Financial Crime World

CEO Liability for Compliance Failures: The High Stakes of Negligence

A growing trend in corporate law is holding Chief Executive Officers (CEOs) and executive directors accountable for compliance failures within their organizations. This trend has become particularly pronounced in Italy, where CEOs face severe consequences for negligence or reckless disregard in supervising their companies.

According to a recent report, CEOs can be held criminally liable for crimes committed by officers down the management chain if they fail to demonstrate that they have effectively delegated a function to a lower officer. This means that CEOs must be able to show that they have implemented adequate compliance measures and monitored their company’s activities closely enough to prevent wrongdoing.

Consequences of Non-Compliance

The stakes are high, with CEOs facing fines of up to 10% of their company’s turnover for breaches of internal control systems and governance rules. Insurance companies can face even higher penalties, with fines ranging from €5,000 to €50,000.

  • Fines: Up to 10% of company turnover
  • Insurance companies: Fines ranging from €5,000 to €50,000

Liability for Non-Executive Directors

But it’s not just CEOs who are at risk. Non-executive directors may also be held accountable if they fail to supervise the CEO or intervene to eliminate compliance violations. This means that boards of directors must ensure that they have adequate procedures in place to monitor their company’s activities and prevent wrongdoing.

Implementing an Effective Compliance Shield

The legal framework for CEO liability is clear: directors have a fiduciary duty to minimize risks of crime commission, which includes implementing an effective 231 compliance shield. This involves:

  • Identifying potential risks
  • Developing procedures to mitigate those risks
  • Monitoring the company’s activities closely enough to prevent wrongdoing

Consequences of Non-Compliance

But what happens if a company fails to implement these measures? The consequences can be severe. Companies may face:

  • Civil liability for damages suffered by third parties as a result of illegal or illicit actions or omissions
  • Administrative sanctions, including pecuniary penalties, disqualifications, confiscations, and publication of the court’s decision

Criminal Charges

In addition, CEOs and senior management may face criminal charges if they are found to have engaged in wrongdoing. This can include breaches of corporate compliance rules, data protection laws, insider trading, market abuse, environmental and health and safety violations, and more.

Takeaway

The takeaway is clear: CEO liability for compliance failures is a growing trend that carries severe consequences for companies and individuals alike. Boards of directors must ensure that they have adequate procedures in place to monitor their company’s activities and prevent wrongdoing. And CEOs must be held accountable for negligence or reckless disregard in supervising their companies.