I. Corporate liability deriving from criminal activity
1. What it is the nature of corporate liability deriving from criminal activity? What is its legal basis?
The criminal liability of legal entities, including corporations, is governed by Act No 418/2011 Coll., on Criminal Liability of Legal Entities and Proceedings against Them (the “Criminal Liability Act”). Since its adoption in 2011, there had been several amendments to the Criminal Liability Act, the most significant of which took effect in December 2016.
Under Czech law, corporate criminal liability is based on the attributable character of a criminal offense. To avoid the materialization of any doubt, the Criminal Liability Act expressly sets out that a crime is attributable to a corporation, provided that it was committed either in its interest or within its operations. In addition, it must be committed by an act of any of the following:
- A statutory body or a member of a statutory body or another person in management authorized to act for or on behalf of the corporation
- A person performing management or controlling activities at the corporation, even though they are not classified as a person under letter (a) above
- A person who has a decisive influence on the management of the corporation, if their conduct was at least one of the conditions leading to the criminal liability of the legal entity
- An employee of such corporation or a person in a similar position while performing employment duties, even though they are not classified as a person under letters (a) through (c) above, subject to the qualification contained in the following sentence. The employee or a person in a similar position must act: (i) based upon a decision, approval, consent or instructions of the bodies of the corporation or of the persons listed under letters (a) through (c) above; or (ii) because the bodies of the corporation or the persons listed under letters (a) through (c) above did not take measures, either those provided by law or those that could be reasonably required of them, especially if they did not take the necessary control of the activities of employees or other persons to whom they are superior, or they did not take the necessary action to prevent or divert the effects of a criminal offense.
Even though an attributable act of an individual is necessary to give rise to the criminal liability of a corporation, it is not required that a concrete individual who acted on behalf of a corporation be identified, nor is the criminal liability of a corporation interdependent on the criminal liability of the individual. As a result, the corporation may be held liable whereas the individual may not.
Notwithstanding the above, if a corporation proves that it adopted all reasonable measures to prevent the committing of a criminal offense, it is exempted from the criminal liability.
Overall, the corporate liability deriving from the criminal activity under Czech law is a pure criminal liability. However, if a particular infringement would not reach the threshold of a criminal offense (for instance because of its lower intensity or less serious character), it may result in an administrative offense and the administrative liability of the corporation.
The initial scope of liability of legal entities based on the 2011 Criminal Liability Act was criticized as being too strict for legal entities that had a very limited chance to exonerate in cases where the offense was committed by members of its statutory bodies, managing persons or persons having influence over the legal entity (paragraphs a) – c) above). For this reason, the amendment effective as of December 2016 newly stipulates, that the legal entity shall be able to exonerate from criminal liability if it proves that it has taken all effort that could be reasonably expected from it to prevent the respective offense.
2. Type of crimes/administrative offenses from which, according to the legislature, corporate liability may arise
Due to the amendment of the Criminal Liability Act effective as of December 2016, the crimes for which a corporation may be criminally liable have been expanded by a reverse method of their specification in the act. Currently, the Criminal Liability Act provides for an exhaustive list of crimes that may not be committed by a legal entity. Conversely, all the other crimes mentioned in Act. No. 40/2009 Coll., Criminal Code (“Criminal Code”), with respect to individuals may also be attributed to a corporation. In particular, the following crimes are excluded:
Manslaughter (Section 141 of the Criminal Code); Murder of a Newborn Child by its Mother (Section 142 of the Criminal Code); Accessory to Suicide (Section 144 of the Criminal Code); Fights (Section 158 of the Criminal Code); Incest (Section 188 of the Criminal Code); Bigamy (Section 194 of the Criminal Code); Abandonment of a Child or an Entrusted Person (Section 195 of the Criminal Code); Malpractice nutrition (Section 196 of the Criminal Code); Maltreatment of Persons Living in Common Dwellings (Section 199 of the Criminal Code); Violation of Regulations on Rules of Competition pursuant to Section 248 (2) of the Criminal Code; Treason (Section 309 of the Criminal Code); Abuse of Representation of State and International Organizations (Section 315 of the Criminal Code); Collaboration with the Enemy (Section 319 of the Criminal Code); War Treason (Section 320 of the Criminal Code); Service in Foreign Armed Forces (Section 321 of the Criminal Code); Freeing of a Prisoner (Section 338 of the Criminal Code); State Border Crossing using Violence (Section 339 of the Criminal Code); Insurrection of Prisoners (Section 344 of the Criminal Code); Dangerous Persecution (Section 354 of the Criminal Code); Insobriety (Section 360 of the Criminal Code); Conscription listed in Special Part Chapter XI of the Criminal Code; Military Crimes listed in Special Part Chapter XII of the Criminal Code and Use of Prohibited Means of Combat and Clandestine Warfare (Section 411 of the Criminal Code)
3. Identification of companies and entities to which liability may apply
Under Czech law, criminal liability may apply to all legal entities regardless of their legal form or status. However, the legal entity must fulfill one of the following: (i) it has its registered office; or (ii) branch office; or (iii) business operations; or (iv) a property in the Czech Republic. Moreover, the Czech Republic itself and municipalities performing delegated state powers are exempted from criminal liability.
