Penalisation of commerce—confiscation of enterprises

With the fight against economic crime, criminal law increasingly intrudes into the sphere of business. Under proposed legislation, an enterprise used to commit an offence could be confiscated.

Nearly every day, the media report on more proposed changes in the law in Poland, including criminal law. One of the proposed changes is to introduce into the Criminal Code the new approach of confiscation of an enterprise if it was used as a tool or instrumentality for committing a criminal offence, regardless of whether the enterprise belonged to the perpetrator. Moreover, at the investigation stage, if there is a suspicion that the enterprise was used to commit an offence, the existing management could be removed by appointment of involuntary administration as an interim measure.

Confiscation of enterprise

Under the proposed amendment to the Criminal Code (new Art. 44a), in the event of conviction for an offence in which the perpetrator obtained a significant financial benefit (i.e. PLN 200,000 or more), even indirectly, the court will be authorised to order confiscation of assets and property rights of an enterprise if the enterprise was used or intended for commission of the offence. Confiscation could be ordered even if the enterprise did not belong to the perpetrator. The decisive criterion for confiscation is whether the owner of the enterprise, or other authorised person, “as a result of failure to exercise the caution required under the circumstances of the specific instance foresaw or could have foreseen that the enterprise could be used for commission of the offence.”

This proposal is a response to the situation where enterprises, in the sense of organised structures intended for conducting economic activity, in reality are used for criminal purposes (money laundering, cybercrime, fraudulently obtaining public funds, VAT carousels and the like).

Risk for third parties acting in good faith

Practice suggests that the proposed solution could be an effective tool in the battle against economic crime and in recovering fraudulently obtained property in situations where the property becomes part of the assets of an enterprise belonging to commercial entities created or acquired for criminal purposes.

But controversy is generated by the possibility of applying confiscation also in a situation where a commercial entity whose enterprise was used as an instrumentality in commission of a crime acted in good faith, and its involvement in the criminal activity resulted from a failure to exercise due caution on the part of the owner of the enterprise or other authorised person. If the court found that an offence was committed using an enterprise, a third party that unintentionally and unawares was caught up in the offence could suffer far-reaching consequences.

The fact that a similar solution already exists under the Fiscal Penal Code (Art. 31 §1a) does not undercut the criticism of the new proposal, particularly as that existing provision has also been criticised for the wording concerning due caution. Like the proposed Art. 44a of the Criminal Code, Art. 31 §1a of the Fiscal Penal Code provides for the possibility of ordering the confiscation of items that were an instrumentality for commission of the offence, not belonging to the perpetrator, if “their owner or other authorised person as a result of failure to exercise the caution required under the circumstances foresaw or could have foreseen that they could be used or intended for commission of a fiscal offence.” It follows from the literal wording that foreseeing such use, or the foreseeability of such use, was the result of failure to exercise due caution. But it is hard to imagine that it could be possible to foresee something due to failure to exercise due caution (T. Grzegorczyk, commentary to Fiscal Penal Code Art. 31 §1a, Kodeks karny skarbowy. Komentarz (Fiscal Penal Code: Commentary), 4th ed., Delta Lex, consulted 16 October 2016). The illogic in the formulation of the condition of due caution makes the construction of confiscation dysfunctional (G. Łabuda, commentary to Fiscal Penal Code Art. 31 §1a in P. Kardas, Kodeks karny skarbowy. Komentarz (Fiscal Penal Code: Commentary), 2nd ed., Delta Lex, consulted 16 October 2016). This conclusion would fully apply as well to the proposed change involving confiscation of an enterprise, if adopted in its current form.

The proposed change is also imprecise, creating risks for businesses. In addition, businesses are not provided procedural guarantees enabling them to actively participate in the criminal case to defend themselves against a confiscation order.

Due caution, meaning…?

First, the notion of due caution is not defined, and the same goes for the criteria the courts will rely on to evaluate what was due caution in the circumstances of the specific case and how the business was supposed to exercise it. As the actions of criminals grow more and more refined, a serious question arises what standards businesspeople should follow in establishing and maintaining business dealings to avoid the allegation that they failed to exercise due caution and allowed their enterprise to be used as a vehicle for criminal doings.

Duly cautious, meaning…?

Second, the question arises of exactly whose behaviour should be evaluated by the criminal justice system in terms of failure to exercise due caution. The bill refers to the “owner” or “other authorised person.” But business practice shows that in the overwhelming number of cases, the owners of enterprises, in the sense of the assets and intangibles used to operate a business, are companies or partnerships. But under the principle of individual responsibility prevailing in Polish criminal law, it appears that the drafters’ intention is to assess the criterion of due caution on the part of a specific individual (natural person). If the notion of an “owner” is considered in terms of capital involvement in a company, attributing a lack of due caution could be difficult if the holdings are fragmented.

