Criminal liability of legal entities for corruption: proposed measures by MPs

In 2022, Ukraine initiated the process of joining the Organization for Economic Cooperation and Development (OECD). A key aspect of this process is the ratification of the Convention on Combating Bribery of Foreign Public Officials. To align Ukraine with OECD standards, a specially created working group developed several draft laws.

On July 25, 2024, People’s Deputies Serhii Ionushas, Oleksandr Korniienko, Oleksandr Kunytskyi, and others registered draft law No. 11443, which changes the approach to the liability of legal entities for corruption. On the same day, the MPs registered draft law No. 11445 on relevant amendments to the legislation on public procurement.

The Committee on Law Enforcement approved draft law No. 11443, and on October 9, MPs considered it for the first time in the session hall. However, only 214 MPs supported its adoption as a basis, leading to the draft law being returned for revision.

TI Ukraine considers these initiatives important, however, both regulations need to be improved. The current version of the draft law is likely to complicate existing procedures and introduce uncertainty into the application of the proposed norms.

Brief conclusions:

–    legal entities may face criminal liability for a limited range of cases, specifically when a natural person cannot be held criminally liable (bribery of a foreign official);

–   liability will involve the imposition of a fine and additional measures (e.g., suspension of licenses or eligibility to participate in public procurement) based on a court decision issued through a special order of criminal proceedings;

–       due to the specific wording of the legislative proposals, the effectiveness of such measures may be insignificant.

What we suggest:

–       To broaden the grounds for autonomous criminal prosecution of legal entities, include actions outlined in the articles on the seizure of property by an official and abuse of office (Articles 191 and 364 of the Criminal Code of Ukraine), as well as those pertaining to national officials;

–       Provide the opportunity to apply the introduced measures to legal successors as well;

–       Eliminate conflicts and terminological inconsistencies in the draft laws and amend other normative acts necessary for implementing the provisions of the draft law;

–       Clearly define the group of persons the legislator plans to prohibit from participating in procurement, and accurately describe this group in the amendments to the legislation on public procurement. This recommendation also applies to amendments to the Law “On Defense Procurement”.

In our analysis, we will focus on the key issues that may negatively impact the effectiveness of the proposed changes in the criminal justice system and public procurement.

How is that liability regulated now?

Currently, the Criminal Code of Ukraine contains a special section on criminal law measures that can be applied to legal entities.

The court may impose a fine, confiscate property, or liquidate a legal entity on the following grounds:

–     when an official of a legal entity commits any of the criminal offenses listed in Article 96-3 of the Criminal Code of Ukraine. For example, sabotage, sexual assault of a minor, money laundering, and providing illegal benefits;

–      if an official of a legal entity commits any criminal offenses on its behalf as defined in the articles on collaboration or terrorism;

–    when a legal entity fails to ensure that its officials take measures to prevent corruption, resulting in the commission of any criminal offenses outlined in the articles on money laundering, private-sector corruption, or active bribery.

At the same time, the court may apply such measures only when issuing a verdict that brings a natural person to criminal responsibility.

According to the current version of the Law of Ukraine “On Public Procurement,” a procuring entity must refuse a participant’s involvement in the procurement procedure and is obligated to reject that participant’s tender offer. A procuring entity must refuse a participant’s involvement in the procurement negotiation procedure if, among other reasons, information about the legal entity-participant is recorded in the Unified State Register of Persons Who Committed Corruption or Corruption-Related Offences (Register of Corrupt Officials).

What MPs suggest?

Amendments to the Criminal Code and the Criminal Procedural Code of Ukraine

In draft law No. 11443, MPs propose changes to several normative acts. The primary changes are to the Criminal Code of Ukraine (CCU) and the Criminal Procedural Code of Ukraine (CPCU), which we will examine in more detail.

The proposed changes primarily address foreign officials. This means that if a national company seeks to bribe an MP to lobby its interests in a parliamentary committee, business owners remain unaffected. However, if the recipient of the bribe is a member of the German legislature, there could be consequences.

