti-trust aspects see our Alert, "8th Amendment of the Act Against Restraints of Competition in Germany".  The changes substantially increase the scope of liability of corporations for typical compliance violations that have been committed by the corporation’s employees (e.g. bribery or cartels) or the omission of management to prevent violations through adequate supervisions.

The reform is important for all companies with business activities in Germany.  In particular, it affects companies operating through Germany-based legal entities, German branches of foreign entities or foreign persons that have committed crimes or administrative offences in Germany.

The recent changes relate to three main areas, (I.) a tenfold increase of the potential maximum for corporate monetary fines, (II.) the expansion of corporate liability to legal successors of corporations, and (III.) an enlargement of the power of German enforcement authorities to freeze assets of corporations which are subject to administrative fine proceedings in Germany.

I.                   Increase of Corporate Fines

Under German law, corporations as such cannot be charged as a criminal defendant.  However, a corporation may be held liable to pay so-called administrative fines under the German Administrative Offences Act.  In short, such corporate liability may occur for (i) misconduct by leading personnel in connection with business operations which violates legal duties of the corporation, or is intended to enrich the corporation, and (ii) the failure to undertake control measures required to prevent such misconduct.  Examples for relevant misconduct include domestic or international bribery, fraud committed against third parties, money laundering, falsification of books and records, or more generally any crime or offense sanctioned under German laws.  

Prior to the recent amendment, the maximum administrative fine that could be imposed against the corporation was limited to € 1 million in case of intentional misconduct, and € 500k in case of negligent misconduct.  With effect as of June 30, 2013, the aforementioned maximum penalty has been increased tenfold to € 10 million for intentional conduct and € 5 million for negligent conduct, respectively.  It is worth noting that the maximum fine can be exceeded without limitation, if and to the extent the corporation’s benefits derived from the misconduct exceeded such maximum (e.g. profits made under a contract obtained by bribery).  Thus, the indirect disgorgement of profits possible by such increase may easily exceed the mere administrative fine amount by multiple times.

The amendments have been taken as a response to the OECD Working Group on Bribery, which during its recent assessment of Germany’s anti-bribery efforts criticized that sanctions imposed on corporations under German law are often not sufficiently effective, proportionate, and dissuasive.  A more fundamental possible change in the legislative pipeline in this regard is discussed below (under IV.).

II.                Successor Liability after Corporate Restructuring Expanded

Prior to the actual amendment, corporate liability was generally limited to the specific legal entity whose legal duties were violated, or which was enriched by the misconduct.  In cases of corporate restructurings (such as mergers or split-offs) following the misconduct in question, under case law as defined by the German Federal Supreme Court (Bundesgerichtshof – BGH), corporate fines could be imposed on legal successors under limited circumstances only, namely that the pool of assets of the surviving entity was identical or nearly identical to the pool of assets of the former entity (see our 2011 Year-End German Law Update under "Compliance — Successor Liability after Corporate Restructuring".  At that time, the German Federal Supreme Court already acknowledged that the court’s interpretation may have consequences unintended by the legislature, enabling corporations to prevent corporate liability through targeted restructuring measures.

With the actual amendment, the German legislature has closed this "gap".  Under the act as amended as of June 30, 2013, administrative fines can now be imposed on the legal successor of a corporation in the most relevant cases of universal succession or partial universal succession under the German Transformation Act (Umwandlungsgesetz – UmwG).  However, the amount of such fine against the legal successor may not exceed (i) the value of the assets assumes by the legal successor, and (ii) a fine which would have been adequate against the assumed corporation.  Further, the legal successor will step into any administrative fine proceedings which are pending against the assumed corporation at the time the legal succession becomes effective, discharging the enforcement authorities from the requirement to initiate new administrative proceedings against the legal successor.

III.             Accelerated Power to Freeze Assets

So far, assets of corporations that were subject to administrative fine proceedings could only be seized by attachment in rem once a court had rendered a judgment actually sentencing the corporation with the administrative fine.  Under the new provision, an attachment order against a corporation facing an administrative fine can already be made once the regulatory authority competent for the misconduct in question has issued an administrative order for such fine.  Such attachment would be possible even if the authority’s order is later found to be illegal or excessive by the courts, which may take several months or even years. 

The aforementioned change may become particularly relevant for foreign corporations.  An attachment in rem requires legal reason and justification in the form of a concern that without such attachment the enforcement might be frustrated or be significantly more difficult.  To assess such legal reason and justification, it is deemed sufficient if enforcement would have to be made abroad and reciprocity has not been granted.  Also, the lack of significant domestic assets and the risk that assets may be expatriated frequently provide sufficient reason for an attachment in rem.

IV.             Other Aspects and Forecast

The amendments as described further increase the need for corporations with business operations in Germany to conduct thorough risk assessments, in order to avoid now even more significant corporate responsibility for white collar crimes and other illegal conduct towards German enforcement authorities.  Further, companies should review whether existing compliance procedures are sufficiently robust and effective to control such risks, and further refine these systems if needed.

Despite well-argued suggestions to the contrary in the legal discussion, the Administrative Offences Act as now amended still fails to acknowledge adequate compliance management systems as a defense or mitigating factor to decrease corporate fines.  Rather, the individual court or enforcement authority retains discretion in each case, whether or not to consider such factors in deciding whether a corporation should be charged, or in the assessment of administrative fines.

Moving forward, the German states recently initiated a more fundamental possible change to address the OECD criticism, by asking Germany to adopt a corporate criminal liability regime through a federal Corporate Criminal Code (Verbandsstrafgesetzbuch).  Cornerstones for a proposal in this regard have been published in May 2013, including, among other primary criminal liability for corporations, the legal obligation for prosecutors to open investigations, sanctions ranging from monetary penalties over debarment from public tenders and the publication of criminal convictions up to the compulsory liquidation of the corporation, and rules for corporate leniency for corporation with the investigating authorities.  A bill has been announced for fall this year, but might be put aside due to the Federal Parliament elections in September.  It is not yet clear whether such bill will propose to acknowledge effective compliance management systems as a defense or a factor to decrease sanctions.  Gibson Dunn will continue to closely monitor this initiative and provide updates on significant developments.