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Fraudulent financial reporting is still a crime
The much-awaited ruling by the Joint Divisions of the Italian Supreme Court on the subject of fraudulent financial reporting and false corporate statements had the final say in the controversial case that has triggered interpretative disputes and academic differences.
By Flavia Giuliani
With judgment no. 22474, the Joint Divisions have definitively expressed their opinion on the age-old jurisprudential and academic question which had caused much confusion among criminal law scholars and financial experts on the subject of fraudulent financial reporting.
It all began with the legislative amendment of the art. 2621 of the civil code introduced by art. 9 par. 1 of law no. 69 of 27 May 2015. Compared to the previous formulation referred to in the 2002 reform, the subject of false statements in the new wording has been reduced from ‘material facts albeit subject to valuation’ to ‘material facts.’
This reduction has created a lively debate between two opposing schools of thought: those who considered the so-called offence of fraudulent accounting decriminalized (Crespi judgment of 16 June 2015) and those who believed instead that the exclusive reference to ‘material facts’, i.e., the subject of fraudulent reporting, did not rule out valuations from the scope of criminal repression, which valuations, conversely, could be defined as false if they clashed with technically or legally undisputed evaluation criteria (Giovagnoli judgment of 12 January 2016).
The fifth criminal division referred the question to the Joint Divisions, which stated that ‘the crime of fraudulent corporate statements exists with regard to representing or omitting material facts albeit subject to valuation if, given the valuation criteria established by law or generally accepted technical criteria, the perpetrator consciously deviates from these criteria without giving adequate supporting information in a way that is apt to mislead the recipients as to these corporate statements.
Legal collected the views of acknowledged experts in tax law regarding this complex subject matter at the round table “Fraudulent financial reporting: tax issues and criminal liability”, moderated by Angela Maria Scullica, editor-in-chief of Le Fonti financial publications. The debate was attended by Vincenzo José Cavallaro of Stufano Gigantino Cavallaro & Associates; Ignazio La Candia of Pirola Pennuto Zei; Gianluca Ferri of CBA law and tax firm; Luigi Isolabella of the Isolabella law firm; Carlo Baccaredda Boy of Carlo Baccaredda Boy; Giuseppe Scozzari of S&R Scozzari and Rutigliano; Riccardo Lucev of Orlando & Fornari; Piero Magri of R&P Legal, and Andrea Orabona of Orabona law firm.
Before arriving at the last ruling by the Supreme Court, how did the law on fraudulent accounting evolve?
Scozzari: Three judgments have been passed on the subject, which are bound to pose an interpretative question, which will ultimately become the central issue, i.e., whether or not accounting estimates should have any criminal relevance within the crime of fraudulent statements and, as such, punishable. In other words, the problem is to establish – in the light of the reform introduced with law no. 69/15 – whether the crime of fraudulent accounting still exists.
A first judgment, the so-called Crespi judgment (no.33774/15) embraced a line that is more consonant with the literal wording of the law (art. 2621 of the civil code) and therefore more restrictive with respect to its applicability. Against a broader background of fraudulent bankruptcy, it excluded accounting valuations from the remit of this criminal offence.
This partially abrogative interpretation of the provision in question has aroused strong criticism from some legal scholars who did not share this restrictive interpretation since, according to this doctrinal line, it would go against the will of the legislator, which is instead aimed at broadening the scope of punishment. The Crespi judgment was followed by the Giovagnoli judgment (Supreme Court law no. 890/15), which resulted in the opposite interpretation, in the belief that removing the phrase “albeit subject to valuation’ is inconsequential, and by adopting instead an interpretation based on voluntas legis, while bringing accounting estimates back into the scope of criminal penalties with the result of voiding the new reform.
