Newsletter - TerraLex Practice Groups
by JUDr. Ing. Hana Skalická, Ph.D., BA
The concept of corporate criminal liability was enacted into Czech law by means of Act No. 418/2011 Coll., on Corporate Criminal Liability and Related Proceedings (the “Corporate Criminal Liability Act”) which went into effect on 1 January 2012.
In contrast to 2004, when the Chamber of Deputies dismissed the bill on corporate criminal liability directly in the first reading, in 2011 the bill passed smoothly through the legislative procedure due to strong pressure from international organizations. The Chamber of Deputies passed the law on 27 September 2011 followed by the Senate a month later, on 27 October 2011. Subsequently, on 3 November 2011 the bill was submitted to the President for signing. The President did not sign it and referred it back to the House of Deputies on 18 November 2011. The House of Deputies voted on the returned bill and overrode the President’s veto on 6 December 2011. The enacted legislation was delivered to the Prime Minister for signing on 15 December 2011 and was promulgated in the Collection of Laws on 22 December 2011.
The vacatio legis (the period between the promulgation of the law and the time the law takes legal effect) of this crunch regulation was rather short – only nine days. Although the entire legislative procedure was widely discussed in the media and the public therefore had a chance to get acquainted with it before it entered force, this nine day vacatio legis was rather short given the serious nature of the penalties the law imposes.
Though the Czech Republic was the last European Union member state to enact corporate criminal liability legislation (both the so-called real and unreal criminal liability), many questions were raised when the legislation was drafted. Most of these questions focused on the distinction between individuals and corporations. What companies could be considered a perpetrator of a crime? What should the approach to fault be where the concept of fault of individuals, namely negligence and intent, cannot be applied to corporations because those concepts reflect a certain exercise of will and corporations have no such will? What facts are relevant and what offenses may be committed by corporations? What penalties may be imposed on corporations versus individuals? What is the relationship between the criminal liability of individuals and the criminal liability of corporations? May individuals and corporations be criminally liable for the same action? Lawmakers ultimately decided to base the corporate criminal liability on the concept of attribution, and to hold companies liable for the acts taken by individuals on their behalf.
2. When Criminal Liability Is Likely to Attach
Under the Corporate Criminal Liability Act, a corporate offender is any company to which criminal liability may be attributed. Under this definition, criminal liability attaches to any company to which a breach or endangering of public interests protected by criminal legislation may be attributed. Criminal liability also applies to any company which used another company or individual to commit a criminal offense on its behalf. The criminal liability of individuals is not affected by the criminal liability of companies, and the complicity of individuals and companies and other forms of aiding and abetting liability (indirect offender, accomplice, counseling, aiding, principal offender) remain possible.
The Czech Republic and regional self-governing units with public authority (namely municipalities and regions) are generally immune from the law and cannot be deemed corporate offenders. The immunity does not apply, however, if the public body has an ownership interest in a company that is subject to the law. In other words, any entity that has been allocated a Business Identification Number may be held criminally liable under the law, even if that company is owned by the government.
Based on the explanatory report, the law also applies to limited liability companies with a sole shareholder when the concurrence of the criminal liability of companies and individuals is also possible. It is therefore possible that a sole shareholder in a limited liability company may be found guilty of an offense as an individual, and that the consequences may also be borne by a limited liability company in which the individual is a sole shareholder.
Offenses that may be attributed to companies include illegal acts taken on their behalf or in their interest or during their activities by the following:
- Statutory bodies or members of statutory bodies;
- Persons authorized to act on behalf of the company, including not only those persons authorized to act on the company’s behalf under the law, but also those persons who act pursuant to contractual arrangements such as tax advisors, attorneys-at-law, agents, liquidators and insolvency administrators;
- Persons who carry out managing or controlling activities within the company such as supervisory bodies and internal controlling bodies;
- Persons who have a substantial influence over the management of the company if their acts are at least one of the conditions causing the acts which arise and establish corporate criminal liability, including persons within the company and also within controlling or controlled companies; or
- Employees or persons in a similar position when fulfilling work tasks even though they do not fall within one of the groups mentioned above.
Under the Corporate Criminal Liability Act, the concept of criminal liability is based on the so-called attribution to companies of acts taken by individuals. Acts taken by the company bodies or persons identified above are attributed to a company irrespective of whether the particular person who committed the illegal act is known or can be identified.
