16 August 2018
The Second Chamber of the Supreme Court, in its recent Ruling 316/2018 of 28 June, has highlighted the importance of implementing compliance programmes within commercial companies in order to prevent the commission of crimes, specifically, misappropriation and unfair administration.
You can download the full Judgment by clicking on the link at the bottom of this article.
The High Court, in the aforementioned judgment, sentenced the former director of the company Carbuastur, as the perpetrator of a continuous offence of misappropriation and disloyal administration, to four years’ imprisonment for taking cash from the company’s cash box without the consent of his Italian partner and making transfers to his personal account without justifying their destination, as well as committing other management irregularities, which caused damage of more than 2 million euros to the company he managed, which imported coal from Ukraine.
The Supreme Court, upholding Ground 9 of the defence’s appeal, imposed the aforementioned sentence of 4 years‘ imprisonment on the defendant, as it considered the criminal continuity of both offences (misappropriation and disloyal administration) instead of sentencing each offence separately, as determined by the 3rd Section of the Provincial Court of Oviedo, which had imposed a sentence of 5 years and 9 months’ imprisonment on the defendant. The High Court upheld the other rulings of the Provincial Court concerning the 10-month fine of 20€/day and the payment of more than 2 million euros in civil liability.
In its Eighth Ground of Law, the Judgment under commentary stresses the need to implement regulatory compliance programmes within the company in order to prevent crimes and consequent convictions such as the one in the case under study.
The High Court first refers to the ‘Olivenza Code’ of 1997, which included protocols of good management and parameters of action in accordance with which the administrators of commercial companies should act, and then the Chamber states that: ‘… the “Olivenza Code” is a code of good management and parameters of action in accordance with which the administrators of commercial companies must act.Together with this Olivenza Code, the introduction of compliance programmes in companies was crucial for the good governance of the administration, which would prevent cases such as the one that has occurred here, since internal control in companies through the Anglo-Saxon technique of the compliance programme as a set of internal rules, established in the company at the initiative of the management body, with the aim of implementing an efficient and suitable organisational and management model that allows it to mitigate the risk of committing crimes and exonerate the company and, where appropriate, the management body, from criminal liability for crimes committed by its managers and employees.“
The Chamber goes on to underline that:If there had been an adequate regulatory compliance programme, cases such as the one that occurred here would have been more difficult, since in most cases knowledge of activities such as the proven misappropriation of funds and abuse of management would not have occurred, and it would not have been necessary to wait until the tax agency had to intervene in this case to detect the tax fraud that existed with the imported coal and discover the misappropriations made by the appellant, as is clear from the evidence provided against the appellant’s opposition to the appellant’s assessment; hence the importance of implementing such compliance programmes in commercial companies.”.
The Judgment goes on to admit that the implementation of these regulatory compliance programmes is not only important in order to avoid the derivation of criminal liability to the company in cases of offences committed by managers or employees (the High Court calls them criminal offences ‘ad extra’), resulting in harm to third parties/creditors who could be liable for offences such as frauds, misappropriation of assets, etc; but it is also essential to hinder the commission of crimes of misappropriation and unfair administration, such as those committed in the case under analysis, which the Court calls ‘ad intra’ criminal offences.
The Supreme Court specifically states that: ‘The latter, although they do not derive criminal liability to the company because this derivation is not recognised as such in their precepts and they are ad intra , they do make it possible to hinder the commission of crimes such as those committed here by the administrators who do not provide their partners or joint administrators with the accounts and who commit irregularities, which in some cases, such as those that have occurred here, constitute criminal offences’.
This statement explains why in the case under study only the natural person who committed the crime (the former director of the company) is criminally convicted, but not the company itself, even though it did not have a compliance program, because in line with what the High Court states, we understand that since the former director committed a crime of misappropriation and disloyal administration (crime of “misappropriation and disloyal administration”), the company itself is not criminally convicted.
ad intra“The company’s former partner and the company itself were harmed, and therefore criminal liability cannot be attributed to the latter. However, we understand that it would be a different matter if the former administrator had committed offenses such as fraud or asset forfeiture (“ad extra” offenses) in which third parties (creditors) would have been harmed, where criminal liability would have been derived to the company (since it did not have a compliance program) and would have probably resulted in the conviction of the company as well.
The Chamber concludes that “a good corporate practice in the company is to implement these compliance programs to ensure that this type of events are not committed, or to hinder the continued actions of money diversion or abuse of functions that a good compliance program would have detected immediately”.
Furthermore, the Judgment emphasizes that these actions of criminal offenses such as those committed here may even give rise to the existence of civil liability, which in the event that they were ad extra or committed against third parties, and not against the assets of the company, would give rise to a civil liability charged to the company by way of art. 120. 4° CP, which could be covered by the civil liability insurance policies that are usually contracted to cover these eventualities; policies that, at the same time, could require the constitution of regulatory compliance programs to lessen or reduce the risk of the appearance of this duty to indemnify the insurer as a consequence of the insurance of civil liability.
The Supreme Court concludes that it is evident that what the compliance program conveys to the corporate director who has in mind to carry out this type of conduct is to know the existence of a control that in the case analyzed here did not exist, and which is what led to the acts of misappropriation and unfair administration declared proven.
In short, the magistrates of the Supreme Court in the Judgment under analysis emphasize the importance of implementing these regulatory compliance programs in commercial companies, as this could prevent the commission of these crimes ad intra, thus avoiding corporate crime with serious internal damage.
It should be noted that the Supreme Court had already highlighted, on previous occasions, the convenience of companies adopting preventive measures and control tools to avoid the commission of crimes and specifically to avoid the derivation of criminal liability to the legal entity. Thus we must cite, among others, and due to its importance, Judgment 154/2016, of February 29 of the Supreme Court in which the Chamber justifies the conviction of the legal person stating that: “the non-existence of any kind of such control tools, already in force the regime of criminal liability of the legal person, is total”.
Other judgments in which the Supreme Court emphasizes these arguments are STS 221/2016, of March 16, STS 516/2016, of June 13, STS 742/2016, of October 6, STS 827/2016, of November 3, 2016 and STS 31/2017, of January 26.
The High Court agrees in most of its rulings that the lack of preventive measures and control tools, as well as the structural defect in the management, surveillance and supervision models, constitute the foundations of the responsibility for corporate crime, which is intended to alert companies of the extreme convenience of implementing a compliance program within them.
Similarly, in line with the arguments put forward by the Supreme Court in the judgment under analysis and the others that have been cited, we find other complementary case law from different Provincial Courts that highlight the importance of implementing compliance programs within commercial companies. Thus, we cite Judgment 141/2017, of November 20, of the Provincial Court of Huesca, which convicts two companies as co-perpetrators of a crime of fraud, based on the absence of control or prevention measures to avoid the commission of the crime.
Finally, we should mention the Judgment of the Provincial Court of Pontevedra 38/2017, of June 30, which sentences a company for a tax offense to a fine of 200,000 euros and the impossibility of receiving public subsidies or contracting with Public Administrations for two years. This judgement states that the company could have avoided the conviction if it had had a compliance programme in place, as this would have demonstrated the existence of ‘due control’.