Some commentators have criticized this decision because it did away with a series of constitutional principles at a stroke, placing in the hands and arbitrariness of the judge the possibility of considering certain conducts punishable, thus desecrating the principle of legality,
a key principle in our penal system. Judgment no. 6919 of 2016 has recently overturned the principle established by the previous judgment, leading back perhaps to the underlying rationale set forth by lawmakers, while entrenching the nature of legality where lawmakers aimed to prevent approximate valuations – which cannot be defined with absolute logic and objectivity – from being subjected to punishment and consequent criminal conviction.
La Candia: First off, one thing must be considered from a comparative viewpoint and taking into account the international context in which companies operate: the regime of financial crimes, and in particular that of fraudulent accounting, as contemplated in other jurisdictions seems to be less strict than in Italy. In France, imprisonment is up to 5 years; in Germany from 1 to 3, in the United Kingdom imprisonment can be up to 7 years for listed companies; in Switzerland imprisonment can reach a maximum of 3 years, while in Portugal imprisonment is up to one year. Thus, the amended Italian regime seems to be quite strict, with the exception of the United States. I wonder if the picture, as outlined, can be considered consistent with the principle of proportionality vis-à-vis criminal offences. On the one hand, penalties have been overall stiffened, while on the other hand, valuations, which permeate financial statements throughout, have been expunged from the law.
What is your opinion on the rulings issued?
Scozzari: I believe that the Crespi ruling, i.e., the first ruling, may be the one that best obeys the will of lawmakers, who wanted to simplify the regulatory framework. The elimination of the penalty thresholds set out in the 2002 reform, which causes uncertainty and varying decisions from one trial to the next, had actually watered down the crime of fraudulent accounting, leading to punishment only in extremely particular cases. I believe that the Crespi ruling gave a correct interpretation of the reform that had been advocated by our lawmakers. Of course, this interpretation may be criticised at least on one account: if, on the one hand, legislators wanted to eliminate the valuation aspects from the criminal remit, on the other hand, by introducing non-liability to punishment per 133 bis, it has envisaged a scenario of possibilities by placing the onus on the shoulders of the judges, thus considerably affecting the principle of legality within which criminal law should be able to freely operate. I believe that the Crespi judgment and law no. 6919 adhere more closely to what lawmakers had in mind and to this reform as contemplated in law 69 of 2015.
Ferri: I mainly deal with tax litigation and I have carefully read the three judgments which have come with all the innovations on the subject of fraudulent accounting, I must admit I can’t go along with the restrictive tendency of the Crespi judgment, despite it being more protective, which were recently confirmed by decision no. 6916 of 22 February. If we read judgment no. 890/16 carefully, I believe that this is the most correct interpretation. In my view and from a more substantive perspective – fraudulent accounting still occurs in the preparation of financial statements, and the reason why I think that this judgment is right is that I have to create a balance sheet according to what is laid down in the civil code and based on both EU directives and international accounting standards, while also abiding by accounting policies. If someone intentionally depart from these parameters, thus failing to prepare a balance sheet on the basis of these principles, then, I’m afraid, it means that fraudulent accounting is still quite prevalent.
La Candia: Following the latest changes, the law has in some ways become quite ‘innovative’ compared to the previous wording, with the result that the Supreme Court must necessarily conform to the literal meaning of the law. One hopes that judges won’t fall prey to the ‘anxiety’ of interpreting the law in a manner that is not in keeping with its formulation. In practical terms, valuations assume greater importance in transfer pricing. In this respect, a number of legal scholars seem to ‘refrain’ from affirming and consolidating some principles, many of which are currently being debated. This recalcitrance has caused many challenges and short-circuited supranational regulations (e.g., amicable dispute resolutions or arbitration procedures).
Orabona: In my opinion, legislators have moved closer to abrogating cases of ‘false accounting’. They have indeed proceeded to eliminate the parenthetical element ‘albeit subject to valuation’ from the text which defines fraudulent corporate communications offences, thus expunging from the same provisions any reference to punishing manipulated accounting valuations found in financial statements. I can only agree with the reading of the provisions in question recently offered by Professor Lanzi, in that it emphasizes the criminal irrelevance of ‘false accounting’ in addition to the multiple comments on the unconstitutionality underlying the application of this unfavourable stance adopted by the jurisprudence. One hopes that the Joint Divisions will ultimately uphold the irrelevance of ‘false accounting’ in all cases of erroneous statements that are in violation of either the accounting standards set forth in the civil code or international accounting standards as well as cases of erroneous statements occurred notwithstanding the same provisions of law.