Criminal offenses may also be attributed to a company even if they are committed before the company is established, the company is established but the court determines it to be invalid, the legal act which is relied upon to establish the individual’s authorization to act on the company’s behalf is deemed invalid or ineffective, or the individual who acts on the company’s behalf bears no individual criminal liability for the offense.
Finally, criminal liability passes to all legal successors of the company. In the case of several legal successors, the extent to which the revenues, proceeds and other benefits from the committed offense passed to the successor will be taken into consideration.
3. Offenses for Which Companies Are Most Likely To Face Prosecution
The Corporate Criminal Liability Act includes an exhaustive list of approximately 80 different offenses that may be committed by companies, including certain negligence offenses. One category of offenses that is most likely to be prosecuted are economic offenses, including (1) evading taxes, fees and similar obligatory charges, (2) failure to pay taxes, social security contributions and similar obligatory payments, (3) distorting economic and property data, (4) arranging advantages in public contracts, tenders and auctions, and (5) conspiring to defraud in public contracts and tenders. Another category of offenses likely to result in prosecution are corruption related offenses, including (1) bribe taking, (2) bribe giving or (3) indirect bribery. A final category of offenses likely to be prosecuted are those resulting in environmental damage, such as (1) damage and danger to environment through negligence, (2) damage to woods, (3) illegitimate discharge of pollutants or (4) illegitimate dealing with waste.
4. Punishments and Protective Measures
The Corporate Criminal Liability Act provides for a range of potential punishments:
- The liquidation of a company is the most severe punishment that can be imposed. The court may impose this punishment on companies with their registered seat in the Czech Republic if criminal activities constitute all or a majority of their activities, and the company enters liquidation immediately upon the respective decision taking legal effect. This punishment is targeted primarily to those companies engaged in organized crime.
- The court may also order forfeiture of property (wholly or in part) and a monetary penalty from CZK 1,000 to CZK 2,000,000 for the term of 20 to 730 days, up to a maximum monetary penalty of CZK 1.46 billion. A monetary penalty may not be imposed in addition to forfeiture of property, and the imposed punishment may not be to the detriment of the injured person.
- Another possible punishment is forfeiture of a possessed item or other items. This punishment may not be imposed in addition to seizure of a possessed item or other items as a protective measure (see below).
- The court can also enter certain types of injunctive relief. First, the court can prohibit a specified corporate activity for a period of 1 to 20 years, if the criminal offense has been committed in connection with that activity. Second, the court can also prohibit the performance of public contracts. Third, the court can prevent the company from participating in concession proceedings and public tenders for a period of 1 to 20 years if the company commits the offense in connection with concluding or performing public contracts or participating in award procedure. Fourth, the court can prohibit the acceptance of subsidies for 1 to 20 years if the company commits the offense in connection with filing or handling of applications for subsidies, or the granting and using any public support.
- The court may also order that the offender publish their sentence in the media. A procedural fine of CZK 500,000 per day for failure to publish the sentence in the media may also be imposed repeatedly until the sentence is published.
The legislation also sets out a protective measure, namely the seizure of company property or assets. This protective measure may be imposed separately or in addition to other punishments except for forfeiture, and can specifically include the seizure of company files and facilities. Limited disposal of the seized items may also be ordered by the court.
When determining the type and terms of punishment to impose, the court is required to take into consideration (1) the nature and the seriousness of the offense, (2) the status of the company, including its current activities and its property situation, (3) its activities after the offense, including its efforts to provide compensation for any damages caused by the events, and (4) the future effects and consequences of the punishment. The court must also consider the consequences of the imposed punishment on the injured person(s), as well as any company creditors whose claims arose in good faith and do not originate from and are not related to the offense committed by the company.
5. Possible Defenses to Criminal Liability
A company can avoid criminal liability for an offense committed on its behalf, in its interest or during its activities when the offense is committed by its employees (or persons of a status similar to the status of employees) and the company or any of its above-mentioned representatives took actions which (1) were required to be taken by them under the law, or (2) may fairly be required of them to prevent the crime. In other words, a company will not be held liable for the criminal acts of an employee if it observes everything which may fairly be requested of it. Corporate internal regulations will therefore become critical. Companies should have a formal process for reporting a crime at the workplace, establish a corruption hotline, adopt codes of conduct to prevent criminal activity, and strengthen its internal audit procedures in order to establish that it has taken all measures which may fairly be required of it. But the mere adoption of such internal regulations and controls may not be enough. The company must also be ready to prove that the employee was acquainted with the regulations and understood them. Consequently, the company’s employees must be trained and tested and the observance of norms must be expected and controlled.
