German liability in foreign trade underscores the paramount importance of businesses implementing robust Internal Compliance Programs to safeguard against potential legal and financial repercussions.
There is no specific EU liability regime for companies who have not implemented an adequate ICP since the respective member states provide for national liability laws. In Germany, if a company fails to implement an adequate Internal Compliance Program or ICP, this can have serious consequences.
German law does not recognize corporate criminal law. Therefore, only individual, natural persons are able to commit criminal and administrative offenses. Each employee is personally responsible for his/her actions and is responsible for all activities falling into his/her scope of responsibility.
Management, especially senior company management, is subject to a higher degree of liability responsibility in the form of selection, control and organizational duties. Infringements subject to criminal consequences or fines may be committed by any person, through action (for example: approval of an export process by employees of the shipping department) as well as through omission (for example: not stopping an illegal transaction). Liability due to omission is only applied to those who have a legal obligation to act.
German Liability in Foreign Trade
The Chief Ethics & Compliance Officer or CECO in particular may face further criminal and administrative responsibility for the actions of employees. The CECO is responsible for the complete export control of the company and is therefore obligated to intervene in case of foreseeable and preventable violations of criminal or administrative laws and regulations.
If the CECO fails to organize export control in the company through the implementation of an effective ICP and if this results in foreseeable illegal export procedures in the company, the CECO may be subject to criminal or administrative liability. Section 130 OWiG (German Act on Regulatory Offences specifies an expansion of the liability risk of the CECO, possibly also for other partners or board members.
The culpable act in this case is constituted by the omission of the required measures to prevent operational violations, for example by not implementing an effective ICP. Section 130 OWiG is a collection standard and only applies if the business owner or his/her authorized representative is not already personally liable for the actual violation of the export control provisions.
Criminal and administrative proceedings against employees also contain serious risks for the associated company. For example, the courts will seize anything resulting from an illegal act during the proceedings.
This can affect not only the culprit but also the company. In accordance with the gross principle, the entire purchase price is confiscated, not only the company’s profit. This may lead to serious economic consequences for the company and increase the risk of bankruptcy.
Furthermore, the goods or a value replacement of goods if the goods are no longer available may be confiscated. In addition, the company may be subject to a significant fine as per Section 30 OWiG if a manager of the company (Section 30 Paragraphs 1 and 9 OWiG) committed a criminal or administrative offense.
An administrative offense may also apply in case of violation of the supervisory duty as per Section 130 OWiG. The company fine may increase to ten million euro in case of a criminal offense committed with intent. If the criminal offense is the result of negligence, the fine may amount to five million euro.
If the offense is deemed an administrative offense, the maximum amount of the fine is determined by the maximum amount of the fine for that specific administrative offense. However, such a fine shall be tenfold if the administrative offense refers to Section 30 OWiG. It must also be noted that the maximum fine stipulated in the law may be exceeded if such a limit is not sufficient to remove the economic advantage drawn from the administrative offense by the culprit (Section 17 Paragraph 4 OWiG). It also has to be noted that saved expenses (for example the implementation of an ICP) form part of the gained advantage and may therefore be taken into consideration when assessing the fine.
The crucial factor for the distinction between a criminal offense and an administrative offense in foreign trade law is whether the act was committed with intent or was due to negligence. It is generally sufficient for intent if the culprit deems the violation of the regulation in question to be possible and approvingly accepts it (conditional intent). In such a case, the existence of an effective ICP may make a difference.
Companies with functioning risk management generally trust regulations to be observed so that violations of due diligence can generally only be caused by negligent acts. Simple work errors are not to be pursued under criminal law but may constitute an administrative offense. Some difficulties exist in the distinction between intent and negligence for „catch-all” regulations, which require a license for the export of non-listed products if the exporting party is aware of the critical purpose of the use of the goods. In such cases, positive knowledge is required.
A lack of knowledge caused by negligence is not sufficient. However, the culprit may not turn a blind eye to circumstances, which imply a critical purpose of use as defined by the catchall provisions, if apparent. Such circumstances may include the technical characteristics of a good, prior use by the recipient, or his/her plans with such goods. The knowledge of relevant circumstances is the equivalent of positive knowledge. Furthermore, the German Federal Court of Justice or BGH allows for a conclusion of knowledge based on conspirative behavior. Therefore, if someone acts in such a way, which may imply knowledge of the violation, it may also be assessed as positive knowledge.
If the exporter has erroneous assumptions about the classification of the goods or their destination, this constitutes a mistake, which voids intent but may lead to criminal liability due to negligence. However, if the exporter makes a mistake regarding the legal assessment of his/her action, for example if the shipment is subject to an embargo, this constitutes a so-called prohibition error. Such prohibition errors are generally preventable regarding foreign trade because the responsible employees in the companies are obligated to familiarize themselves with the applicable regulations. This shall also apply if goods are only occasionally being exported.
However, even non-entrepreneurs are obligated to adhere to all regulations when conducting business, for example, those relating to an area under embargo. Incorrect information provided to the culprit by consultants will only lead to an unpreventable and possibly penalty-exempting prohibition error if the culprit has selected a competent and nonbiased consultant who does not pursue any self-interest with the provision of such information and who offers a guarantee for the objective, diligent, dutiful and responsible provision of information.
Final Thoughts
In assessing the European Union’s approach towards companies failing to implement an Internal Compliance Program (ICP), it’s evident that individual member states retain autonomy through their national liability laws. Specifically, Germany’s stance underscores the significance of implementing a robust ICP. German law uniquely holds individual employees, especially management, accountable for their actions rather than implicating corporations as a whole. The Chief Ethics & Compliance Officer (CECO), tasked with overseeing export controls, faces pronounced liability risks, with lapses potentially leading to criminal or administrative charges.
Moreover, criminal and administrative proceedings against employees can result in dire financial ramifications for companies, potentially even risking insolvency. Key distinctions between criminal and administrative offenses in foreign trade law hinge on the intent versus negligence of the action, emphasizing the protective role of a comprehensive ICP. This intricacy, combined with the nuances surrounding knowledge-based regulations and potential prohibition errors, underscores the critical importance of diligence, awareness, and commitment to understanding and adhering to relevant laws and regulations in international trade.
