Chapters of the article
What is a legal entity
A legal person is an entity that is granted legal personality by the legal system, which means that it can have rights and obligations similar to a natural person (human being). A legal person has the ability to enter into contracts, own property, be a party to legal proceedings and generally act as an independent entity in legal relations. Legal personality enables a legal person to function in the legal world, even if its actions are in fact carried out by the natural persons who represent it (for example, managing directors, board members or employees).
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Division of legal persons
Legal entities in the Czech Republic are divided into three basic categories:
- Corporations: a corporation is formed as a legal person by a community of persons, but even a legal person formed by a single member is viewed as a corporation. These are usually business corporations whose purpose is profit. Another version is that of an association, which has a stated common interest and consists of at least three persons. A business corporation is, for example, Škoda auto a.s. and an association is, for example, the Czech Sokol Community or Sokol.
- Foundation: a foundation is a legal entity created by assets earmarked for a specific purpose. Its activities are linked to the purpose for which it was established. Typically, it is a charitable purpose in the form of a foundation or endowment fund. Specific examples are the Charter 77 Foundation and the Kapka naděje Foundation.
- Institutes: an institute is a legal entity created for the purpose of carrying out an activity useful socially or economically using its personal and property component. The Institute shall carry out an activity whose results are equally accessible to everyone under predefined conditions. Examples include an educational institute in the form of Charles University or a cultural institute in the form of the National Museum.
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When is a legal person criminally liable
Criminal liability is a legal concept that means that a person can be prosecuted and punished for committing a criminal offence. To be criminally liable, a legal person must meet two basic conditions:
The conduct must be attributable to the legal person
The legal person does not actually exist as such, but is represented by a natural person or a group of persons. For this reason, its criminal liability is specific and is regulated by the Law on Criminal Liability of Legal Persons and Proceedings against them. It provides that in order for a legal person to be criminally liable, the condition of imputability must be met. This means that criminal liability can only be incurred for acts committed by certain persons associated with the legal person. These persons must be:
- thestatutory bodies, members of the statutory body or other persons acting on behalf of the company (e.g. managing directors, members of the board of directors); or
- persons in a managerial position in charge of control or supervisory activities; or
- persons in a managerial position who exercise decisive influence over the actions of the legal person (e.g. directors, managers); or
- employees or other persons subordinate to the management body if they acted on the instructions or with the consent of the management body. Or where the governing bodies did not prevent the criminal conduct even though they could have (e.g. they did not control the work of the employee as they should have).
The act must be carried out for the benefit of a legal person
The offence must be committed for the benefit of, on behalf of, in the course of or through the activities of a legal person. In other words, the offence must have some connection with or benefit the activities of the legal person.
Imagine a situation in which a manager of a large company bribes a public official in order to win a lucrative government contract for his company. This act is committed in the name of the company and for the benefit of its business, because obtaining the contract brings financial gain to the company.
In this case, the manager, as a person associated with the legal person (company), has committed the crime of corruption. If it is proven that the act was committed in the course of the company’s business to obtain the contract, the company may be held criminally liable.
Why was corporate criminal liability introduced?
Criminal liability of legal persons was first legally regulated in 2011 with the adoption of the Law on Criminal Liability of Legal Persons and Proceedings against them. Until then, criminal liability was related to a specific natural person.
However, with the development of the economy and the growing number of different commercial companies, more and more crimes committed by legal persons have also started to appear. Most often in connection with environmental damage, organised crime and tax evasion.
In many cases, it has not been possible to effectively prosecute the specific person behind the unlawful conduct of the legal entity. The persons responsible are often hidden behind complex organisational structures. Therefore, it was often impossible to convict a specific person. Therefore, the criminal liability of legal persons simplifies the entire conviction process. Moreover, the introduction of corporate criminal liability puts pressure on corporations to put in place internal mechanisms and control measures to prevent wrongdoing.
Another important reason was the desire to adapt the Czech legal system to the legal systems of other countries and to comply with various international obligations. Indeed, many international treaties and agreements, such as the United Nations Convention against Corruption (UNCAC) or the OECD Convention against Bribery of Foreign Public Officials, require states to introduce corporate liability for certain offences.
Act on Criminal Liability of Legal Persons and its scope
The scope of the law defines the extent to which the law applies. This includes defining to whom, when, where and to what situations the law applies. The scope of the law is divided into four basic categories:
Personal scope
Determines to whom the law applies. This can be natural persons, legal persons, or specific categories of subjects (e.g. citizens, business people, government bodies).
In the context of legal persons, it refers to all legal persons with the exception of the Czech Republic as a state, including its organisational units (e.g. courts and ministries) and local self-government units (regions, municipalities) in the exercise of public authority.
Material scope of competence
Defines what types of actions or situations are regulated by the law. That is, what areas of life, activities or legal relations are regulated by the law.
The law applies to crimes that can be committed by legal persons as defined in the Criminal Code. However, there are crimes that by their nature cannot be committed by legal persons, which are individually enumerated in the law. These are mainly personal offences such as manslaughter, drunkenness or neglect of maintenance.
Local competence
Specifies the territory in which the law applies. It can be the whole state, certain regions or specific places.
In the case of legal persons, it refers to offences committed by a legal person that has its registered office in the Czech Republic or has an establishment or organisational unit located in the Czech Republic, or at least carries out its activities or has its property there.
A criminal offence shall be deemed to have been committed in the Czech Republic even if the legal person acted wholly or partly in the Czech Republic, even if the consequences of the act were abroad. It is also liable if it acted abroad, provided that the consequences of the act were at least partly in the Czech Republic.
