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Capital punishment in the corporate world – A first in the Czech Republic

April 2014 - Two weeks ago, the Czech media reported extensively on the first-ever court ordered dissolution of a legal entity as a sanction for a corporate criminal offense. The court’s decision has already entered into effect and can now only be challenged on the basis of extraordinary legal remedies.

Czech entrepreneurs have so far tended to underestimate the risks of corporate criminal liability. Very few Czech companies have implemented properly functioning compliance programmes and only a very limited number of them routinely and thoroughly assess compliance-related risks associated with their businesses.

Perhaps this is due to the fact that these rules are perceived as being too limiting or restrictive. But their purpose is not to bind but to help companies navigate through business risks. This latest development in the application of the Corporate Criminal Liability Act provides a clear signal for companies to start examining and upgrading their own compliance programmes in order to minimise the impacts that non-compliance with the law can pose – not only to a company’s reputation but also its very existence. 

Even though the ruling had been anticipated (because the corporation in question – Lax Prag – showed signs of being involved in criminal, rather than business, activities), it nevertheless constitutes a landmark decision. The decision’s significance lies in the fact that the prosecuting authorities were willing to consider, and the court did not hesitate to impose, a sentence that carried fatal consequences for the legal entity in question – its dissolution. The decision establishes that this sanction which is clearly available under the statute, will be imposed by the courts in appropriate circumstances.

It is important to bear in mind that under the Corporate Criminal Liability Act, a legal entity may be sanctioned by its dissolution not only in cases in which a company engages solely in criminal activities, but also in cases when the company engages “predominantly” in such activities. 

The law does not contain a clear definition of “predominantly” and there is no relevant case law to assist in discerning whether this threshold has been met. Therefore, it is not yet clear or predictable how this provision will be interpreted in practice and in what cases this sanction may be applied.

Moreover, it is also important to point out that, almost two and half years since the entry into force of the Corporate Criminal Liability Act, the Public Prosecutor’s Office has not yet provided instructions for public prosecutors as to which criteria to emphasise when recommending sanctions and how to ensure a consistent approach to these issues within the public prosecution system. This fact undoubtedly increases the risk of overstraining the criminal prosecution.

Other corporations have already been sentenced to lesser sanctions under the Corporate Criminal Liability Act, mostly in the form of financial penalties. It is also of interest to point out that there has already been at least one case of a legal entity being sanctioned for the acts of one of its employees (as opposed to its executive body), where the company in question was not able to make out a defense based on the existence of an effective prevention programme.

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Kinstellar is the only independent law firm in Emerging Europe and Central Asia with a dedicated regional Compliance, Risk and Sensitive Investigations practice. Our strengths include a multi-jurisdictional approach, cross-disciplinary capabilities to handle complex matters, deep knowledge of the region’s anti-corruption laws and culture, familiarity with regional enforcement trends and proficiency in dealing with local authorities.