Cavallaro: To determine the criminal relevance of accounting valuations, and for the purposes of establishing the criminal offence of fraudulent accounting, it is essential to indicate in the documents attached to the financial statements the accounting criteria that underlie the assets and liabilities and the actual compliance with these accounting principles. Only the violation of these criteria could give rise to punishable facts. This is the case, for example, of tax offences where, to establish the offence of fraudulent tax return, art. 4 of legislative decree 74/2000 does not take into account the incorrect classification of existing assets or liabilities, in relation to which the criteria that have actually been applied have, in any case, been indicated on the balance sheet or in other relevant documentation required for tax purposes.
Isolabella: In my opinion, the issue it is not so much all-encompassing penalties as penalties that are often not strident enough. Lawmakers feel the need to intervene in a certain area and do so in unclear terms because what leads them to deal with that specific legislative area is often heterogeneous. In other words, lawmakers are not so strong as to be able to afford clarity and yet – and there is no doubt about it – the law must necessarily be clear. Let’s analyse, however, the specific case that concerns us: what were lawmakers thinking of as they were wording this law? Did they want to bring the Supreme Court to a standstill? Could they imagine all the pages that would be written and the hours spent trying to interpret the legislative text which, as a result, were taken away from the administration of justice? I’m obviously being provocative here because of the countless hours spent understanding the law. Logic is the rationale behind law. Dialectics – as we witness on a daily basis – is an element that can stifle logic. Dialectics is fundamental, language is what brings logic to the surface, but langauge can also stymie and distort logic.
Dialectics, which is a fundamental component of law, can transform itself and assume perverse connotations. If it is true that fraudulent accounting, or rather, the concept of valuations, can fall under the category of fraud, and if it is true that the new law has focused on a specific aspect to be protected, i.e., transparency, it is foolish to think that fraudulent accounting can be extrapolated from the new punitive model. So, let’s get away from the logic that’s behind the law. While it is true that the parenthetical element ‘albeit subject to valuation’ has been done away with, it is equally true that, because that element had been added to the previous law, it may very well have had a meaning. However, it is true that the concept of material fact also includes any valuation aspects. Removing that parenthetical element – especially if we consider the principles that inspired the reform – does not have, in and of itself, a definitive or crucial meaning. It is merely a lexical fact, which risks engulfing us in dialects once again. Let’s focus instead on the role of the legislator. The concept of liability is fundamental for all of us, though our legal system is not particularly focused on the principle of duty and objective truth. What we’re talking about is fraudulent financial reporting, a law that is specifically geared towards protecting the truth, and yet – on the whole – our legal system is reluctant to deal with the duty to truth – if not sporadically. The punitive paradigm identifying objective truth as a category to be protected is in fact quite limited.
Lucev: After a decade of ineffectiveness in dealing with fraudulent financial reporting, lawmakers have brought the law back to levels of effectiveness and punitive response as a result of a clear criminal policy. This didn’t use to be the case under the 2002 law, which had relegated fraudulent accounting to being a ‘Cinderella’, which we criminal lawyers seldom encountered: with prosecution upon complaint and a shortened statute of limitations due to art. 2621 being a fine, we rarely have had to tackle defensive arguments. This positive view on the reform seems to therefore jar with the apparent 2015 legislative debacle, which fuelled the debate on this variously persistent criminal relevance of fraudulent financial reporting. There is no doubt that this is where the weak point of the reform is, because – as a result – we are faced with two equally authoritative but clashing jurisprudential theses today. This will necessarily have to reach a solution because companies and their management must carry on with their business knowing where they stand vis-à-vis the law.
