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Effective Compliance Increasingly Important in the Czech Republic

Effective Compliance Increasingly Important in the Czech Republic

Czech Republic

The Czech Republic has implemented a number of statutory reforms aimed at tackling corruption and fraudulent business practices. These reforms have been welcomed by Transparency International, which describes the Czech Republic as making one of the greatest advances in fighting corruption worldwide in 2015. In this context, the Czech Corporate Criminal Liability Act (CCLA), applied by prosecution authorities with growing frequency, has in particular been in the limelight.

New Legislation to Battle Fraudulent Business Behavior

The CCLA came into force on January 1, 2012, and constitutes the most crucial measure affecting the day-to-day conduct of business activities, since it allows for the criminal prosecution of companies as legal entities (and not only the individuals they consist of).

The legislature has now tightened its grip on corporate crime even more: Since December 1, 2016, when the latest amendment to the CCLA (the “CCLA Amendment”) came into force, the list of criminal offenses attributable to a company has expanded considerably. Companies may now be prosecuted for over 300 criminal offenses.

In addition, other anti-corruption instruments have been introduced. For instance, a recent amendment to the Czech Criminal Procedure Code encourages suspects of certain corruption-related offences to report them to the authorities. If the suspect meets the statutory requirements (e.g., the voluntary and timely provision of all details concerning the committed offense to the public prosecutor’s office and follow-up cooperation) he/she will not be prosecuted.

Criminal Liability of Companies in Practice

The CCLA applies to all types of companies that have their seat or branch in the Czech Republic, as well as to foreign companies conducting business or owning property in the country.

The Czech concept of corporate criminal liability is based on the “attribution principle.” According to this principle, criminal acts carried out by a company’s management, employees, or persons authorized to represent it are automatically attributed to the company, making it liable for acts committed by persons within the scope of the company’s business, generally in its interests or on its behalf. The person who actually committed such an attributable criminal act remains criminally liable and can be prosecuted individually.

Convicted companies can be penalized by fines of up to EUR 50 million, court verdict publishing, a ban on participation in public procurement or state subsidies, or even by dissolution.

Approximately 300 criminal proceedings were initiated against companies in 2015 alone, of which 100 were actually resolved in court – and the number of companies that have been investigated is much higher. Numerous investigations that often receive public attention relate to bribery. Such publicity alone is capable of compromising the company’s or its holding group’s business endeavors.

Protection from Criminal Liability

Companies were previously held liable for the criminal acts of their management, and had no ability to relieve or exonerate themselves. The CCLA Amendment allows companies to avoid the application of the attribution principle by using all reasonable efforts to prevent a criminal offense from occurring. This very point makes the implementation of stringent and effective compliance-management systems a top priority for businesses.

However, practice shows that the mere introduction of internal bylaws or employee training does not suffice. In order to protect the company and its reputation, it is recommended that internal control mechanisms and preemptive measures, as well as clear and regularly reviewed internal directives, be put in place. These have to be revised and updated on a regular basis.

Safer and Better Market Environment

Inevitably, the legislative measures have increased and will continue to increase the burden on management and the requirements on the operation of companies and their business. If the new obligations are not met, companies active on the Czech market may face significant risks which – if realized – could not only discredit companies (or their holding groups) but also adversely affect their activities. On the other hand, it is generally expected that the measures described will make the Czech Republic overall a more reliable and thus attractive market, to the advantage of everyone. Companies are therefore well advised to review and adapt their internal processes and compliance management systems. What appears to be a heavier burden now can reduce risks and costs in the future.

By Philip Smitka, Partner, and Petr Hrncir, Senior Associate, Noerr 

This Article was originally published in Issue 3.6 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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