MPs propose amendments to the CCU to establish the grounds for introducing autonomous criminal liability for legal entities. This means that such measures can be applied to a legal entity without simultaneously holding a natural person criminally liable. Below are the descriptions of these grounds, quoted directly from the draft law:

–  commission of a socially dangerous act by an authorized person, founder (participant), ultimate beneficial owner, or member of the supervisory board, on behalf of and/or in the interests of a legal entity, as specified in Articles 209, 369, and 369-2 concerning officials outlined in Article 18, part 4 of this Code;

–    failure to ensure the fulfillment of duties assigned to a legal entity and/or its authorized person by law or by the legal entity’s constituent documents to implement measures for preventing corruption, which resulted in the commission of a socially dangerous act as specified in Articles 209, 369, and 369-2 concerning officials outlined in Article 18, part 4 of this Code;

–   lack of supervision and/or control by a person authorized by law or by the constituent documents of a legal entity over the actions of individuals acting on behalf of the legal entity or its authorized persons, including members of its collegial bodies or employees, which resulted in the commission of a socially dangerous act as specified in Articles 209, 369, and 369-2 concerning officials outlined in Article 18, part 4 of this Code;

–       committing a socially dangerous act, as outlined in Articles 209, 369, and 369-2 concerning officials specified in Article 18, part 4 of this Code, in the interests of a legal entity with the knowledge of its authorized persons, founders (participants), ultimate beneficial owners, or members of the supervisory board.

In such cases, legal entities may face increased fines, additional non-financial criminal-legal measures, and special confiscation.

Additionally, temporary restrictions on a legal entity’s activities may include prohibitions on participating in public procurement, using licenses, or engaging in the privatization of state and municipal property. There may also be temporary restrictions on obtaining rights and benefits, such as disallowing the legal entity from receiving any benefits or assets from the state and the community or acquiring the status of a resident of Diia City.

Overall, the draft law proposes the autonomous criminal liability of legal entities in rather limited cases:

–    when carrying out such criminal proceedings against a legal entity separately cannot negatively affect the completeness of the pre-trial investigation and trial, or

–      in the presence of a guilty verdict of a court, a decision to grant a motion to close criminal proceedings, or a decision to grant a motion to apply medical or educational measures in relation to an authorized person who acted on behalf of or in the interests of a legal entity. This concerns those court decisions that have gained legal force;

–     upon the death of a suspect, accused, or an authorized person who acted on behalf of or in the interests of a legal entity, in relation to which the pre-trial investigation authorities have collected enough evidence to report the suspicion of committing a criminal offense but did not report such suspicion due to the death of this person;

–       if it is impossible to conduct a pre-trial investigation or trial due to the presence of other obstacles defined by the provisions of the Criminal Code of Ukraine (in particular, evasion of a pre-trial investigation or court, serious illness of a suspect or accused, or an authorized person who acted on behalf of or in the interests of a legal entity, etc.), when implementing such criminal proceedings separately in relation to a legal entity cannot negatively affect the completeness of the pre-trial investigation and trial.

MPs propose changes to the CPCU to introduce an additional measure ensuring criminal proceedings, which would limit the authority to amend the charter or conduct significant transactions involving a legal entity’s capital.

To apply such temporary restrictions, corresponding changes will need to be made to several legislative acts of Ukraine. For example, in the Subsoil Code, the law on public procurement, and others.

Amendments to the legislation on public procurement

In draft law No. 11445, lawmakers propose to clarify the existing grounds for refusing participation in the procurement procedure, specifically the entry of a legal entity into the Register of Corrupt Officials. The ban on participation in procurement will, among other grounds, apply to a legal entity that has been subject to one of the measures of a criminal law nature, as proposed in draft law No. 11443 concerning amendments to the Criminal Code of Ukraine.

The MPs plan to supplement the legislation on defense procurement with similar regulations. For the rejection of a price offer under the Law of Ukraine “On Defense Procurement,” draft law No. 11443 adds two alternative grounds for the prohibition of participation in such procurement procedures:

–       if the information about the legal entity participating in the selection is entered in the Register of Corrupt Officials, or

–       if one of the measures of a criminal legal nature under the proposed amendments to the Criminal Code of Ukraine has been applied to such a legal entity.

Also, the application of criminal law measures is provided as a reason for refusing to participate in defense procurement, but only when the legal entity is entered in the Register of Corrupt Officials.

What should be improved in both draft laws?

Given the significant and multifaceted volume of changes, let’s focus on the key updates of the CCU and the CPCU that definitely need improvement before consideration by the parliament.

Regarding amendments to the Criminal Code of Ukraine

1. Some grounds for holding a legal entity accountable may prove to be ineffective in practice

If a legal provision is overly complex or unclear, law enforcement agencies may face challenges in interpreting it correctly. It can also be misunderstood by officials of a legal entity.

In our opinion, there may be difficulties in proving a causal relationship between the “lack of supervision or control over the actions of persons acting on behalf of a legal entity or on behalf of its authorized persons, members of its collegial bodies, or employees, by a person authorized by law or the constituent documents of a legal entity,” in other words, compliance control, and bribery conducted on behalf of and in the interests of a legal entity.

