It is a common misconception that criminal liability and risks apply only to individuals, and that companies are safe from such proceedings. However, this is far from the truth. Moreover, companies often become subject to reputational damage already at the very beginning of an investigation, suffering irreversible damage – even before the case has truly started.
How can a company become involved in a criminal proceeding?
Typically, a company can become subject to criminal proceedings in a case if the crime was committed for the company’s benefit or advantage, and a company representative (such as an executive officer, manager, employee, or supervisory board member) was involved. This situation frequently arises in cases of corruption or economic crimes. For example, imagine a situation where a company’s manager secures a contract for the company through bribery. If discovered, the authorities may initiate proceedings not only against the individual who committed the bribery but also against the company they represent, arguing that the crime was committed for the company’s benefit. Similarly, a company may face criminal proceedings if it accepts fake invoices and claims VAT deductions on them.
What penalties can be imposed on a company?
Obviously, a legal entity cannot be arrested or imprisoned. Nevertheless, serious criminal sanctions can be imposed on a company. The most common measure is financial penalty. The maximum amount can be up to three times the material gains the company obtained (or attempted to obtain) through the crime, which serves as a strong deterrent. However, in practice, it is rare for fines to exceed 100% of the material gain.
In the indictment, the prosecution can also request a restriction on the company’s activities or even its dissolution. Activity restrictions may vary widely, for instance, the company may be barred from participating in public procurement procedures, signing concession contracts, or receiving state subsidies. In practice, these restrictions usually target the company’s most sensitive areas: for example, a temporary ban from public procurement can seriously impact a construction company’s operations. The dissolution of a company as a criminal sanction is exceptionally rare.
The real pain point
For a company facing criminal proceedings, the true disadvantage often is not the criminal penalties themselves. The real ordeal begins much earlier.
Once the investigative authority believes there may be a connection between the crime and the company and initiates criminal proceedings against the company, the authority may request that this be recorded in the company register extract. The company court has no discretion in this matter and must note the existence of the proceedings upon the investigating authority’s request. This registration has far-reaching and potentially severe consequences for the company.
Anyone who subsequently deals with the company and checks its company extract to assess its reliability will see the criminal proceeding recorded. This can cause many disadvantages in practice:
- Naturally, the company’s creditworthiness decreases, potentially leading to the termination of existing loan agreements and making access to further financing more difficult.
- The law imposes specific restrictions on companies formally registered as being under criminal investigation: they cannot participate in transformations, effectively blocking many organizational restructurings.
- Due to the strict public procurement regulations, companies under criminal proceedings are usually excluded from public procurement processes. They may also lose ongoing and future grant opportunities, with the risk of having to repay previously received grants.
- Such stigmatized companies face various other business disadvantages. Market participants may view them as risky and offer contracts under less favorable terms – for example, insurance companies might raise premiums. Additionally, key employees may leave the company, creating difficult replacement challenges.
All these disadvantages can occur without a conviction or even before the company has had the chance to defend itself, as investigations often begin without the company having presented its position.
How can companies mitigate these risks?
The sanctions and, especially, the disadvantages accompanying the initiation of an investigation can severely disrupt a company’s business situation. In many cases, these companies do not survive until the end of the investigation. What should be done?
The above risks can be mitigated if the company places a strong emphasis on compliance-oriented operations. This includes, among other things, documenting and internally communicating company rules and policies, and ensuring management enforces compliance. Introducing a whistleblower system can also be an effective tool to detect and prevent misconduct.