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Triggering Corporate Criminal Liability by its Directing Minds – Liability Mitigation

The area of corporate criminal liability is a highly controversial field of law and there was, until recently, a strong opposition among scholars and practitioners to a principle of holding a legal person liable for a criminal offence and liability mitigation by cooperating with authorities.

However, this has significantly changed in the recent years and there were important steps taken towards proper functioning of the corporate criminal liability legal regime including capacity building of all relevant stakeholders.

It would be inconceivable not to continue upgrading the area of corporate criminal liability by further incentivising companies to take action and reduce their own liability and contribute to the overall fight against corporate crime.

This article deals with some of the basic features of the liability triggers and mitigating factors.

Liability Triggers

Corporate criminal liability means that a company is responsible for acts or omissions of their officers as long as:

  • they act in of their engagement by breaching their corporate duties. To act within the scope of the engagement, the officer must have an actual or apparent authority to engage in a particular act. If a nexus exists between the officer's acts and his/her corporate duties, the company will be criminally liable for the officer's conduct;
  • in case the officer acted, for the benefit of the company. This requirement consists of two elements. First, the officer has to act with intent to benefit the company; second, the officer acts for his/her own personal gain, and the company ends up benefiting from the conduct; and
  • company shall be also held responsible if due to the lack of supervision or control of the officer, an employee commits a crime for the benefit of the company.

Having company criminally liable in Serbia does not exclude the responsibility of natural persons; it only means that in addition to individual liability of officers and employees, there exists a complementary company liability. Therefore, the prosecuting authority always has a wide discretion to prosecute individuals or companies and individuals. That is decided on a case to case basis, depending on the circumstances.

Until recently, the prosecution in most cases focused on the natural person even when it was realistic to expect that the act unlawful act could have been attributed to the company due to the identification doctrine. Under this doctrine, mens rea (criminal mind) of the company is actually a criminal mind of an individual who holds a controlling position in the company or exercise supervisory duties.

The recent legislative trends have resulted in an extreme broadening of board power and responsibilities – non-executive directors are required to control the company in a growing number of areas. For example, board members bear responsibility for the correctness of certain corporate governance statements (i.e. financial statement). Member of the board who enabled a false statement where a statement disclosure is required under the law shall be criminally liable, which shall further trigger the liability of the company itself, due to the identification doctrine, as accepted legal concept in Serbia.

Similarly, more duties have been imposed on members of senior management to monitor the implementation AML compliance measures. However the definition of senior management is not entirely clear and also whether the duties under the new law extend to members of the board of directors/supervisory board and in which situations.

In any case, not only are the executives and employees subject to external control, they are also subject to the greater internal control by the non-executives, or the special control organ of the company i.e. internal audit.

Therefore, if there is a danger that the company could be found criminally liable due to the wrongdoings of its officers and employees, than there is an additional motive for the non-executive directors to monitor the executives in order to ensure that such acts are not committed.

Mitigating Factors

It has long been argued that more credit should be given for cooperation so that the companies are incentivized for taking action but also guaranteed a full spectrum of procedural safeguards. However, there are still some reasonable concerns relating to the application of equality of arms principle for companies in certain anti-corruption legislation such are confiscation proceedings. This principle should be applied to the current owner to whom the assets sought for seizure were transferred as these legal persons might be ignorant of the potential wrongdoings of the previous owner who is usually a defendant in regular criminal proceedings.

The company can also mitigate the liability by proving it took all reasonable measures to prevent and detect the wrongdoing act. One of these measures is an internal investigation.

Following the above example, the non-executives should claim that they made a comprehensive inquiry via internal investigation and had reasonable grounds to believe that certain statement was true or act was legal.

In cases of parallel investigations (internal and external – by the authorities), counsel has the right to seek information from a company, organ and other organisation and these are obliged, in accordance with the law, to provide the required information to the counsel. During an investigation, counsel may collect evidence and materials and talk to a person who could provide relevant case data and obtain written statements and information, with their consent – i.e. taking interviews or depositions. These rights are generally reserved for a local counsel, meaning that an internal investigation of a foreign company should always be coordinated this way.

The law does not contain a specific provision that all communications between lawyer and client should be regarded as privileged, and consequently not subject to disclosure. This communication should be protected in principle (as there are general provisions in professional advocacy law and by-law), but there are no mechanisms to prevent the authorities to obtain this information and potentially use it as a reference point for directing the case. The same goes for reports and interviews.

This evidence could not be, however, used in proceedings and consequently a court decision should not be based on it. For these purposes, the judge for preliminary proceedings should issue a ruling on excluding these from the file immediately, or no later than the conclusion of the investigation.

Personal data of the employees are protected from unauthorised access by third parties, provided that such access is related to labour rights and obligations. Therefore, if an employee is under parallel criminal investigation, he/she could not rely on the provisions of the labour/data protection legislation. In line with the new data protection legislation, if the transfer of employees' personal data, takes place during the course of a cross-border internal investigation, the Serbian privacy legislation might impede the collection of employees' data meaning that certain conditions must be met to enable the transfer.

It is therefore always necessary to balance the requirements from domestic legislation (and the possible breach of such a legislation), with a need to conduct in full a cross-border internal investigation and creating a potential cooperation credit with a foreign enforcement agency.

The practice also shows that it is crucial to preserve the protection fundamental rights especially those relating to access to case file guaranteed by the ECHR and Right to Information Directive (although formally not binding to Serbia yet). In this manner, if the case is in the very early stage i.e. shortly after the issuance of the investigation order, the disclosure issues usually occur so the company cannot fully assess the prospective case and as a corollary cannot fully ascertain whether to enter into the cooperation arrangement.

Conclusion

The recent legal developments showcased that is necessary to expand the scope of application of measures for liability mitigation – companies should be incentivized for taking action but also guaranteed a full spectrum of procedural safeguards.

NOTE: The views and opinions of Vladimir Hrle expressed here are personal, and do not necessarily represent the opinions of current or past employers or colleagues, or professional associations, or organizations with which Vladimir has collaborated