Are directors liable for corporate fines under the Association Sanctions Act? ­ The legislator is silent

The corporate criminal law for Germany is coming, even if it may not be called that. Despite the Corona crisis, it now seems certain that the grand coalition will pass the so-called Association Sanctions Act in this legislative period. An updated, probably final draft of the law was only presented on 20 April 2020.

Compared to previous practice, the Association Sanctions Act provides for a considerable tightening of sanctions for companies. On the one hand, the so-called legality principle will apply, i.e. the public prosecutor's office must also investigate companies in every case of initial suspicion and cannot, as before, decide this by way of official discretion. In addition, the framework for fines against companies is raised to a maximum of up to 10 % of the average annual turnover at group level into enormous spheres, which were previously only known from cartel cases. In return, the law provides clear privileges for companies that maintain effective compliance systems and proactively take care of the investigation of criminal offences from its sphere. The compliance work as well as the internal investigation for the purpose of clarification must - from the point of view of the prosecution authorities - be appropriate in order to be able to bring about the desired effect of sanction mitigation or even a sanction waiver.

With this law, Germany is catching up in international comparison and creating modern corporate criminal law. It is expressly to be welcomed that serious and professional compliance work should be bindingly "worthwhile" for the company even if a compliance case occurs.

However, the law does not take into account an important aspect that has preoccupied case law, literature and, above all, practice for years: Can the company, claim costs of the defence, the internal investigation or even the sanction itself from board members and managing directors as damages and rely on the  justification that the compliance system was not suitable (enough) to prevent the violations?

It seems as if the legislator deliberately did not want to regulate this important issue, which boards of directors and managing directors in particular are likely to see as a significant omission. Both the Austrian counterpart, the so-called Associations Responsibility Act, and a first proposal for a corporate criminal law in Germany from academia (the so-called Cologne draft), which is oriented towards this law, expressly provide that fines imposed on companies are not recourseable, i.e. they cannot be claimed as damages against board representatives or employees. This is intended to underline the sanctioning character of the fine, which would be lost if the company could simply "pass on" the fine.

Now, in practice, it is not exactly easy to simply "pass on" a substantial fine. In any case, if the fine is based on 10% of the group's turnover, it would clearly be too much for most private individuals. This is where the D&O insurance may intervene, but only in the case of negligent behaviour on the part of the representative of the corporate body, e.g. because he did not create an effective compliance system or did not pursue suspicions of criminal offences. However, the threshold for negligence is crossed more quickly than one might think. At least, this accusation has been increasingly made in practice recently in order to claim compensation for high costs for internal investigations or adjustments to compliance systems.

But can this approach really be correct? This is highly questionable in individual cases at the latest. And how is it possible to prove that the specific violation and the internal investigation would not have occurred if the compliance system had been (even) more suitable? With the Association Sanctions Act, this question becomes even more significant than it already is at present. Thus, in the future, the offence committed not by a management person but by another person who is active in the company's sphere of duties (cf. "associated person") will be attributed to the company if the compliance system - simplified - was not suitable to prevent the offence or at least to make it significantly more difficult.

With the same argumentation of justifying liability, one could also demand compensation for fines imposed on the company on the merits. Board members and managing directors who act solely negligently could then be liable in full. For both insurers and board members/managing directors, this regulatory loophole represents an enormous risk.

The legislator is handing over responsibility for the question of whether corporate fines are compensable to the courts. It is not foreseeable how this will be decided. For years, a considerable dispute has been raging within legal science. While some representatives, such as the Austrian legislator, argue that the fine should affect the company and should therefore not be recourseable, others argue that a fine is, from a purely economic point of view, a pecuniary loss for the company, which can also be claimed for compensation according to the general rules of civil law if board representatives are responsible for it.

The legislator has failed to take its own position on this important question at the interface of criminal and civil or liability law. The direction in which practice will develop remains to be seen and will in part be a challenge that requires not only legal but also a certain economic and socio-political tact.

In any case, board members and managing directors are more than ever well advised, also in their own interest, to have the effectiveness of compliance systems regularly reviewed and to consistently pursue suspicions of criminal offences from the sphere of the company.