Corporate criminal liability in Germany: an overdue reform?

On 16^th June 2020, Germany’s Grand coalition government introduced the Verbandssanktionengesetz (short: VerSanG), thereby taking a decisive step towards introducing corporate criminal liability in Germany. The proposal marks the end of a year-long controversy among German policy-makers concerning the suitability of this legal reform. Already in 2013 had the Minister of Justice of North-Rhein Westphalia Kutschaty unsuccessfully attempted to introduce it.[i] The current proposal which is being amended following suggestions by Germany’s Federal Council (Bundesrat) is expected to come into force in 2021.[ii]

Under the legal framework which is in place today, legal persons (as opposed to natural persons) including corporate entities can only be sanctioned under administrative law (Ordnungswidrigkeitsgesetz, OWiG). Section 30 of the law determines that corporate entities can be fined up to €10 million for intentional criminal offences committed by someone representing it, and up to €5 million for negligent offences.[iii] Furthermore, fines can be extended if the company’s owner violated supervisory duties.[iv] Finally, the “opportunity principle” (Opportunitätsprinzip) allows for economic advantages generated from illegal practices that exceed €10 million to be confiscated.[v]

However, in the eyes of many, the OWiG proves insufficient for prosecuting corporate crimes. One criticism has been that under the OWiG, administrative offences are only prosecuted on the discretion of the public prosecutor’s office, i.e. there is no duty to prosecute.[vi] In fact, legal persons and associations rarely get fined in Germany in legal practice, and if they do, fines are usually modest. In 2015, 2,907 registrations of fines for legal entities were made, only 2.2% of which exceeded €50,000.[vii] Furthermore, two prominent cases caused an uproar in the German public due to the mildness of the fines that were imposed. One of them is the Siemens bribery case whereby the company bribed officials in Israel, Mexico and Venezuela to obtain licenses for various infrastructure projects.[viii] US authorities criminally prosecuted Siemens on the basis on the Foreign Corrupt Practices Act, extracting $450 million in criminal fines.[ix] In Germany, the regulatory fine amounted to €395 million of which €394.74 million accounted for the benefits the company realized through its unlawful practice, rendering the additional fine imposed by administrative law comparatively low.[x] Ten years later, a similar case received considerable attention in the public, namely the Volkswagen “Dieselgate” scandal whereby manipulated software was installed into cars which allowed the car to recognize testing conditions and temporarily lower emissions.[xi] Of the approximately €1 billion in regulatory fines which were determined by the public prosecutor’s office in Braunschweig in June 2018, only 5 million constituted fines while the rest were benefits the company had realized through its illegal practices.[xii] Notably, the criminal liability of company officials has been investigated separately, such as Volkswagen CEO Martin Winterkorn who, as was announced in September 2020, is going to face new charges for market manipulation connected to the “Dieselgate” scandal focused on his late response to inform investors about the manipulated software.[xiii]

What the cases of Siemens and Volkswagen have in the eyes of many once more illustrated is the inherent limitation of administrative law to adequately punish companies engaging in criminal activity as the actual fines that were imposed were too low to substantially deter large-scale companies from engaging in criminal activity. Next to a lacking deterrence effect, the current law seems to impede prosecutors in fully assigning criminal liability for a committed crime. The problem is that if criminal activity lies in the very nature of a company’s business model, which was the case both for Siemens and Volkswagen, criminal prosecutors are likely to adequately sanction only a subset of the criminal activity by charging individuals instead of the entire company for it.[xiv]

In 2020, this view was apparently adopted by the German government as well which led to the introduction of the aforementioned Verbandssanktionengesetz. It acknowledges the “outdated” nature of the current system of sanctioning. Based on that, it is suggested to create an independent legal foundation for sanctioning legal persons and thereby introduce the principle of legality into the prosecution of corporate crimes which implies that prosecution would not be initiated on discretion by the prosecutor’s office any longer, but would be mandatory. Furthermore, it puts accused companies under a new duty to cooperate.[xv] Furthermore, in the case that a company realizes more than €100 million in annual revenues, the fines payable can be increased to up to 5% of annual revenues in the case of negligence.[xvi] If intentional criminal behavior is identified, up to 10% of annual revenues can become due.[xvii] The proposal also entitles courts to publish information on the trial and its outcome.[xviii] However, since the publication has been opposed by the Federal Council, it remains to be seen whether it will be eventually included.