4. Corporate liability for crimes committed abroad by representatives or subsidiaries
In general, a criminal offense must be committed within the territory of the Czech Republic in order for the Criminal Liability Act to apply. However, this condition is also deemed to be met if a criminal offense was committed outside the territory of the Czech Republic but its effect occurred or should have occurred in this territory. A criminal offense committed outside the Czech Republic by a legal entity with its registered office in the Czech Republic may also be subject to the Criminal Liability Act. Finally, Czech criminal liability may arise with respect to a criminal offense committed abroad by a legal entity not incorporated under Czech law, provided that it committed one of the crimes designated as the most serious in the exhaustive list of such crimes stated in the Criminal Liability Act (such as torture), or in a case of a crime committed in the interest of a legal entity having its registered office in the territory of the Czech Republic.
In the light of the aforesaid, a criminal offense committed abroad by a corporation incorporated in the Czech Republic is punishable under the Criminal Liability Act. Thus, for instance, if a representative being a member of the statutory body acts on behalf of the corporation contrary to the law, this behavior resulting in a criminal offense may be attributed to a Czech corporation, even though the representative acted outside the territory of the Czech Republic.
In case of a subsidiary of a Czech corporation, a criminal offense committed on behalf of the subsidiary by its representative does not generally result in the criminal liability of the Czech parent company, since these companies are two separate entities from the Czech law perspective.
5. Corporate liability in the case of transactions taking place after the commission of a crime (acquisitions, mergers, demergers, etc.)
The general rule is that the criminal liability passes to a legal successor of a corporation. This means that should a corporation participate in a merger or a demerger, the criminal liability will pass to the successor corporation. If the criminal liability is passed to multiple successor corporations (eg, in the case of a demerger into multiple companies), a court, when ruling on the kind or amount of the penalty for the criminal offense, will take into consideration the extent to which the proceeds or other benefits from the criminal activity were transferred to a particular corporation participating in the restructuring, or the extent to which the participating corporations continue to carry out the activity in connection with which a criminal offense was committed.
If the criminal proceedings were initiated against a corporation, the corporation is obligated to notify a prosecutor or, at the stage of court proceedings, the court, that it intends to initiate steps leading to its dissolution or transformation (including a merger and demerger). Otherwise, such transactions are null and void. The approval is necessary prior to the implementation of the change. However, the preceding does not apply if the consequences of the ban on such a transaction would be unreasonable in comparison to the nature of the criminal offense in question. In such a case, the criminal liability will be passed on to a successor corporation.
II. Applicable sanctions
1. Type of sanctions applicable to the company
The following sanctions may be imposed upon a corporation being held liable for a criminal offense:
- Forced liquidation: This sanction may only be imposed upon a corporation having its registered office in the Czech Republic, the activities of which consisted wholly or at least predominantly of the criminal activities.
- Forfeiture of assets: This sanction may only be imposed for a particularly serious criminal offense (ie, an intentional crime for which an individual, had such a crime been committed by them, could be sentenced to imprisonment for at least 10 years), if a corporation had acquired or tried to acquire for itself or for another person a property benefit or, in the event the above conditions are not met, if the Criminal Code enables the imposition of such a penalty.
