Does the Law to Strengthen Business Integrity Go Far Enough for Europe’s Largest Economy?

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Post By: Ty Francis, Chief Advisory Officer, LRN

The German government is expected to adopt the draft “Law to Strengthen Integrity in Business” or “Gesetz zur Stärkung der Integrität in der Wirtschaft” later this year.

The law provides a new framework for penalizing companies for corporate crime in Germany and encourages proactive prevention measures. It is the first of its kind law in Germany to encourage the adoption of effective compliance management.

The move comes as German legislative bodies seek to strengthen the regulatory landscape in  response to a series of high-profile scandals involving German companies. Related discussions have highlighted the need for more robust ethics and compliance programs that haven’t yet been fully adopted as best practice in Europe’s largest economy.

The Volkswagen emissions scandal, Seimen’s massive corruption fraud, the elaborate accounting scandal at Wirecard referred to as the “Enron of Germany”, and Deutsche Bank’s money laundering allegations not only impacted the operations and reputations of those individual companies, but called into question the standards for corporate governance in Germany.

This new law hasn’t come without controversy, however. Critics have raised concerns about the law not going far enough to truly strengthen the “integrity” of business. Others challenged the perceived and additional burdens on companies already in crisis due to COVID-19. Challenges prompted changes to the draft law that have softened obligations after the government heard concerns about the potential of unequal impacts on smaller to midsize organizations. Given the challenges of the COVID-19 pandemic, the law is likely not to come into force immediately, giving companies additional time to prepare.

It’s important to note that the new law is not an attempt by Germany to establish a regulatory framework and prosecutorial landscape as broad as in the U.S., U.K., or France, but it does begin to provide harsher penalties for corporate crime and encourages the option of compliance programs that meet the rising international standards for corporate behavior.

The law does indicate companies impacted should see a reduction in sanctions with efforts to uncover or prevent wrongdoing, including the existence of a company’s compliance management and the effectiveness of its efforts.  There is little guidance, however, on what constitutes an effective program in the new law. What is clear is that compliance with the new law is a requirement of senior leadership.

Though not intended to replicate what has been done in the U.S., U.K, and France in terms of scope of the country’s regulatory regime, there are lessons from those regulatory bodies in terms of what constitute effective programs. Further, LRN’s own research and experience illustrates that programs that adhere to the spirit verus the letter of the law and embrace a values-based approach to governance experience the greatest levels of compliance and value creation through an aligned, inclusive and ethical culture.

The law isn’t expected to be enforced until roughly two years after its passing, which provides a welcomed reprieve for many affected and allowing companies the necessary time to analyze their current ethics and compliance programs and ensure proper management and the effectiveness of their efforts.

ABOUT THE AUTHOR: Ty Francis MBE is the Chief Advisory Officer at LRN where he leads LRN’s worldwide ethics & compliance and board advisory consulting business. He helps companies reinvent and rewrite codes of conduct, deliver policy simplification, provide strategic E&C program evaluations, and conducts ethics and culture assessments.

@LRN

@TyFrancis