Criminal liability under Czech law also applies to acts committed abroad if they were committed by a legal person established in the Czech Republic. Similarly, the law also applies to acts committed abroad by a legal person that does not have its registered office in the Czech Republic if the act was committed for the benefit of a legal person with its registered office in the Czech Republic. The Act shall also apply in cases where required by an international treaty which forms part of the legal order.
In addition, the law applies to specific crimes such as torture, counterfeiting of money or terrorism, even if committed by a legal person not established in the Czech Republic.
Temporal scope
Determines from when to when the law applies. The Law on Criminal Liability of Legal Persons applies to crimes committed after its entry into force, i.e. after 1 January 2012. Therefore, if a legal person committed an act before this date, the old legislation (i.e. the Criminal Code) is used. The exception is where the newer legislation (i.e. the Law on Criminal Liability of Legal Persons) would mean a lighter penalty for the perpetrator.
Penalties for legal persons
The choice of penalties is somewhat more limited than in the case of natural persons. The most common penalties are the dissolution of the legal person, forfeiture of property or assets or a fine. You can read more about how legal persons are punished in our next article.
Execution of a legal person
Exculpation of a legal person (exculpation) is the process by which a legal person proves that it is not responsible for the wrongful act attributed to it. The result may therefore be that the legal person is exonerated from criminal liability. Exculpation may occur where the legal person has made every effort that could fairly be required of it to prevent the commission of the offence. This is related to the observance of the so-called due diligence.
Due diligence
Due diligence means that the statutory body has a duty to act with due care, prudence, responsibility and in the best interests of the legal person. This includes careful and considered decision-making that is based on sufficient information. It also includes the duty to act in accordance with the law, internal policies and in the best interests of the legal entity. To this end, effective control and oversight mechanisms usually need to be put in place. If a legal person does not act with due care, this may lead to criminal liability. However, if the legal person proves that it has acted with due care, it may escape criminal liability.
Compliance management system
The due diligence then goes hand in hand with the so-called compliance management system. This is a structured framework and set of processes that legal entities use to ensure compliance with laws, regulations, internal policies and ethical standards. The aim of the CMS is thus to identify, manage and minimise the risks associated with non-compliance and to ensure that the organisation acts in accordance with legal and ethical standards.
Practical example
Let’s illustrate with an example: Imagine XYZ Ltd. deciding to make a major investment in a new technology project focused on the extraction of raw materials. The board members must decide whether to approve the project. They make the decision with due diligence and using the Compliance Management System (CMS).
This means that they obtain detailed information about the technology project, including technical specifications, financial analysis, risk analysis and potential benefits. They will assess the potential risks of the project, including technological issues, market risks, competition and financial costs. They will also assess environmental risks such as impacts on local ecosystems, greenhouse gas emissions and potential pollution. Once the investment is approved, control mechanisms will be put in place to monitor project progress, minimise risks and ensure compliance with environmental standards and regulations.
After a period of time, the technology project is shown to have serious negative environmental impacts. XYZ Ltd. therefore faces environmental sanctions. The Board of Directors will therefore present evidence that it acted in accordance with due diligence and the use of CMS in deciding on the project.
On the basis of this evidence, the court is likely to decide that the board acted with due care and using CMS and therefore is not criminally liable for the failure of the project and its environmental consequences. The exculpation is based on the Board’s showing that they acted properly and with all possible prudence in making their decisions, and that the failure of the project was not the result of their negligence, but the unavoidable risks inherent in doing business.
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Effective contrition
A legal person may be released from criminal liability if it voluntarily refrains from further unlawful conduct and at the same time:
- removes the danger which has arisen to the interest protected by the criminal law,
- or prevents the harmful consequence,
- or remedies the harmful consequence,
- or makes a report of the offence to the public prosecutor or the police at a time when the danger to the interest protected by the criminal law could still have been eliminated or the harmful consequence of the offence could still have been prevented.
The aim of effective contrition is therefore to motivate the perpetrator (in this case the legal person) to take active steps to repair the damage and mitigate the negative consequences of the offence. However, this possibility applies only to a limited group of offences. It cannot be applied, for example, to the acceptance of a bribe, bribery or indirect bribery, bid rigging and bid rigging and other offences listed in the law.
Extinction of criminal liability by division of a legal entity
The division of a legal entity does not abolish its criminal liability, but shifts it to the individual parts. Criminal proceedings are then brought against those parts, taking into account which of them carries out the activity or operates with the proceeds of the criminal activity committed by the legal entity before the division.
Limitation of criminal liability of legal persons
The same rules apply to the limitation of criminal liability of legal persons as for natural persons, except that the legal person is not subject to imprisonment. The length of the limitation period is determined on the basis of the gravity of the offence as follows:
- thirty years in the case of an offence for which the criminal law allows the imposition of an exceptional penalty and an offence committed in the course of the preparation or approval of a privatisation project under another legal provision;
- fifteen years, if the upper limit of the penalty is at least ten years’ imprisonment;
- ten years, if the upper limit of the penalty is at least five years’ imprisonment;
- five years, if the maximum term of imprisonment is at least three years;
- three years for other offences.
Summary
Criminal liability of legal persons makes it possible to punish unlawful conduct by legal persons. The Law on Criminal Liability of Legal Persons, introduced in 2011, responds to the need for effective prosecution of crimes committed by legal persons and adapts the Czech legal system to international standards. Legal persons may be held criminally liable for acts committed by their statutory bodies, officers or employees if these acts benefit the legal person. In order to protect themselves from criminal liability, it is important that legal persons implement an effective compliance management system and act with due care.