- Monetary penalty: The amount of the penalty may range from CZK 1,000 (approximately EUR 37) to CZK 2,000,000 (approximately EUR 74,000) per day for the period of time during which the monetary penalty applies according to the court decision (minimum of 20 days and maximum of 730 days, ie, the maximum penalty is CZK 1.46 billion.). When imposing a monetary penalty, regard should be given to the financial situation of a corporation at the time the sanction is imposed.
- Forfeiture of a thing/things (or forfeiture of a replacement value): This sanction may be imposed in the event that such a thing was used for the criminal activities, was designed for a crime or was acquired as a result of a crime.
- Ban on activities: This sanction may be imposed for one year to 20 years, provided that a crime was committed in connection with such activity.
- Ban on the performance of public procurements, participation public tenders: This sanction may be imposed for up to 20 years if a corporation committed a crime in connection with entering into contracts for the performance of public procurement or in connection with its performance or in connection with its participation in a public tender or concession proceedings.
- Ban on receiving grants and subsidies: This sanction may be imposed for up to 20 years if the crime was connected to the use of grants or subsidies or repayable financial assistance.
- Publication of a court’s judgment in the public media: This sanction may be imposed if the court deems it appropriate to inform the public of the court’s ruling, in particular with respect to the nature and seriousness of the criminal offense or if it is required for the security of people or their assets.
Additionally, a court may impose the following protective measures upon a corporation:
- Confiscation of a thing/things: A court may impose the protective measure of confiscation of a thing/things, including confiscation of the replacement value or confiscation of records and apparatus or, instead of the confiscation of a thing, it may impose the obligation to change a thing, destroy certain apparatus, mark a thing or perform any other change. The court may also limit the disposing of a thing under the terms of the Criminal Code.
- Confiscation of part of a property: A court may also impose the protective measure of confiscation of part of a corporation’s property.
2. Interim measures, cease and desist orders, bans and confiscatory measures
It is possible to impose an interim measure in order to suspend one or more business activities of a corporation, or an interim measure limiting the disposition of the corporation’s assets. The court may also impose bans and confiscatory measures stipulated in the list of criminal sanctions in Section 1 above under the terms provided by the Criminal Liability Act and the Criminal Code. Please refer to the previous section for more information.
3. Liability of directors or managers for not having adopted (intentionally or negligently) measures for the prevention of the crime
No specific provision of Czech law addresses the criminal liability of directors and managers of a corporation for failing to adopt measures to prevent a crime attributed to a corporation. The potential criminal liability of the directors and managers cannot be fully excluded and will be assessed on an ad hoc basis (ie, whether or not a particular action fulfils the requirements set out for a criminal offense of such directors and/or managers as natural persons).
Moreover, a failure to adopt the measures may lead to the responsibility of the directors and the managers for any damage a corporation incurred as a result of the failure (although this is a civil law liability).
III. Measures and “models” of prevention and effects of the same on corporate liability and applicable sanctions
Under Czech law there is no statutory compliance “model” to be adopted. However, an effective prevention model may prevent a criminal offense from taking place, especially in the case of the employees of a corporation.
Thus, each corporation is advised to perform consistent, mandatory and essential controls and supervision over its employees. When setting up effective internal tools for these purposes it is necessary to consider the size of the corporation, its scope of business, nature of its activities, its staff structure, internal check systems, structure of its customers, etc. For instance, the supervision should be more intensive in the case of companies dealing with weapons or operating in and from jurisdictions characterized by a high level of corruption.
Similarly, a corporation frequently participating in public procurement procedures will probably require a proper internal system to avoid any risk of criminal liability. For instance, the management should arrange for the necessary training of the corporation’s employees and require the compliance department to take an active role in the implementation of the measures aimed at preventing a criminal offense which would result in criminal liability attributable to the corporation. To that end, internal policies, working codes, corporate governance rules and codes of conduct may be very useful.
In the case of large companies, it is recommended to establish a compliance (monitoring) body performing due diligence with this respect.
