Criminal liability of legal entities is a relatively new concept in the Czech Republic. It consists in the fact that the intangible legal entity itself, represented by its executives, employees, etc., is punished for a criminal offence. Therefore, there are no more futile attempts to convict the natural person hiding behind complex organisational structures. In this article we will look at how criminal liability is regulated by law and under what conditions it is possible to avoid punishment.
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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Legal entities in the Czech Republic are divided into three basic categories:
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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 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:
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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.
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.
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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:
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.
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.
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.
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.
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.
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 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.
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.
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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A legal person may be released from criminal liability if it voluntarily refrains from further unlawful conduct and at the same time:
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.
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.
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:
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.
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