Criminal Vulnerability of Companies and Organizations

Area: Corporate Compliance
Author: IN DIEM Team, Criminal, Corporate and Compliance Area

VULNERABILITY of Organizations and Companies. Trends.

Being aware that a COMPANY is being investigated for the commission of a crime, whether committed by the Board of Directors, legal representative, Administrator, Managers, and/or Employees, entails –first and foremost– a genuine concern about the potential damage to be faced and its impact on costs, market position, or reputation, as well as –secondly– surprise at the absence of prevention mechanisms and the fact that such an illicit action could have been carried out.

Frequently, when executives and/or administrators are informed of the criminal responsibilities –and by extension, civil responsibilities– that companies are obliged to face after the Penal Code Reforms, a common reaction is the feeling of an absence of real risk or danger for the Company, which is usually based on the fact that the Company has not been charged or investigated for a crime before and that –furthermore– this situation of compliance and correctness will continue in the future.

However, such deductions, based on a historical and past reality within a regulatory framework that has been largely superseded, do not prevent the change in trend regarding the true vulnerability of companies.

Indeed, we are facing a new legal (criminal and procedural), social, and competitive scenario… in which the “regulatory compliance” of companies is becoming one of the main axes of risk management within the company; and this for the following reasons:

1st.- Principle of Responsibility of Organizations/Companies.
The regulatory framework affecting companies, including criminal law, has been completely reinforced. The principle of individual responsibility and sanctions, which for centuries has been one of the principles of our Legal System, has been shifted in Spanish law towards a new conception, where the individual’s action is framed within an organization that can be the subject benefiting from and acquiring a competitive/economic position from the illicit act… therefore, the organization and the company are direct passive subjects of punitive law, and consequently, the main recipients of the penalties to be imposed.

This new position of Companies and Corporations implies an EFFECTIVE SHIFT of the CENTER of the sanctioning action of the LAW, now focusing –therefore– on the legal entity and the company as the primary bearer (in addition to the individual) of the sanctions established by law.

2nd.- Expansion of the definition of sanctionable conduct.
Not only has there been an extension of the subject liable for criminal responsibility, moving from the individual to the Organization/Company, but –in addition– there has been an extension and expansion of the object of responsibility; indeed, there has been a redefinition and expansion of the actions that can generate responsibility for the Organization/Company.

Indeed, there has been a regulatory development that has resulted in the expansion of crimes for which companies can be held criminally liable; which means that the risk is even greater.

3rd.- Investigation Mechanisms.
The investigation mechanisms concerning Organizations/Companies, as can be seen in the recent Law 41/15 of a procedural nature, which came into force on December 6, 2015, represents the greatest qualitative leap in terms of resources for police and judicial investigation since the LECRIM was created in the 19th century, and definitively brings Spain into the 21st century, providing police and judicial investigation forces for the first time with the most sophisticated, developed, and modern investigation systems available.

4th.- Internal and External Conflicts: extension to compliance areas
Internal conflicts (within the organization, for example, between managers and employees) and external conflicts (clients, suppliers, or competitors) are being affected by new mechanisms and destabilizing elements, such as requirements or the use of information related to potential regulatory non-compliance. Indeed, current legal regulation is generating a marked tendency for parties involved in internal or external conflicts (framed within specific areas of relationships) to try to assert their interests based on the consequences derived from information about potential regulatory non-compliance and the detrimental effects –no longer for the directly responsible individual– but for the Company/Organization as a whole.

Our LEGAL SYSTEM –therefore– has proceeded from the criminal sphere to:

1.- Extend criminal liability to Organizations/Companies

2.- Increase the number of infractions that can be subject to sanction

3.- Establish novel investigation mechanisms

All of this is in line with the evolution of Criminal Law in the European Union; where all legal systems, each at its own pace, are incorporating and adapting with the aim of establishing homogeneity in criteria for criminal responsibility and investigation.

NOTORIOUS CASES of VULNERABILITY of large companies

Among the public or notorious cases of vulnerability, the following could be cited:

BARCELONA/NEYMAR Case.

Court: INSTRUCTION COURT NO. 22 OF BARCELONA.

Procedure: Preliminary Proceedings 1957/2015

Subject: The Sports Company FUTBOL CLUB BARCELONA is charged with three crimes against the Public Treasury, through which it allegedly defrauded the Tax Agency of eleven million euros, by acquiring the player’s rights “outside normal competition” and for a value “lower than the market value,” having confirmed “the possible simulation of several contracts” signed by Barça and Santos, “disguising” the payment for the transfer of the player’s federative rights by “faking” other “unreal concepts.”

BANKIA Case.

Court: CENTRAL INSTRUCTION COURT NUMBER 4 OF THE NATIONAL HIGH COURT

Procedure: Preliminary Proceedings 59/2012

Subject: The Company BANKIA is charged with crimes of investor fraud, corporate crimes, and disloyal administration with the obligation to compensate those affected.

VOLKSWAGEN Case.

Court: CENTRAL INSTRUCTION COURT NUMBER 2 OF THE NATIONAL HIGH COURT

Procedure: Preliminary Proceedings 91/2015

Subject: The Company VOLKSWAGEN is accused of fraud (Art. 248 to 251 CP), crimes against consumers (Art. 270 to 288 CP), environmental crimes (Art. 325 to 328 CP), catastrophic risk crimes (Art. 343 CP), public health crimes (Art. 359 to 366 CP), document forgery crimes (Art. 392 and 395 CP), misleading advertising crimes (Art. 282 CP), fraud crimes (Art. 436 CP), and crimes against the public treasury (Art. 305 CP). Volkswagen itself has budgeted a worldwide expense for this contingency estimated at 6.5 billion euros.

COUNTERBALANCE to VULNERABILITY. Compliance.

In response, in an exercise of BALANCE or counterbalance to the evolution of criminal regulations and the increased generation of VULNERABILITY for the BUSINESS SECTOR in SPAIN, regulations have been established to provide benefits and incentives to COMPANIES to effectively implement crime prevention systems or Compliance programs with direct, immediate, and recognized benefits of both mitigating and exempting from the penalty derived from the commission of crimes.

Given the scenario presented by the Spanish legislator after the Penal Code Reforms, the implicit messages directed at companies and entrepreneurs are clear and numerous:

1.- Entrepreneurs are free to implement or not implement a crime prevention system or Compliance program.

2.- The level of state interventionism is and will be incisive when investigating alleged criminal conduct committed by companies, as demonstrated by the modification of the Criminal Procedure Law, providing police and judicial forces with the most modern and sophisticated means and investigation systems available.

3.- The State has already warned of the potential impact that an extensive, implacable, and punitive application of the legislation could entail for COMPANIES and has voluntarily offered entrepreneurs the greatest advantage that criminal legislation provides, which is exemption from punishment in exchange for the prior implementation of a crime prevention system or COMPLIANCE program.

4.- In order to incentivize companies that are already subject to a judicial criminal investigation, the State has provided for the maximum benefit that legislation foresees in case of conviction, which is the mitigation of the effective penalty to be imposed, a mitigation that implies a reduction of the sentence that can reach, based on the concurrence of a series of easily achievable circumstances, up to a reduction of one or two degrees of the imposed penalty, a reduction that would imply that in a potential conviction.

IN DIEM offers defense services and implementation of REGULATORY COMPLIANCE systems or CORPORATE COMPLIANCE programs, which are effective and adapted to the needs of each company to avoid the upward trend of criminal vulnerability of companies and organizations.