I find the thesis supporting the continued criminal relevance of fraudulent accounting convincing. Yet, I also believe that leaving out a portion of text cannot be read as neglectable by legal experts. The wording ‘albeit subject to valuation’ was there yesterday and it’s gone today.
This is a fact and it’s only fair to ask whether lawmakers had meant to change something in this case, since elsewhere, e.g., art.2638 of the civil code, this phrasing is still used. A systematic reading seems to suggest that this parenthetical element is indeed meaningful. Likewise, its absence must be meaningful, too. At first sight, it seems to me that a restrictive thesis – whereby fraudulent accounting has been expunged from criminally relevant conducts – is preferable also in terms of protection of the accused. That said, we’re all waiting for some clarification from the Joint Divisions.
Baccaredda Boy: This law is dogged by the problem of understanding what is fraudulent and what is not. Fraudulent accounting cannot be found in the literal wording of this law, which is sacrosanct in our criminal law system, where the principle of legality is effective. Three legislators have intervened in this matter: in 1942, in 2002 and today. The laudable 1942 text referred to ‘facts’; the 2002 law specified ‘material facts’ to narrow down the scope, while adding the parenthetical element ‘albeit subject to valuation’, which has since been eliminated in the current legislative intervention. In my opinion, it is clear that if this parenthetical element has been eliminated, the principle of legality requires that fraudulent accounting should not be considered. One wonders then how the much-heralded repressive goal set by the 2015 law could be explained given the decriminalization of fraudulent accounting. On the other hand, the problem of fraudulent accounting aside, the rule presents some clarity issues on technical grounds, giving judges a wide margin of discretion. This aspect is plainly evident if we take into account the three legislative texts. The 1942 law was written in a simple and linear manner and was applied correctly until the ‘Mani Pulite’ era. From that moment on, that law was unreasonably expanded. Faced with the greater power wielded by magistrates, the subsequent intervention in 2002 by the Berlusconi government certainly aimed to establish significant ceilings to circumscribe the discretionary powers of the magistrates. It subsequently brought about an actual non-application of the law, also due to the presence of the prosecution on complaint condition. On balance, it seems to me that the new text today has, once again, granted dangerously and unreasonably discretionary powers to the judges.
Magri: It goes without saying that the literal wording of the law is very important. The provision ‘albeit subject to valuation’ is no longer there and, as such, valuations should no longer be important. However, what I’d like to stress is that criminal lawyers will increasingly need to rely on corporate lawyers. Teamwork will need to be put in place because criminal lawyers may well look into the existence of fraudulent accounting, but only corporate experts can ultimately ascertain the accuracy of accounting valuations. Indeed, the ruling by the Supreme Court goes back to the Crespi judgment, which groups criminally relevant facts into ten categories: falsely increased revenues, non-entered costs, false statements regarding the existence of bank accounts, recognition of invoices issued for non-existent transactions, recognition of enforceable receivables, recognition of assets derived from fictitious contract, etc.. The criminal offence of fraudulent accounting will be increasingly applied, for example in cases in which tax offences fail to constitute a criminal offence at a subjective or objective level. In such cases, false accounting then becomes a very effective and powerful tool in the hands of prosecutors.
How does this law affect the preparation of financial statements?
Cavallaro: What is, after all, a balance sheet if not a set of valuations? If the legal system attributes criminal value to the conduct of those providing false corporate statements because the choices of a number of stakeholders can depend on those statements, it is clear that punishable facts must depend on valuations – if valuations are the medium that provides such false information to third parties. Financial statements are nothing more than a set of valuations, an aggregate of assets and liabilities represented by numerical quantities behind which are valuations. If the criteria for these valuations are compliant and fully explained, it follows that no sanctionable facts can derive from valuations. However, if corporate directors want to provide false corporate statements through manipulated valuations, then these conducts must clearly be criminally relevant, thus constituting fraudulent financial reporting.
