The Federal Court states: Reduction of Fines in case of effective Compliance Management System possible!
Recently, the German Federal Court of Justice (BGH) for the first time explicitly recognizes that the efforts in implementing a Compliance Management System (CMS) must be taken into consideration as a mitigating element when it comes to assessing the amounts of fines for compliance breaches (BGH 1 StR 265/16, ruling of May 9, 2017).
This ruling represents a milestone for the German compliance practice. Not only does the Federal Court come to the conclusion that the implementation as well as continuous improvements of compliance management systems have to be considered as a mitigating element in assessing the amounts of fines. It also indicates that such mitigating effects can also be attributed to improvements of existing compliance management systems which have only taken place after proceedings had already been initiated. These principles should also apply when it comes to assessing the amounts of fines for officers and directors in their capacities as individuals, i.e. personal sanctions. Moreover, there are good reasons to argue that the existence of a compliance management system will also have to be taken into consideration when it comes to assessing personal (civil law) liability of officers and directors. At the same time, the Federal Court emphasizes that the regulatory fine shall exceed the financial benefit that the company has obtained from the compliance infringement.
Against the background of the mitigating effects that compliance management systems can have when it comes to assessing the amounts of fines for potential breaches, companies of any size should immediately implement or improve their compliance management systems. Our compliance experts are happy to assist with any required steps.
A German company sold goods. The transaction was based on an impermissible agreement. With respect to the transaction, commission was paid and – against § 4 of the German Income Tax Act – treated as tax-deductible.
The competent court of first instance, the Regional Court of Munich (Landgericht München I) had imposed – inter alia – a fine of 175,000 EUR on the German company (pursuant to Sec. 30 Para. 1 German Act on Regulatory Offenses). The Federal Court (appeal instance) recalled the fine and sent the case back to the Regional Court inter alia for a re-assessment of the amount of the fine.
Federal Court: Reduction of Fines in case of effective CMS possible
With regard to the determination of the adequate amount of the fine to be imposed, the Federal Court stated the following principles:
- For the assessment of a fine imposed on the company, the court shall take into account to which extent the company fulfilled its duty to prevent legal infringements committed within its sphere of responsibility and has put in place an effective compliance management system.
- Such CMS has to be designed to avoid violations of laws and regulations.
- For potential mitigating effects, a court also has to consider whether or not the company has made efforts to improve its CMS in order to make a possible future repetition of the investigated infringements at least more difficult. A court even has to take into account the efforts made during the ongoing proceeding.
In addition, the Federal Court noted that the fine for compliance violations should exceed the economic benefit resulting from the violation (Sec. 30 Para. 3, 17 Para. 4 German Act on Regulatory Offenses).
Impact on compliance practice:
This decision is a milestone in compliance practice. It leads to several important consequences:
- Long awaited, the Federal Court (finally) ruled that the extensive efforts of a company to implement and enhance a CMS may lead to a reduction of potential fines. That means that a CMS is not only a way to prevent misconduct within the company, but can also help reducing sanctions in case misconduct occurs.
- Moreover and, very importantly, the Federal Court states that the improvement of a CMS may have a positive effect on the assessment of potential fines at any time – even during ongoing proceedings.
- Finally, in our opinion, the ruling shows that the implementation or enhancement of a CMS is not only important for the exemption or reduction of potential administrative fines but may also become relevant for civil liability of corporate executives pursuant to Sec. 93 AktG (German Stock Companies Act) and Sec. 43 GmbHG (German Limited Liability Companies Act).
Many companies are not yet aware of those important legal consequences. Please do not hesitate to contact us with any compliance-related queries that you may have at any time - especially if the undertaking that you represent has already become involved in administrative or criminal investigations or proceedings. The time to work on your CMS is now!