In addition, the draft law proposes to apply a criminal law measure to legal entities based on the area of activity in which the legal entity has engaged in bribing officials. However, in such cases, a legal entity could potentially repurpose its business and continue its criminal activities in a different field.

2. The draft law does not address situations involving bribery of Ukrainian officials by legal entities, nor does it extend the application of measures to cases where both a legal entity and a natural person are prosecuted simultaneously.

The authors of the draft law adopt a rather narrow approach to amending the Criminal Code of Ukraine, justifying this by stating that the specified updates aim to implement recommendations for Ukraine’s participation in the Working Group of the Organization for Economic Cooperation and Development (OECD) on combating bribery in international commercial transactions. On the other hand, the legislators miss the opportunity to genuinely improve the prevention of corruption offenses committed on behalf of legal entities.

We believe that the legal regulation is incomplete, particularly because changes are made only concerning the commission of acts defined by the articles on the legalization of income, the granting of undue benefits, and the abuse of influence concerning foreign officials.

However, the primary range of illegal benefits and advantages derived from corruption that legal entities receive pertains to the articles on abuse of office and misappropriation of property (Articles 364 and 191 of the CCU), rather than those involving foreign officials. The author proposes to eliminate this restriction in an alternative draft law.

In addition, new measures of a criminal law nature—namely, temporary restrictions on the activities of a legal entity and the acquisition of rights and benefits—cannot be applied in the usual manner, meaning when a legal entity is held liable alongside a natural person (such norms currently exist in the Criminal Code of Ukraine).

At the same time, the draft law does not specify the reasons for not applying such measures in cases where criminal law measures are taken against a legal entity alongside the imposition of criminal liability on a natural person.

The proposed rules do not guarantee that legal entities will be unable to evade liability or sanctions through restructuring, merger, or acquisition.

One example is Germany, which received high marks from the OECD for revising its legislation on this issue. In particular, it is noted for the broad scope of application of the law, which holds legal successors liable for offenses committed before the start of a transaction.

In the proposed changes, to prevent the transformation of legal entities, MPs suggest an additional measure to ensure criminal proceedings—imposing restrictions. What happens if the legal entity is reorganized before the commencement of criminal proceedings? Therefore, the proposed provision should be improved by specifying that such measures can also apply to legal successors.

3. The proposed changes create new conflicts in the legislation

The authors of the draft law propose establishing specific grounds for applying special confiscation to legal entities when criminal measures are imposed on them. We find this proposal inappropriate as it conflicts with the general procedure for applying special confiscation and unreasonably narrows the grounds for its use in cases involving legal entities.

Additionally, in the proposed Article 96-6, part 2, paragraph 2 of the Criminal Code of Ukraine, it states that in cases outlined by Article 96-3, part 2 of this Code, additional non-financial criminal law measures may be applied to a legal entity. It is unclear whether only non-financial measures can be applied under the “special order” or if other measures defined by the current Article 96-6 of the Criminal Code of Ukraine are also applicable.

Under the pretext of amending the Criminal Code of Ukraine, the authors of the draft law exclude the legalization of property on behalf of a legal entity as grounds for applying criminal measures to that entity. This could be problematic, as property legalization is a common criminal offense in the economic crime sector.

Regarding amendments to the Criminal Procedural Code of Ukraine

1. The proposed legal regulation is not comprehensive

The lawmakers propose granting investigators, prosecutors, and courts the authority to appoint a free defense attorney in the cases outlined in the proposed amendments. However, they do not propose corresponding amendments to the law on free legal aid.

Additionally, no changes are proposed to the Law of Ukraine “On Compensation for Damage Caused by Illegal Actions of Bodies Conducting Operative and Investigative Activities, Pre-Trial Investigation Bodies, the Prosecutor’s Office, and the Court.”

Given that the draft law introduces a form of criminal liability for legal entities, it is necessary to establish compensation measures in cases where a legal entity is wrongfully held criminally liable.

1. The practical application of the provisions added to the CPCU may be challenging due to a lack of clarity

The authors of the draft law propose that one of the grounds for conducting criminal proceedings in a special procedure against a legal entity be “the existence of a guilty verdict from a court, a decision to close a criminal proceeding, or a decision to apply measures of a medical or educational nature, all of which must have come into force”. However, the text of this provision does not clarify to whom these court decisions should apply.

