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Germany: Insufficient compliance organization of an insurance company can cause criminal liability risks

Dr. Christoph Louven

Dr. Christoph Louven,

Dusseldorf

Fabian Klaws

02 May 2014
As a consequence of a recent amendment to the German insurance regulatory law, which entered into effect on 2 January 2014, infringements of certain compliance provisions applicable to insurance companies in Germany can constitute a criminal offence.

According to German insurance regulatory law an insurance company must provide a proper business organization in order to secure compliance with the pertinent provisions and to control the specific risks of their business ventures. The executive board must ensure that the business organization includes an adequate risk strategy, appropriate internal rules regarding organization and processes, an effective internal controlling and monitoring system and an internal audit.

As of late, a new provision of the German insurance regulatory law states, that non-compliance with those provisions may expose the members of the executive board, responsible for the business organization, to the risk of criminal liability.

In detail violations of the provisions on proper business organization are penalized if such violations:

  • cause the insolvency or overindebtedness of the insurance company,
  • or if the insolvency or overindebtedness can only be prevented by the recourse of state aid.

Restrictively it is provided that an offence is only punishable, if the German regulatory authority (Bundesanstalt für Finanzdienstleistungsaufsicht) previously issued an enforceable order regarding infringements of the aforementioned compliance provisions. This means a member of the executive board can only be subject to criminal sanctions if he/she does not comply with the BaFin's order.

The offence can be committed intentionally or with negligence, and is penalized with imprisonment up to five years or with a fine.

At a first glance the penalization of an insufficient compliance organization seems quite excessive. As a matter of course the draft bill was facing heavy criticism at the beginning of the legislative process. However, the draft bill underwent some major changes (e.g. the requirement of a previous enforceable order by the BaFin), which resulted in a more moderate final version of the new provisions. Furthermore it is important to note that most German insurance companies, inter alia in anticipation of the requirements under the Solvency II Directive, already comply with the proper business organization as demanded in sec. 64a Act on the Supervision of Insurance Undertakings (Versicherungsaufsichtsgesetz).

With that in mind, the risks of criminal liability associated with the new provisions should be manageable. In particular the grounds for exemption of punishment will restrict the scope of application to a small number of cases.

Dr. Christoph Louven

Dr. Christoph Louven,

Dusseldorf

Fabian Klaws

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