How are legal entities punished?

Quick Overview:

• A company may be held criminally liable if a crime is committed in its interest or in the course of its business and can be attributed to it under the law.
• A company’s liability does not preclude a specific executive, manager, or employee from also being held criminally liable for the same offense.
• Typical examples of crimes committed by legal entities include property and economic crimes, acts of corruption, and certain environmental crimes.
• A company may face, for example , a fine, a suspension of operations, a ban on participating in public procurement, or a prohibition on receiving subsidies.
• The most severe penalty is the dissolution of the legal entity. Once such a decision becomes final, the company enters liquidation.

If your company is facing criminal prosecution or you need to assess whether the conduct of a specific individual can truly be attributed to the company, our attorneys will help you evaluate the company’s criminal liability and recommend the next steps.

How are legal entities punished?

The legal framework governing the criminal liability of legal entities is separate from the Criminal Code and is regulated by a standalone law on the criminal liability of legal entities and proceedings against them. Several reasons led our lawmakers to introduce this legal framework into Czech law. For one thing, we were perhaps the last EU country to lack such a framework, and there were also increasingly frequent cases in which certain members of a company’s statutory bodies managed to avoid liability by citing a decision made by a collective body, meaning that some criminal offenses went unpunished.

However, there are still opponents of the introduction of criminal liability for legal entities who argue that a legal entity is, de facto, a legal fiction and acts indirectly, or that the prerequisites for culpability are lacking in the case of legal entities. Nevertheless, the prevailing view is that this legal framework is necessary.

Which legal entities are criminally liable?

The law generally presumes the potential liability of all legal entities; it expressly excludes from this liability only the Czech Republic and local government entities when exercising public authority (i.e., municipalities and regions, to the extent that they exercise public authority).

To which criminal offenses does the law apply?

Criminal offenses subject to prosecution are again defined negatively by law; that is, a legal entity may commit any criminal offense that a natural person may commit , with the exception of those specifically listed in the law. By its very nature, it is clear that a legal entity cannot commit, for example, the crimes of brawling, bigamy, child abandonment, public intoxication, or other acts that we immediately associate with natural persons. Conversely, these offenses will primarily involve property crimes, crimes related to corruption (such assubsidy fraud or bribery), and crimes related to environmental hazards.

Common examples of crimes committed by legal entities thus may include, for instance, fraud, subsidy fraud, corruption-related crimes, certain tax crimes, or environmental crimes. However, it always depends not only on the type of crime but also on whether the conditions for attributing it to a specific legal entity are met.

What are the conditions for committing a crime?

The fact that one of a company’s employees acts unlawfully does not automatically mean that the entire company can be prosecuted. In this context , only unlawful acts committed by the following are considered :

• a statutory body or a member thereof (such as the president of an association or the CEO of a company),
• a person who performs managerial functions (i.e., a manager or CEO),
• a person in a leadership position,
• a person who exercises decisive influence over the management of the legal entity, provided that their conduct was at least one of the conditions leading to the consequence,
• an employee while performing work duties based on instructions from a supervisor (or even without such instructions, if these supervisors failed to take measures that could reasonably be expected of them to prevent such actions by the employee).

For a legal entity to be held criminally liable, the unlawful act must have been committed in its interest or within the scope of its activities, and at the same time, the conduct of a specific natural person must be legally attributable to the legal entity. In the case of an employee, a decisive factor may be, for example, whether the employee acted based on a decision or instruction from management, or whether management failed to exercise the necessary oversight or take other measures to prevent the criminal conduct.

Can a company be exempt from criminal liability?

Yes. A company can be exempt from criminal liability if it demonstrates that it made every effort that could reasonably be expected of it to prevent the commission of a crime. It is not enough to merely adopt internal guidelines in a formal manner. Factors that may be relevant include, for example, a control system that actually works, employee training, established approval processes, or an effective response to identified violations of the rules.

In practice, one of the key questions is whether the company can demonstrate that prevention measures went beyond mere paperwork. When assessing liability, records of training, inspections, internal audits, or how the company responded to previous violations of the rules may be relevant.

What penalties does a company face for a criminal offense?

Just as we cannot imagine a legal entity getting into a physical fight with someone, we cannot expect to imprison a legal entity either. The range of penalties is therefore somewhat more limited than in the case of natural persons. Depending on the circumstances, the company may face, for example, a fine, a ban on conducting business, a ban on participating in public procurement, forfeiture of assets, or, in the most serious cases, dissolution of the legal entity:

Dissolution of a Legal Entity

Sometimes, in this context, people refer to “liquidation of a company as a punishment,” but legally speaking, the more precise term is the dissolution of a legal entity. A court may impose this penalty on a legal entity with its registered office in the Czech Republic if its activities consisted entirely or predominantly of committing a criminal offense or criminal offenses. In the case of certain specific legal entities, such as banks, insurance companies, securities dealers, or savings and credit unions, the court may impose the penalty of dissolution of the legal entity only after the Czech National Bank has issued a statement regarding the possibilities and consequences of imposing such a penalty. The court shall take this opinion into account. The legal entity enters into liquidation only once the decision on dissolution becomes final.

