Due to the increasing activities of state authorities concerning the liability of juridical persons in general, but especially regarding corporate criminal liability, the topic of compliance is no longer seen only as a formal requirement but is becoming more and more important in the Czech Republic in almost all areas of law.
The criminal liability of juridical persons (entities endowed with juridical personality – as contrasted to “natural persons,” i.e., human beings) was introduced in the Czech Republic by Act no. 418/2011, Coll., on Corporate Criminal Liability, effective from January 1, 2012 (the “Act”).
Since the entry of the Act into force, the Activity of the public prosecution office has been on the increase. On the basis of the Act, juridical persons especially face the threat of the following punishments: liquidation of the juridical person, forfeiture of property, forfeiture of an item or other asset of value, and prohibition of activity.
Various sections of the Act are controversial as being open to misunderstanding, and calls for amendments can be identified from various sides of the political and business spectrums.
On December 1, 2016, an amendment to the Act (the “Amendment”) became effective, introducing the possibility of excluding the liability of a juridical person when the company “made every effort that may be reasonably expected to prevent the commission of a criminal offence.” At the same time, the Amendment extended the list of criminal offences for which juridical persons can be sued. Before, a juridical person could only be sued for an enumerated list of criminal offences fixed in the Act. Pursuant to the Amendment, juridical persons are generally liable for all criminal offences, with some minor exceptions. In addition, a corporation may be held criminally liable pursuant to the Amendment only for unlawful conduct of a person in a managerial position. Previously, the definition of the liability for persons acting on behalf of the corporation was broader.
One measure for lowering the risk of liability may be performed through a compliance program, as notably confirmed by the recent case law of the Municipal Court in Prague in the Agrotec case.
Agrotec was suspected of illegal conduct in public procurement in respect to the Czech Post (Ceska Posta). The Municipal Court in Prague ruled that Agrotec committed the crime in question, but that due to the Amendment, and the fact that the company had made every effort to prevent the crime, because it had its own ethics code, the court dropped the criminal case against Agrotec.
However, the Municipal State Prosecutor immediately appealed the verdict. The case is now being heard by the High Court in Prague, and it is unclear how it will decide. The question that needs to be decided by the High Court is when exactly companies have fulfilled the requirement that they “made every effort that may be reasonably expected to prevent the commission of a criminal offence.” In some opinions, Agrotec must also prove that it took all reasonable steps to ensure that employees and other persons responsible in the company fully complied with the ethics code.
The Agrotec case, as the first precedent case, and the new regulations show that many companies’ failure to install a compliance program becomes even more risky than before, both for the companies and their management – and that, indeed, a compliance program can have a great impact on reducing costs and protecting reputations.
Companies that already have a compliance program should update their internal compliance procedures regularly, to demonstrate to state prosecutors and the competent court that they have “made every effort that may be reasonably expected to prevent the commission of a criminal offence.”
As criminal liability generally passes to a legal successor of a corporation (by means of acquisitions, mergers, demergers, etc.), corporations have to keep compliance in mind not only in their own organizations but also in those they are contemplating acquiring. As a precaution, they may wish to obtain an excerpt from the Criminal Register and perform appropriate due diligence focusing on potential criminal liability before acquiring a juridical person – as well as, of course, minimizing potential risks in the share and purchase agreement by means of appropriate representations and warranties.
In view of the above, we can conclude that the matter of compliance has become not only a legal, reputational, and ethical factor, but also an economic one, which can be crucial in today’s competitive environment.