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Governing Bodies and Senior Management Face Liability for Breach of Risk and Compliance Management Obligations
A recent wave of corporate scandals has highlighted the importance of effective risk and compliance management. However, the consequences of failure to comply with regulatory obligations are severe, and governing bodies and senior management may face not only administrative sanctions but also civil liability and even criminal charges.
Civil Liability
According to German jurisprudence, members of the board of directors are responsible for ensuring that their company operates within the framework of laws and internal directives. If the management board violates these obligations, each individual member may face damage claims arising from this breach of duty by the company. Similarly, senior managers below the corporate board may be held liable for damages resulting from the violation of risk and compliance management obligations.
In addition, members of the supervisory board are obliged to analyze and enforce the company’s claims against members of the board of directors. If the supervisory board fails to do so and if damages occur or increase, the members of the supervisory board may be held liable for such damages.
Administrative Consequences
Inadequate supervision by the management or owner of a company may be sanctioned with massive fines against the responsible person as well as the company. Members of senior management also face administrative consequences if they are found to have breached their obligations.
Criminal Liability
Members of governing bodies and senior management may face criminal proceedings for breach of risk and compliance management obligations. For example, failure to establish an appropriate compliance system or to react promptly on evidence for infringements of law may be deemed a violation of duty in this regard.
Recent cases have highlighted the importance of effective risk and compliance management. The Volkswagen emissions scandal, also known as “Dieselgate,” has resulted in massive fines and damage claims against the company. Similarly, the truck cartel scandal has led to heavy fines for four European manufacturers of trucks.
Corporate Compliance Defence
While there is no general statutory corporate compliance defence enabling a company to avoid vicarious liability for violations of anti-bribery provisions, courts may consider whether an appropriate corporate compliance system was in place when determining the responsibility of the management for the infringement and the level of the financial penalty.
Conclusion
Governing bodies and senior management must be aware of their obligations to ensure effective risk and compliance management. Failure to comply with regulatory obligations can result in severe consequences, including civil liability, administrative sanctions, and even criminal charges. It is essential that companies implement robust compliance systems and cultures to prevent breaches of law and protect against the resulting damages.
Recent Cases
- Volkswagen Emissions Scandal (“Dieselgate”): Public enforcement authorities and private plaintiffs are holding VW responsible for illegal defeat devices in the engine control, false emission reports, and delayed capital market information. The scandal has resulted in massive fines and damage claims against the company.
- Truck Cartel: Four European manufacturers of trucks were fined by the European Commission for participating in a cartel to manipulate prices and restrict competition.