IV. Judicial proceedings to determine corporate liability
1. Court competent to decide the liability of and penalties applicable to the company
According to Section 1(2) of the Criminal Liability Act, the Criminal Code and Act No. 141/1961 Coll., Criminal Procedure Code (“Criminal Procedure Code”), which is applicable primarily to individuals, will also apply to corporations unless the Criminal Liability Act provides otherwise or the nature of the criminal liability of a corporation excludes the applicability of these two acts.
Hence, a court that is authorized to decide on the corporation’s liability is the same as a court that is empowered to decide on the liability of an individual with respect to the same crime (generally the court in whose jurisdiction the crime was committed), subject to an exception stipulated in Section 29 of the Criminal Liability Act. This section provides that if the place of the crime cannot be identified or if a crime was committed abroad, the court in whose jurisdiction the registered office of a corporation is located (or where an enterprise or a branch of a foreign corporation is located) is the competent court. If neither of these places can be ascertained, the court in whose jurisdiction the crime was discovered is the competent court.
The joint proceedings of an individual and a corporation may be held, provided that their criminal offenses are interrelated, unless an important ground excludes such joint proceedings. However, the criminal liability of an individual and the criminal liability of a corporation are always assessed individually.
2. Possibility of the application of interim measures
During the preliminary investigation and court proceedings, a judge, upon a prosecutor’s application (made during the course of the preliminary investigations) or the chairperson of a court panel (during the course of court proceedings), can apply the temporary suspension of one or more business activities of the corporation or impose a limitation on disposing with its assets, provided that there is well-founded concern that a corporation will: (i) repeat the same crime for which it is being prosecuted; (ii) complete the criminal offense that it attempted; or (iii) perform a criminal offense it intended or threatened to commit.
For important reasons, the chairperson of a court panel or, during the course of preliminary investigations, a prosecutor, can approve, upon the motion of the corporation, the conclusion of an act relating to the property of the corporation over which the interim measure is imposed.
A corporation may at any time ask for the termination or the limitation of the interim measure.
3. Plea bargains and related effects on corporate liability
A corporation is entitled to always attempt to settle the criminal proceedings by a plea bargain.
A plea bargain can also be initiated by a prosecutor, provided that the investigations sufficiently indicate that a criminal offense was committed by a corporation.
A prerequisite for the conclusion of a plea bargain is an affidavit executed by a corporation stating that it had committed the crime. The plea bargain will be concluded between a corporation and a prosecutor, with the need for the corporation’s attorney to be present. The plea bargain must be approved by a court.
A plea bargain cannot be concluded in the case of a particularly serious crime.
4. Imposition of sanctions against the company
The sanctions mentioned above may be imposed simultaneously or separately. However, it is not possible to impose a monetary penalty or confiscation of part of a property along with an order for the forfeiture of the same part of property, or the forfeiture of a thing or things along with a protective measure of the confiscation of a thing or things.
5. Persistence of corporate liability if the crime is extinguished
Pursuant to Sections 3 and 4(d) of the Criminal Liability Act, a corporation may be held liable for a criminal offense even though a specific perpetrator cannot be tracked down or is not themselves liable for a criminal offense.
V. Corporate liability in multinational groups
1. Liability of parent companies located abroad in the case of offenses committed by directors, managers or representatives of the local company
Please note that the criminal liability of a local corporation does not generally extend to its parent company under Czech law.
2. Basis of liability and applicable sanctions
Please refer to the previous answer.
VI. Significant case law concerning corporate liability arising from crimes and draft laws under discussion
1. Significant case law, if any
In Case No. 8 Tdo 627/2015, the Supreme Court held that an Executive (a statutory body) being a witness in the specific case, may not represent the company at the hearings.
The court also deduced that the culpability of a corporation in relation to any of the offenses specified in the Criminal Liability Act must be derived from the culpability of a natural person committing the crime who acted on behalf of the corporation or on behalf of, or in connection with its activities, and not from the culpability of the individual authorized to act on behalf of such corporation, in the case of different individuals.
In Case No. 4 Tdo 928/2016, the Supreme Court held that the mere change in ownership structure of the company (the change in owner of the ownership interest, its executive, business name and address) is not a reason for acquittal of the company.
2. Proposed or contemplated new legislation
Currently there is no new legislation regarding criminal liability of corporations that is contemplated to be enacted.