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New law allows direct penalties on companies

Following international pressure, Slovakia introduces direct criminal liability for legal entities.

Illustrative stock photo(Source: SME)

As of July, companies – not just individual people – can be subject to criminal prosecution. Though most consider that good news, legal experts point out that international institutions and the European Union, not Slovak politicians, pushed for the reform.

“It is a step for Slovakia to meet its international obligations, as well as improve law enforcement and punish violations,” Tomáš Korman, an associate with TaylorWessing law firm, told The Slovak Spectator.

The Act on Criminal Liability of Legal Entities approved in late 2015 introduces a registry of criminal offences such as tax crimes, drug and human trafficking, sexual violence, legalisation of income from criminal activities, crimes related to business and IT, extremism, corruption or environmental damage, and many others.

Usury is also on the list, a last minute addition by the chairman of the parliamentary constitutional committee, Róbert Madej (Smer), along with abuse of consumers and unfair commercial practices against consumers, the TASR newswire reported.

Active prevention required

Justice Ministry spokesman Peter Bubla said that the act, in accordance with general prevention standards, may help prevent crime. It also includes conditions and mechanisms to deal with companies that distort the business environment, he told The Slovak Spectator.

“It is a death penalty for dishonest entrepreneurs that are creating debts, cheating and lying,” Ján Oravec, president of Entrepreneurs Association of Slovakia (ZPS), told The Slovak Spectator.

Peter Kremský, executive director of the Business Alliance of Slovakia (PAS), noted that the law could be used to purge the market of companies that abuse their position, fail to pay their employees and their suppliers, engage in tax fraud or corruption, or abuse EU funds.

Lawyers believe that the new legislation will affect mostly international corporations and large domestic companies which bear liability for their employees. It is not just the punishment itself but also the harm to the company’s reputation that it could entail.

“While so far companies could act more or less passively on regulatory issues, the new legislation requires active prevention and an effective system of internal control,” Korman said.

Concerns over abuse

Businesses within ZPS and PAS, however, voiced concerns about the law’s potential to harm any business considered “inconvenient”.
They are worried that the law could be abused by the state against companies which impugn its practices in courts and arbitrations, Kremský of PAS said.

“The act allows for dissolving a company, banning its participation in public procurement or its ability to access EU funds, or seizing assets,” Kremský told The Slovak Spectator.

Legal rules

The act, however, does not apply to all legal entities; rather mainly to state institutions and international organisations. All data of companies and their penalties will be kept in the business registry or another registry of companies, Bubla said.

“Information from registries will be available for all, which is why they create a wide space to check the reliability of business partners,” Bubla said.

To get a licence for specific activities, entrepreneurs have to prove their integrity with their criminal record, Bubla added.

Some crimes not included

Kremský expects that state authorities will penalise companies involved in racketeering, tax fraud, cybercrime, money laundering, illegal employment, unfair commercial practices and abuse of financial interests of the EU.

“The state could purge the market of companies which abuse their dominant position by banning them from public procurement, drawing EU funds or taking over property,” Kremský said.

Ľubomír Leško, managing associate with Peterka & Partners law office, stressed that the new legislation does not cover many economic crimes, fraudulent offences, abuse or favour from creditors, or machinations with bankruptcy and compensation.

Until now, Slovak legislation allowed penalising legal entities in criminal procedures by sanctions within the so-called indirect criminal liability, Leško said.

“This form of liability is not singled out and only natural persons acting on behalf of a legal entity are criminally responsible,” Leško told The Slovak Spectator.

Expected penalties

Legal entities face criminal liability within the act due to activities of statutory body members, persons who carry out external and internal inspections, shadow managers, employees and other persons; all these persons do not face personal liability.

The most important penalties are liquidation of the company, restriction of its activities and on receiving subsidies and support from the EU funds, as well as banning participation of the company in public procurements or making the judgement public. In addition, companies can receive fines in the amount of €1,500 to €1.6 million. 

Korman expects potential difficulties with application of the law before authorities begin to apply the new rules uniformly.

“As legal entities do not have a state of mind (intention or motive), proving their liability will be different than in the case of natural persons,” said Korman.

The definition of certain legal concepts foreseen by the law would also take more time, such as setting the minimum threshold needed in order for a legal entity to escape its liability thanks to its due supervision and internal control over employees, Korman said.

Kremský said that authorities who will investigate companies must be truly independent to decide fairly and impartially and to understand the business environment.

“Police, the General Prosecutor’s Office and courts must work actively and efficiently to stop criminal activity and compensate damage in a timely manner,” Kremský said.

Practical application will show specific problems or deficiencies, Korman said.

“In an optimal case, decision-making activities of courts or uniform guidelines by the prosecutor’s office will help to solve problems,” Korman said.

International pressure

The Organisation for Economic Cooperation and Development (OECD) has urged Slovakia for years to enact direct liability into its legislation with emphasis on corruption, Oravec said.

“If we look at all areas of sanctioning, it is an incredibly long list of many senseless acts,” Oravec said.

All member states of the EU use one of three basic concepts of criminal liability – direct, indirect or administrative standards – while the Czech Republic, the Netherlands, France, Portugal, Spain, and Slovakia have implemented a modified model of direct liability, according to Leško. 

He said that in the third concept, used in Germany, sanctions are handed out by an administrative authority in first instance and a court during the appeal procedure.

“Implementation of the concept in Slovak conditions would require a number of legislative changes including separation of criminal law,” Leško said.

Next steps

The government’s programme statement has brought plans to improve law enforcement via reduction of delay in distrainment, exemption of debts and payment orders, said Bubla.

“Law enforcement is not only a matter of court and its decision-making activity, but all state authorities which transform legislation to judicial and other legal protection,” Bubla said.

Leško proposes to improve the decision-making of public authorities and laws.

PAS calls for amendments to improve practical procedures and business ombudsman to help entrepreneurs when state authorities abuse their power of exaction would improve law enforcement.

“Concerns of entrepreneurs emerge mainly from a large number of corruption suspicions,” Kremský said.

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