13 June 2010

Criminal Liability for Legal Entities in Luxembourg

The law establishing criminal liability for legal entities was adopted in Luxembourg on 3 March 2010 (the “Law”), allowing for prosecution of entities committing serious crimes or lesser offences considered under Luxembourg law as crimes or délits.

Up until the Law legal entities were not criminally liable when the offences had been committed by a representative of the legal entity. When a director committed an offence, it was only he who was liable and not the company: even where this was done as a company act and the company benefitted therefrom.
This was based on the idea that legal entities did not have the mental element required to commit a crime and companies could only act through their representatives (directors, managers or internal auditor, depending on the structure). Further, criminal penalties were not seen as appropriate for companies.
However, many jurisdictions have already allowed for criminal liability of companies including those with a similar legal system to Luxembourg, like France and Belgium. A number of other jurisdictions are committed to introducing such liability to fight offences like corruption, money laundering and terrorist financing.
Given this background and further pressure from the OECD the Law introducing criminal liability of legal entities in Luxembourg was passed. All companies and all non-profit organizations may now be prosecuted. The state and local authorities are excluded. Most entities in the Luxembourg financial centre have legal personality. Unit trusts (SICAV), for example, have legal personality and could therefore be prosecuted for offences committed on their behalf. This is still not the case for investment funds.
 

CONDITIONS OF IMPLEMENTATION OF CRIMINAL LIABILITY

Pursuant to the new article 34 of the Criminal Code (Code Pénal), legal entities can be held criminally liable for the offences committed in their names, on their behalf, and in their interest.
In order to hold a company criminally liable, an offence must have been committed by one of its organs or legal or factual representatives. This is a kind of vicarious liability, since the company can be prosecuted for offences not committed by itself but by its director or other representative.
Once the state persecutor is sufficiently convinced that he has a case against either the company or its representatives or both, he can bring charges as he sees fit.
The offence must further have been committed in the interest of the company. Usually this is a financial interest. However, there are still offences which are not primarily concerned with financial gain such as terrorist financing. In such cases, a company may still be held criminally liable, since the draft of the Law expressly states that the concept of interest of the company has to be adapted to the relevant offence.
 

ADAPTATION OF THE CRIMINAL CODE TO THE LEGAL ENTITIES

The scope of the Law is general and covers any kind of offences (crimes and délits) mirroring possible penalties for natural persons.
The Law has, however, modified some provisions of the criminal code in order to make it consistent with the specificities of a legal entity.
As it is impossible to order imprisonment against a legal entity, a company can incur a fine for any offence, in criminal matters for example of up to EUR 750,000.-
However, the most severe sanction is the dissolution of the legal entity. The law of 10 August 1915 concerning Commercial Companies already provided for the possibility of dissolution of the company but only for companies. From now on all associations and corporate bodies could be sanctioned by a forced dissolution if it is shown that the legal entity has been specially created to accomplish the crime. The same sanction could occur if during the life of the company its object has been misused to carry out a crime or a delit punishable by a minimum of 3 years imprisonment.
Proving that a company has been incorporated as a façade or a sham for illegal purposes might be difficult for the state prosecutor. Consequently, the winding up of the company might not occur very often.
As an entity must have a legal personality in order to be prosecuted, the legislator had to make sure that such entity could not escape from its prosecutors by using the flexibility of the Luxembourgish company law.
For example, shareholders may try to avoid criminal sanctions by proceeding to wind-up the company or merging with another company. In such cases, the prosecuted company would no longer exist. The risk of criminal proceedings against such entity would therefore be avoided. For this reason, some “anti-avoidance measures” have been introduced in the Law.
Article 89 of the Investigation Criminal Code provides the possibility during the formal judicial investigation for the Investigating Magistrate (Juge d’instruction) to order the suspension of the procedure of dissolution or of the winding-up of the legal entity if he has serious reasons to believe that the company is guilty of any crimes or delits.
Furthermore, a legal entity could organise its insolvency in order to avoid the criminal proceedings. Therefore, to avoid this kind of abuse the article 89 of the Instruction Criminal Code provides that the investigating magistrate may prohibit certain transactions.
 

A PROMISING LAW

The new provisions of the Law take in account the specificities of legal persons. They are new subjects of the criminal law.
This is a promising law as it seems to answer a large number of problems the criminal law had. It was often difficult to find out who was the actual perpetrator of a crime. Now the state prosecutor can bring charges directly against the company.
Furthermore, victims may be able to recover any civil damages quicker than would usually be the case. Here a victim can claim civil damages in the criminal procedure against not only the director of the company but also the company itself as the company itself will now be party to the criminal proceedings.
Finally, we can hope that the scope of the dispositions introduced by the law and the media coverage of criminal proceedings against legal entities will have a preventive effect.