Governing Bodies and Senior Management Face Legal Consequences for Breach of Risk and Compliance Management Obligations
In recent years, members of governing bodies and senior management have faced increasing legal consequences for breach of risk and compliance management obligations. This obligation is not limited to CEOs or managing directors; each member of the board of directors and senior managers has a duty of diligent care and may face damage claims arising from breach of this obligation if the company suffers damages as a result.
Civil Liability
In case of breach of risk and compliance management obligations, members of governing bodies and senior managers may face civil liability for damages resulting from such breaches. The Federal Court of Justice (BGH) has ruled that the supervisory board is obliged to analyze and enforce claims against members of the board of directors who have failed in their duties. If the supervisory board fails to do so and damages occur or increase, the members of the supervisory board may be held liable for such damages.
Examples
- Failure to establish an appropriate compliance system
- Inadequate supervision by the management or owner of a company
- Lack of prompt reaction to evidence of infringements of law
Administrative and Regulatory Consequences
Inadequate supervision by the management or owner of a company may result in massive fines against the responsible person as well as the company. Members of senior management who have been entrusted with specific responsibilities may also face administrative consequences, including fines.
Examples
- Fines for non-compliance with regulatory requirements
- Suspension or revocation of licenses or permits
- Criminal charges
Criminal Liability
Members of governing bodies and senior managers may also face criminal liability for breach of risk and compliance management obligations. The German Federal Court has ruled that failure to establish an appropriate compliance system or react promptly to evidence of infringements of law may be regarded as a violation of duty.
Examples
- Failure to prevent or detect illegal activities
- Failure to report violations of laws or regulations
- Corruption or bribery
Recent Cases
The Volkswagen emissions scandal, known as “Dieselgate,” is a recent example of the consequences of breach of risk and compliance management obligations. The company’s CEO resigned over the scandal, which has resulted in damages exceeding €25 billion. Similarly, the truck cartel case saw four European manufacturers fined by the European Commission for antitrust violations.
Key Takeaways
- Breach of risk and compliance management obligations can have severe legal consequences
- Companies are advised to prioritize compliance and risk management to minimize the risk of legal action
- Effective corporate governance and senior management are crucial in preventing and detecting breaches of laws and regulations
Corporate Compliance Defence
While there is no general statutory corporate compliance defence in Germany, a public prosecutor or court may consider whether an appropriate corporate compliance system was in place to prevent and detect violations of laws when determining the responsibility of the management for the infringement. A company’s efforts to correct deficiencies in its compliance framework as part of a remediation programme may also be taken into account when determining the level of financial penalty.
Key Takeaways
- Companies should prioritize compliance and risk management
- Effective corporate governance and senior management are crucial in preventing and detecting breaches of laws and regulations
- Remediation programmes can be effective in mitigating legal consequences