The government’s submission of the proposal to the Federal Council has been largely criticized by politicians, as well as representatives of industry and the legal profession in Germany. On the one hand, it has been argued that the proposal does not go far enough because it simply assigns crimes of individuals to corporations instead of introducing new corporate liabilities. Hence, due to its low level of innovativeness, it would be questionable whether it would increase the deterrence effect.[xix]

On the other hand, the proposal has been criticized for going too far. For instance, six German federal states have announced their aim to prevent the implementation of the law stating the reason that it violated constitutional principles.[xx] The German bar association criticized the possibility of higher fines as disproportional and potentially “existence-threatening” for many companies given that the average annual profit of Germany’s 30 largest companies is below 10% of revenues. Hence, limiting fines to 3% of annual revenues would be more appropriate.[xxi] Leipold argues that Germany should not follow the example of countries that have implemented corporate criminal liability, such as the USA. This was the case because the “existential threats” to the companies caused through excessive fines could lead to panic reactions by company employees. This could eventuate in too wide-reaching confessions in order to escape trial which, in turn, is a development that endangers the integrity of the prosecution of corporate crimes in Germany in general.[xxii]

The most widespread criticism has been that the current legal framework actually provides sufficient room for sanctioning companies. Leipold argues for the potential of referring to European antitrust laws for imposing additional fines, or reference to German corporate laws which allow for the liquidation of company’s under certain conditions.[xxiii] Furthermore, a report by the EU commission notes how in Germany the liability of representatives in case of statutory offences which was mentioned above serves as a counterweight for the absence of criminal liability, resulting in a conclusive system of sanctioning for corporations.[xxiv]

In view of the availability of these various additional laws for addressing the liability of corporations in Germany even without corporate criminal liability, the easiest alternative to the Verbandssanktionengesetz could have been the increase in administrative fines without changing the nature of corporate liability, as deterrence was arguably the strongest motive for the legislative changes. This strategy has been adopted in other states that do not recognize the criminal liability of legal persons. In Russia, which establishes the administrative responsibility of legal persons under Article 14 of its federal law, a form of “administrative punitive liability” is in place under which administrative law sanctions approximate those of the criminal law in their severity.[xxv] For instance, the upper limits of fines for bribery are calculated using a multiplier, whereby the multiplier itself increases with the amount of the bribe. For instance, for bribes of less than €13,900, a fine of up to 3 times the amount of the bribe can be imposed while fines can be multiplied by up to 100 if the bribe exceeded €277,000.[xxvi]

However, despite the possibility of increasing the punitiveness of administrative law or resorting to other areas of corporate law to hold German companies adequately accountable, as suggested by Leipold, the main rationale for introducing the Verbandssanktionengesetz might have been political. While the EU does not encourage any specific form of liability for legal persons, Germany is only one of 5 EU members without corporate criminal liability, and there are indications for a trend towards introducing the concept with Spain adopting it in 2010 and the Czech Republic in 2012.[xxvii] At the same time, one-third of EU member states does not apply administrative liability of legal persons as it is the case in Germany in their national systems at all.[xxviii] In the general process of the alignment of supervision and sanctioning frameworks in the EU, which is exemplified on financial markets with the Single Supervisory Mechanism (SSM) whereby EU banking rules are centralized and enforced across the union, it seems sensible to argue that similarly, corporate liability laws should converge to create a more predictable basis for intra-EU business transactions. Altogether, while there would be potential for improving the sanctioning of corporations under the current administrative law in Germany without the Verbandssanktionengesetz, this does not seem to be the most desirable development against the background of the political reality of an ever-closer economic union in Europe.

[i] Nowak, J., “Corporate Criminal Liability in Germany”, Corporate and commercial disputes review – issue 3 (2016), pp. 26-27.

[ii] Morrison-Foerster, “Verbandssanktionengesetz: Gesetzgebungsverfahren schreitet voran”, 25th September 2020, URL: https://www.mofo.com/resources/insights/200925-deutsche-gesetzgebung.html.