Forfeiture of Assets

The court may order the forfeiture of assets (or a portion thereof) if the legal entity is convicted of a particularly serious crime through which it obtained or attempted to obtain financial gain for itself or another party, or in other cases where such a penalty is permitted by the Criminal Code. In the case of banks and other similar legal entities, it is again necessary to obtain a statement from the Czech National Bank.

Fines

Fines are imposed based on the so-called daily rate, whereby the amount of the daily rate and the number of such rates are determined. The daily rate ranges from a minimum of 1,000 CZK to a maximum of 2 million CZK. When determining the amount of the fine, the court takes into account the financial circumstances of the legal entity.

Forfeiture of Property

The penalty of forfeiture of property or other assets is imposed under the same conditions as for natural persons, that is, in accordance with the Criminal Code.

Prohibition on Business Activities

A prohibition on conducting business may be imposed for a period of 1 to 20 years. The key factor is that the criminal offense was committed in connection with the legal entity’s business activities. In other words, fraud and similar acts were part of the company’s regular business operations.

Prohibition on the Possession and Breeding of Animals

If animal cruelty occurred (for example, in an agricultural cooperative)—that is, if the criminal offense was committed directly in connection with animal husbandry—then a prohibition on raising animals may be imposed as a penalty.

Prohibition on Performing Public Contracts or Participating in Public Bidding

The ban may be imposed for a period of 1 to 20 years. Again, the condition is that the legal entity’s criminal offense was related to public contracts, such as influencing them, bribery, and similar acts.

Prohibition on receiving grants and subsidies

The ban may also be imposed for a period of 1 to 20 years.

Publication of the Judgment

This somewhat unusual penalty was included in the law primarily to protect the public. The court may impose a penalty requiring the publication of the judgment at the legal entity’s expense in the media if it concludes that the public needs to be made aware of the conviction (for example, if the company’s activities have a broad impact and affect a large number of people).

According to currently available statistics, legal entities have most frequently been prosecuted for economic and property-related crimes. As a rule, they were sentenced to a prohibition on conducting business, followed by a fine and the dissolution of the legal entity. However, in cases of dissolution, the entities in question were almost always companies that were not actively conducting business.

Plea Agreement

Even serious criminal cases can currently be resolved through this agreement. The accused legal entity agrees to waive its right to have its case heard in court, and in exchange, the prosecution agrees to ask the court for a more lenient sentence.

Effective Repentance

In the case of certain criminal offenses, a legal entity can, colloquially speaking, “save itself” (i.e., avoid criminal liability) if it voluntarily refrains from further unlawful conduct and, at the same time:

• eliminates the danger posed to an interest protected by criminal law,
• or prevents the harmful consequence,
• or remedies the harmful consequence,
• or reports the criminal offense to the public prosecutor or the police at a time when the danger to an interest protected by criminal law could still have been eliminated or the harmful consequences of the criminal offense could still have been prevented.

However, this option applies only to a limited group of criminal offenses. It cannot be applied, for example, to the acceptance of a bribe, bribery, or indirect bribery; collusion in the awarding of public contracts and in public tenders; or other criminal offenses listed in the law.

Differences from the Criminal Liability of Natural Persons

For natural persons, criminal liability ceases upon the perpetrator’s death. In contrast, however, the criminal liability of a legal entity passes to all of its legal successors. Such a situation may arise, for example, in the event of mergers or divisions. Our legal framework does not allow legal entities to escape criminal liability, for example, through a merger, in which the original legal entities cease to exist and a new entity is created at the same time. The criminal liability of the original legal entities simply passes to the newly created entity.

Summary

Under Czech law, the criminal liability of corporations is based primarily on whether the unlawful conduct of a specific natural person can be attributed to the legal entity. A company may be held liable for most criminal offenses under the Criminal Code if they were committed in its interest or in the course of its business and other statutory conditions are met. It may face a fine, a ban on conducting business, a ban on participating in public procurement or receiving subsidies, forfeiture of assets, and, in extreme cases, dissolution of the legal entity. However, a company may be exempt from liability if it proves that it made every effort that could reasonably be expected of it to prevent the commission of the criminal offense.