If a company commits an offense which is not bribe taking or giving, or indirect bribery, then it may also rely on the defense of effective recompense. Under this defense, a company’s criminal liability ceases to exist if it refrains from engaging in any further illegal activity and (1) eliminates the danger which gave rise to the criminal offense and prevents or otherwise rectifies the harmful consequences of the offense; or (2) submits a report of the commission of an offense to the prosecuting attorney’s office or the police in the period when the danger may be eliminated or the harmful consequences may be prevented.
6. Specific Features of Criminal Proceedings
An accused company is a party to criminal proceedings. The police notify the body in charge of the Commercial Register or other registers of the criminal proceedings. Jurisdiction is determined based on the registered seat, enterprise or branch of the company or the place where the offense was revealed.
Joint proceedings are held against an accused company and any accused individuals, but the criminal liability of the company and that of the individual are assessed individually. A company against whom criminal proceedings are commenced may not be wound-up, transformed or dissolved until the final and conclusive judgment is granted except when the consequences would be inadequate to the nature of the committed offense. Exceptions to this general rule must be approved by the court.
The doctrines of estoppel by lis pendens and res judicata are recognized by the legislation and may be applied in two situations. First, the initiation of criminal proceedings against a company prevents the commencement of administrative proceedings concerning the same action, and vice versa. Second, criminal proceedings against a company may not be initiated, and if initiated, may not proceed and must be suspended, if earlier proceedings on the same action(s) against the same person(s) were terminated by a final and conclusive decision on an administrative offense and the administrative decision was not discharged.
7. Access to Corporate Criminal Records
In contrast to the criminal records of individuals, data in corporate criminal records are accessible by the general public. If a company is found guilty of an offense upon a final and conclusive judgment, this fact is entered in the criminal records and the data are publicly accessible. Data of companies convicted by courts upon a final and conclusive judgment are stored for 100 years.
Anybody may apply in writing for a company extract from the Criminal Records. Beginning on 1 January 2012, applications for an extract from the Criminal Records may be submitted in person at the premises of Rejstřík trestů (Criminal Records) or sent by post to Rejstřík trestů, Soudní 1, 140 66 Prague 4. Applications are submitted on the form available at www.justice.cz in the Criminal Records section. A duty stamp of CZK 100 must be affixed to the application. Because the data on companies are publicly accessible, the identity of applicants is not verified or checked. Beginning April 2012, applications for data from the Corporate Criminal Records may also be submitted at all CzechPoint contact places.
8. Unknown Consequences and How to Avoid Criminal Liability.
The powers of investigative, prosecuting and adjudicating bodies have been extended as a result of the enactment of corporate criminal liability. And unlike the United Kingdom Bribery Act 2010, whose guidance notes were issued before it took effect on 1 June 2011, no internal methodology for prosecuting attorneys and the police exist in the Czech Republic. Thus it is difficult to predict how the new law will be enforced and applied.
Another unknown is the extent to which other companies may use reports of criminal offenses as a competitive tool. Such reports are likely insofar as the act does not make it a crime for a company to make false accusations.
To avoid some of these uncertainties, companies should do the following:
- Review or draft internal regulations with the aim of limiting the risk that offenses will be committed by employees, or persons of similar status in relation to a company, or that those offenses will be attributed to the company;
- Develop a methodology for preventing and detecting criminal activities within the company;
- Train and test persons affected by the new law;
- Assess the effectiveness of internal controls and maintain the related documents;
- Document all instructions that may give rise to claims of criminal liability irrespective of whether they were given verbally or in writing;
- Review current agreements on outsourcing services; and
- Update personnel policies applicable to key positions to address criminal liability issues.
*JUDr. Ing. Hana Skalická is an attorney in the Prague office of Peterka & Partners and is registered with the Czech Bar Association and the Slovak Bar Association. She is also the head of the Financial and Tax Law Department of the University of ŠKODA AUTO a.s. She specialises in administrative and court proceedings, tax consultancy, European law, criminal law and real estate law. Ms. Skalická may be reached at firstname.lastname@example.org.