Conflict of interest and right of defence of a legal entity

July 2016 | EXPERT BRIEFING | LITIGATION & DISPUTE RESOLUTION

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One of the main problems that may arise in criminal proceedings in which a legal entity or company is investigated or accused is the conflict of interest that can often exist between the individual and the legal entity when preparing their defence.

In this way, and with more countries enshrining criminal liability for legal entities in their national legislation, we now find ourselves with the problem of determining who should or can represent the company during the different stages of any criminal proceedings.

It seems clear that in those cases where provisions on the criminal liability of legal entities are not applicable, the coordination of all of the defences is certainly possible (and in fact, recommended) since the defence of the individual is also the defence of the company. For this reason, the payment of the employees’ legal fees is possible as the actions have been carried out by the individuals in the performance of their corporate duties.

If, however, a legal entity may be held criminally liable, the company’s defence may be incompatible with that of any individual accused in the same criminal proceedings. The company’s criminal liability may be mitigated, among other avenues, by disclosing the offence to the authorities prior to learning that proceedings have been brought, by cooperating and providing evidence to the investigation that is new and decisive for shedding light on any criminal liability, or by reparating or reducing the damage caused by the offence prior to criminal trial. In other words, although no obligation for self-reporting is established, it could have positive results for the legal entity and must be decided on a case-by-case basis.

Therefore, in such situations, it seems reasonable that in order to avoid conflict of interest and safeguard the rights of all parties concerned, the individual whose action has given rise to the criminal liability of the legal entity – whether administrator, legal representative or employee − cannot be appointed by the company as the designated person in such proceedings.

The matter lies, then, in answering the question about which system should be used to designate the individual who should act on behalf of the legal entity in proceedings that prosecute possible criminal liability, not only in a strict representational function but also when making decisions about the most suitable defence strategy to be followed in the interests of the company.

The last Court to rule on this question was the Spanish Supreme Court in its recent rulings 154/2016 and 221/2016 of 29 February and 16 March 2016, respectively. In these rulings, the most the Spanish judicial body provides regarding conflict of interests which may arise when representation of a legal entity is entrusted to one of the individuals accused or previously investigated is to warn “Examining Magistrates and Judges” of their obligation to safeguard the right to defence of the legal entity.

Without prejudice to the Court affirming that this question cannot be solved in general, some possible formulas are offered that are used in other systems, such as: the appointment by the relevant judicial body of a public defender, which occurs when there is a conflict of interest between an incapacitated person and their legal representatives or guardian. This measure is expressly provided in the Chilean system in article 23 of ACT 20.393, which states, “If the legal representative is not recognised, the prosecutor will ask the court to appoint a public criminal defender, who will perform the task of a guardian ad litem, representing the legal entity”.

Additional formulas include assigning such responsibilities to a governing body comprising independent people together with others representing the interests of third parties affected by possible sanctions arising from illegal acts of the legal entities, and attributing the defence of the legal entity to the compliance officer or other person responsible for the entity’s internal controls.

But what is truly notable regarding these rulings is that the Spanish Supreme Court goes further and affirms that in those situations in which an effective infringement of the right to defence is evident, everything done must be annulled so that the legal entity can be represented by someone with no conflict of procedural interests.

In short, what seems undeniable is that the first criteria for interpretation of the Spanish judges regarding criminal liability of a legal entity reinforces the idea that “the set of rights that can be invoked by the legal entity (in this case, the right to a defence), arising from its procedural status as defendant, that is, with the necessary modifications, cannot be different to that held by the individual who is charged with committing a criminal act.”

Mar de Pedraza is a partner at De Pedraza Abogados, S.L.P. She can be contacted on +34 91 532 39 43 or by email: mar@depedrazaabogados.com.

Mar de Pedraza

De Pedraza Abogados, S.L.P.