[iii] § 30 Absatz 1 Satz 1 OWiG

[iv] § 130 Absatz 1 Satz 1 OWiG

[v] Nowak, J., “Corporate Criminal Liability in Germany“, Corporate and commercial disputes review – issue 3, April 2016, pp. 26-27.

[vi] Ibid.

[vii] Markuntsov, S./ Wassmer, M., “The Problem of Imposing Criminal Liability on Legal Persons in Germany and Russia”, Russian Law Journal 6/3, 2018, p. 132.

[viii] US Securities and Exchange Commission, Litigation Release No. 20829, 15^th December 2008.

[ix] Ibid.

[x] Markuntsov, S./ Wassmer, M., “The Problem of Imposing Criminal Liability on Legal Persons in Germany and Russia”, Russian Law Journal 6/3, 2018, p. 128.

[xi] Arbour, A, “Volkswagen: Bugs and Outlooks in Car Industry Regulation, Governance and Liability”, European Journal of Risk Regulation No. 1, vol. 7, 2016.

[xii] Beschorner, T., “Ein Anreiz zum Betrug“, Der Spiegel, September 2018, URL: https://www.spiegel.de/wirtschaft/unternehmen/volkswagen-warum-wir-ein-unternehmensstrafrecht-brauchen-gastbeitrag-a-1212897.html.

[xiii] Miller, J., “Ex-VW Boss to be tried on charges of market manipulation over diesel emissions scandal”, Financial Times (September 2020), URL: https://www.ft.com/content/cfe3561f-1bf6-41fc-a07c-67e9043302b9.

[xiv] Prantl, H., “Siemens, feste Burg”, Süddeutsche Zeitung, 17th May 2010, URL: https://www.sueddeutsche.de/wirtschaft/korruption-siemens-feste-burg-1.278342.

[xv] Bundesministerium für Justiz und Verbraucherschutz, “Entwurf eines Gesetzes zur Stärkung der Integrität der Wirtschaft“, 16th June 2020, p. 1.

[xvi] § 9 Absatz 2 Satz 1 Entwurf eines Gesetzes zur Stärkung der Integrität der Wirtschaft

[xvii] § 9 Absatz 2 Satz 2 Entwurf eines Gesetzes zur Stärkung der Integrität der Wirtschaft

[xviii] § 14 Entwurf eines Gesetzes zur Stärkung der Integrität der Wirtschaft

[xix] Kolter, M., “Ein Unternehmensstrafrecht, das keines sein will”, Verfassungsblog, URL: https://verfassungsblog.de/warum-so-schuechtern-ueber-ein-unternehmensstrafgesetz-das-keines-sein-will/

[xx] Beck Aktuell, “Wachsender Widerstand gegen das Unternehmensstrafrecht”, 4th September 2020.

[xxi] Bundesrechtsanwaltskammer, “Zum Regierungsentwurf eines Gesetzes zur Stärkung der Integrität in der Wirtschaft“, Stellungnahme Nr. 32, Juli 2020, p. 7.

[xxii] Leipold, K., “Das Unternehmensstrafrecht – eine rechtspolitische Notwendigkeit?”, Zeitschrift für Rechtspolitik 46. Jahrg., H. 2, 7th March 2013, p. 37

[xxiii] Ibid., p. 36.

[xxiv] European Commission, “Liability for legal persons for offences in the EU”, European Commission, Directorate-General for Justice and Consumers, 14^th February 2012, p. 35.

[xxv] Markuntsov, S./ Wassmer, M., “The Problem of Imposing Criminal Liability on Legal Persons in Germany and Russia”, Russian Law Journal 6/3, 2018, p. 131.

[xxvi] OECD, “Liability of Legal Persons for Corruption in Eastern Europe and Central Asia”, OECD Anti-Corruption Network for Eastern Europe and Central Asia, p. 36.

[xxvii] European Commission, “Liability for legal persons for offences in the EU”, European Commission, Directorate-General for Justice and Consumers, 14^th February 2012, p. 35.

[xxviii] Ibid., p. 36.