Another ground for special proceedings is “the impossibility of conducting a pre-trial investigation and/or trial due to obstacles defined by this Code, such as evasion of a pre-trial investigation or court, or the serious illness of a suspect or accused. Conducting such criminal proceedings separately against a legal entity should not negatively impact the completeness of the pre-trial investigation and trial”. However, the CPCU does not contain a separate article defining the obstacles to conducting a pre-trial investigation, and the list in this provision of the draft law is not exhaustive, which may lead to potential abuse.

Additionally, the provisions of the proposed Article 483-1, part 2 of the CPCU do not clarify in which cases the prosecutor’s resolution serves as the basis for a special procedure of criminal proceedings regarding the application of criminal law measures to a legal entity, and in which cases a court’s decision is required.

Overall, the draft law proposed for analysis contains numerous terminological inconsistencies, unjustified vocabulary, and inadequate descriptions.

Regarding amendments to procurement legislation

When describing the updated grounds for refusal to participate in procurement, the authors of draft law No. 11445 made an error. The second part of the proposed Article 96-10-1, to which they refer, prohibits a legal entity from receiving benefits or assets from the state or the community. However, the ban on participation in public procurement is mentioned in paragraph 1 of the first part of the above-mentioned article.

The necessity to specify in the Law “On Public Procurement” the grounds for refusal to participate due to the entry of a legal entity-participant in the Register of Corrupt Officials also appears questionable. In accordance with the Regulations on the Register of Corrupt Officials, this list includes information on legal entities to which criminal-legal measures have been applied due to the commission of a corruption offense. Under such conditions, there is no need to clarify the reason for refusal to participate in procurement, as the mere fact of a company being entered into the Register of Corrupt Officials already excludes the possibility of its participation in procurement.

Due to the fact that the draft law, when prohibiting the participation of a legal entity in procurement, refers only to one measure of a criminal law nature regarding the receipt of benefits or assets from the state, the question arises whether other additional (non-financial) measures should also serve as obstacles to participation in procurement.

If so, it makes no sense to refer to just one separate type of measures. And if the lawmakers do not plan to prohibit participation in procurements for all legal entities to which any criminal law measures have been applied, this is inconsistent with the prohibition of participation for all companies entered in the Register of Corrupt Officials.

Then, to differentiate legal entities based on the type of measures applied to them, and to prohibit some from participating in procurement while allowing others, it is necessary to make further amendments to the legislation on procurement. For example, to establish that the application of certain measures will not result in the company being entered into the Register of Corrupt Officials.

Measures of a criminal legal nature may not necessarily correlate with the prohibition on participating in procurement. However, if all legal entities to which such measures have been applied are entered into the Register of Corrupt Officials, they will be barred from participation. The law explicitly prohibits anyone on this list from participating in procurement activities. At the same time, the reference to this register creates a loophole for legal entities to which criminal law measures were not applied under the “corruption” articles of the Criminal Code. For example, if criminal law measures are applied in connection with money laundering, information about such a legal entity will not be entered in the Register of Corrupt Officials. Therefore, formally, the reason for refusing to participate in the procurement for this legal entity will not apply.

As a result, when finalizing the draft law, it is necessary to clearly define which group of persons the legislator plans to prohibit from participating in procurement and to accurately describe this group. This recommendation also applies to the update of the Law “On Defense Procurement” sought by the lawmakers.

Conclusions and recommendations

The draft laws submitted for consideration are significant and timely in the context of Ukraine’s anti-corruption efforts. TI Ukraine conceptually supports their adoption; however, improvements are needed in both content and terminology to ensure these regulations have a meaningful impact on social relations.

Considering this, TI Ukraine provides the following recommendations.

Regarding draft law No. 11443:

1. Specify the grounds for autonomous application of criminal law measures to legal entities. For example, clearly state that the autonomous application of criminal law measures will be due to the lack of compliance control;
2. Expand grounds for application: include additional grounds for the application of criminal law measures to legal entities that commit acts outlined in Articles 191 (seizure of other people’s property) and 364 (abuse of office) of the Criminal Code of Ukraine, particularly concerning national officials.  
3. Provide the opportunity to apply the introduced measures to legal successors as well. Also, eliminate conflicts and terminological inconsistencies in the draft laws and amend other normative acts necessary for implementing the provisions of the draft law.

Regarding draft laws in the area of public and defense procurement:

1. Clearly define the group of persons the legislator plans to prohibit from participating in procurement, and accurately describe this group in the amendments to the legislation on public procurement. This recommendation also applies to amendments to the Law “On Defense Procurement”.

We believe that, despite the undeniable importance of introducing amendments regarding the liability of legal entities, the MPs’ proposal will complicate existing procedures and create uncertainty in the application of these norms. Consequently, it will not be effective in the context of Ukrainian realities.