On May 9 2017 the Federal Court of Justice (FCJ) decided for the first time that the establishment of a compliance management system, designed to prevent breaches of the law, can reduce fines in accordance with Section 30 of the Administrative Offences Act.
The facts of the case
In the decision, the FCJ addressed accusations of bribery and tax fraud against the middle management of a German defence company regarding a 2001 armaments transaction with the Greek state. The Munich Regional Court (the court of first instance) held that the armaments transaction was based on a bribery arrangement between the defence company’s management and the Greek defence minister.
The Munich Regional Court imposed a suspended jail sentence for the authorised officer (in German - prokurist) of the defence company. The grounds for the sentence were that he assisted with disguising the bribe payments as commission payments deducted as operating expenses in the company’s tax returns. Under German tax law requirements, bribe payments may not be deducted as business expenditure. Additionally, the Munich Regional Court imposed a €175,000 fine on the defence company pursuant to Section 30 because the authorised officer’s conduct resulted in tax avoidance, which benefited the company.
The FCJ’s ruling
The FCJ overturned the Munich Regional Court’s decision and issued guidelines on how courts should deal with corporate fines under Section 30.
According to the FCJ, the amount a company may be fined under Section 30 can be influenced by the extent to which a company satisfies its duty to prevent legal infringements through the establishing of an efficient compliance management system. Although the Munich Regional Court previously ruled in another case that the setting up of a compliance management system is a basic organisational duty of the management board of a stock corporation, this is the first time the FCJ has held that a compliance management system can be considered when calculating a fine under Section 30. Interestingly, there is still no legislative provision for this in Germany, whereas in other countries there is often legislation that expressly provides exculpation options for companies that have set up effective compliance management systems.
The FCJ also noted that a company’s corrective measures to improve its compliance management system after a breach has occurred, with the aim to make it difficult to commit comparable breaches in future, could also lead to a reduction in the financial penalties imposed under Section 30.
Unlike other European countries, there is no corporate criminal law in Germany. However, the corporate fine pursuant to Section 30 offers the option of imposing financial penalties against companies whose managerial personnel have committed criminal offences. Section 30 offers the option of fining legal entities or associations of persons in the event that their representatives commit a criminal or administrative offence that leads to company duties being breached.
Section 30’s broad wording covers all responsible persons acting for a legal person or partnership (members of management boards, directors or shareholders with the right of representation). If a person with managerial responsibility in a company commits a criminal offence with intent, fines of up to €10 million can be imposed on the company and there are even situations where this maximum fine can be exceeded.