Members of the Board of Directors and Members of the Foundation Board bear a key responsibility. As bodies of the company or foundation, they manage third-party assets and make far-reaching legal and economic decisions.
Whilst civil liability may arise even in cases of negligence, criminal law generally applies only as a last resort in cases of particularly serious breaches of duty.
The key offence in connection with misconduct by corporate bodies is breach of trust under Section 153 of the Criminal Code (“Strafgesetzbuch or StGB”).
1. Breach of trust in white-collar criminal law
Under Section 153 of the Criminal Code, a person commits breach of trust if they knowingly abuse their authority to dispose of another’s assets or to bind another party, thereby causing damage to the assets.
Put simply: although the perpetrator acts within their legal capacity, however they thereby breach their duties. A prerequisite is that they know (“Wissentlichkeit”) that their conduct is contrary to their duties.
The breach of duty may consist of either an abusive legal transaction or an negligent omission contrary to duty.
Mere harm to creditors, however, does not constitute the offence of breach of trust; such cases may, however, fulfil the elements of other criminal offences, such as defrauding of Creditors (“betrügerische Krida”).
2. The Business Judgement Rule and the abuse of authority
The offence of breach of trust is closely linked to the so-called Business Judgement Rule, which is found in the general provisions of the Law of Persons and Companies (Art. 182 PGR). The Business Judgement Rule originated in Anglo-Saxon law and is now a central principle of modern corporate governance. A body acts in accordance with its duties when it
- makes a business decision,
- acts free from conflicts of interest,
- decides on the basis of adequate information, and
- acts in the best interests of the company or foundation.
If these conditions are met, a so-called safe harbour exists: even a decision that is economically disadvantageous does not automatically lead to civil or criminal liability.
Under the law, a criminal abuse of authority occurs when a body acts in an unjustifiable manner in breach of rules designed to protect the beneficial owner’s assets.
Under the law, a criminal abuse of authority occurs when a body acts in an unjustifiable manner in breach of rules designed to protect the beneficial owner’s assets.
This prevents every economically disadvantageous decision from having criminal consequences. It is therefore a matter of economic considerations, which must also be viewed in the context of the relevant circumstances. Abuse of authority thus goes further than the Business Judgement Rule, meaning that the latter can be used as the primary standard of conduct.
3. Corporate (Foundation) Governance for Prevention
Clear corporate and foundation governance is crucial to avoiding breaches of duty and liability risks. The governance structure should correspond to the size, complexity and risk of the organisation and grow with it.
It is necessary, to consider at the time of founding, to
- define a clear scope of action for the governing bodies and
- establish guidelines for discretionary decisions, as well as
- embed the dual-control principle through joint signing authority.
In the case of larger organisations, appropriate supervisory bodies, which may be composed of beneficial owners, must be established. These supervisory bodies serve the interests of both the beneficial owners and the governing bodies, particularly as the governing bodies’ liability for risk-related decisions is reduced when approvals or instructions are issued by the (composed with beneficial owners) supervisory bodies.
To prevent the supervisory bodies from being burdened with excessive duties, their supervisory powers must, on the one hand, be limited to relevant important and high-risk decisions, and, on the other hand, a transparent decision-making system must be implemented.
It is essential that important decisions are documented in writing and in a comprehensible manner so that the basis for the decision can be demonstrated in the event of a dispute. Anyone who can provide comprehensible evidence of their intentions and the basis for their decisions is at an advantage in both criminal proceedings and parallel civil liability proceedings. In case of doubt, expert advice should be sought.
Author: Johannes Preisl