With respect to other authorised persons, it may be assumed that the drafters intend this category to cover persons serving on corporate boards entitled to act for the company. But would the notion also cover other persons empowered to act for the entity, such as employees, commercial proxies, or attorneys-in-fact?

Inability to demonstrate due caution in a criminal proceeding

Third, the proposed changes do not ensure the owner of an enterprise or other authorised persons within an enterprise the possibility of actively participating in the criminal proceeding, and thus the possibility of effectively demonstrating that they did exercise due caution. Moreover, businesses are not given the right under criminal procedure to appeal against a judgment ordering confiscation of the enterprise. If the confiscation order was unwarranted, any claims would have to be pursued in civil proceedings, under general rules (Criminal Procedure Code Art. 421).

During the criminal proceeding, the business whose enterprise is threatened with confiscation would be entitled to appoint an attorney—again, under general rules—who would be permitted to participate in the proceeding in connection with the obvious need to defend the interests of the business. The observed practice in the Polish justice system does not suggest, however, that an attorney for an entity that is not a party to the proceeding (neither the accuser nor the accused) will be in a position to effectively protect such entity’s interests. First and foremost, such attorney is not afforded the right to introduce evidence.

Safety valve

The bill assumes that confiscation of an enterprise would not be ordered automatically, but would require a decision by the court, and a key condition for applying it would be issuance of a guilty verdict. Moreover, the court would not be permitted to order confiscation if it would be incommensurate with the seriousness of the offence or the degree of guilt of the accused.

But again, doubts arise whether the proper criterion to be considered in potential waiver of this measure is the degree of guilt of the perpetrator, when the finding calling for confiscation of the enterprise is the lack of due caution on the part of the owner or other authorised person, who is not necessarily the perpetrator of the offence.

On the other hand, if it is not possible to order confiscation of property or assets of an enterprise because of factual or legal barriers, it would be possible to order confiscation of their equivalent value.

It should also be pointed out that analogous solutions concerning confiscation of an enterprise have been provided in amending the Fiscal Penal Code. Additionally, under specific regulations, this measure could also be applied to financial offences committed in connection with trading in financial instruments. This concerns for example insider trading, market manipulation, or releasing false or distorted inside information.

Involuntary administration of enterprise during criminal proceedings

The owners of an enterprise or persons authorised to manage the enterprise could lose control over the enterprise and its assets even before issuance of a guilty verdict, at the investigation stage. If during the investigation it turns out that there are grounds for finding that an enterprise served as an instrumentality for commission of an offence, and thus there is a probability that the court will order confiscation of the enterprise, the prosecutor may apply the measure of involuntary administration of the enterprise in order to maintain the condition of the enterprise and maintain items and documents that are evidence in the case.

Such administration would be carried out applying as relevant the provisions of the Civil Procedure Code governing execution through involuntary administration. Thus the person appointed as administrator would have to be a licensed restructuring adviser. But the purpose of the administration would not be execution of claims, but (at least) maintaining the status quo, which could be a serious challenge for someone from outside the company, particularly in the case of enterprises operating in specialised industries or across multiple sectors. Involuntary administration could last up to several years, until issuance of a judgment by the court of first instance—particularly considering that the enterprise could be removed from the decision-making control of the persons generally authorised to exercise such control, and previously performing managerial functions, at an early investigative stage.

Under the proposed changes, apart from managing the enterprise, the administrator would become a kind of helper to the prosecutor insofar as the prosecutor could demand and obtain information and documents concerning the operations of the enterprise, as well as documents and items that could serve as evidence in the case.

Unavoidable change and potential defence

The proposed regulations concerning confiscation of enterprises require further work. But their adoption and entry into force are nonetheless unavoidable, because of Poland’s obligation as an EU member state to implement Directive 2014/42/EU on the freezing and confiscation of instrumentalities and proceeds of crime in the European Union.

The approaching changes require reflection on how to operate a business and organise an enterprise in order to minimise the risk that it will be used as an instrumentality to commit crimes, and to minimise the risk of criminal responsibility of the company resulting from criminal activities of people connected with the company. Solutions in this respect may be found in internal compliance procedures, particularly as the legislative changes suggest that the burden of combating and minimising the risk of commission of criminal offences is shifted to the defendants, including enterprises.

Consequently, procedures ensuring proper functioning of the enterprise, tailored to suit the specific company and effectively implemented, in compliance with law, regulatory requirements, and ethics, will gain in importance. Criminal law does not provide for a legal requirement to establish compliance procedures in enterprises. Indirectly, however, the need to implement them may be deduced from certain regulations, including the proposed provisions on confiscation of enterprises. Arguments based on proper organisation and operation of the enterprise in compliance with rules of behaviour adopted by the enterprise may be persuasive in making a credible showing that due caution was maintained. The system of compliance procedures should thus gain an additional function. It will not only protect against irregularities, but having such a system in place and following it may protect the enterprise against confiscation in criminal proceedings.

Aleksandra Stępniewska, Business Crime Practice, Wardyński & Partners