Isolabella: The old law referred to ‘material facts albeit subject to valuation’. This wording clearly incorporates – by definition – what is subject to valuation into the concept of material fact. Therefore, even if I leave out the parenthetical clause, the material fact still includes valuations. If I leave only the wording ‘material facts’, the concept of valuations is still included in it. This is indisputable as is the rationale behind the law, which – however bad it may look – still requires transparency including by punishing fraudulent accounting. It’s about going into the details of individual cases in an effort to fully understand when a specific wording can constitute a significant material fact. However, ruling out that valuations may be at the root of fraudulent statements means reducing to the bare minimum what the new law aims to protect, which is in stark contrast with what inspired the law in the first place.
Ferri: In my opinion, the law must also be interpreted a little more boradly, so that it can strike more offences and not only affect, for example, the use of fictitious invoices or the failed recognition of earnings.
Magri: In my opinion, the fundamental issue is to provide a correct interpretation of material facts and valuations. In other words, we cannot accept a thesis whereby a balance sheet is merely an aggregate of valuations. We must understand – and this is where criminal lawyers need corporate lawyers and tax lawyers – when it is a significant material fact and when it is a mere valuation.
Baccaredda Boy: While it is true that this law risks becoming meaningless in its application – because there are cases of false financial statements that are not valuation-based, these are a small minority and are less serious as a whole in the complex communications of large corporations. Thus, it is clear that the lawmaker’s hope which aimed to broaden the scope of criminal offences while exacerbating the punishment was ultimately dashed. If the intent is really to punish more, then this is absolutely antithetical to decriminalizing false accounting. Against this background, lawmakers could step in to fix the error, as they are already doing in other matters relating to corporate criminal law, instead of leaving it to the jurists to decide.
La Candia: As mentioned earlier, a much-debated issue concerns the valuation fact and the issue of transfer pricing in multinational groups. In the past – in a few cases – false accounting was inadequately debated by some courts on the assumption that transfer-pricing policies adopted by companies had not been deemed adequate or compliant with the provisions laid down by national regulations and, in some cases, the OECD.
While this is a complex and not easily solved issue, I hope that the new law will bring about a radical change in the mindset of both technical and legal experts.
Scozzari: With this reform, lawmakers aimed to create an equitable balance between what can and what cannot be considered a criminal offence. The adverb ‘consciously’ – repeated several times in the revised regulations under scrutiny here – clearly defines what dolus eventualis is: an unconscious conduct that subsequently triggers a behaviour that incorporates both consciousness and willingness. The fact that lawmakers have urged us to exercise caution because an offence must have a specific intent since the ultimate goal is to gain an advantage – and as such cannot be unintentional – I believe that it is consistent with the interpretation found in the Crespi judgment. If the jurisprudence excludes manipulated valuations, i.e., if I manipulate the existence of a loss-making checking account, or if I artificially devalue the shares of a company when I shouldn’t, then in these cases, of course I’m engaging in a conduct aimed at intentionally creating a profit while damaging specific individuals. Then, there, of course, that’s where criminal liability can be traced.
Orabona: However, I hope that the courtrooms will take on board the restrictive interpretation of the subjective element of false financial statements, since the existence of wilful misconduct in disclosing false facts or figures in financial statements is now required for establishing the same criminal offences. Therefore, the punishment of corporate management for fraudulent financial reporting should be automatically ruled out in all cases of erroneous or negligent representation within these statements of material facts, which can be attributed to the mere violation of the accounting preparation criteria required by national and EU law currently in force.
Lucev: Discussing balance sheets without including the concept of ‘valuations’ is impossible and even a criminal lawyer must take note of it. However, if the concept that ‘a balance sheet is an aggregate of valuations’ is acceptable, this does not mean that the criminalization of fraudulent financial reporting based on an unclear incriminating rule must be accepted. In particular, I find it difficult to accept that false accounting continues to constitute an offence on the basis of an incriminating rule that used to maintain that it was an offence, but it no longer does.
In the hope that the Joint Divisions untangle the matter soon, it seems to me that a reasonable approach would set out the rules of the game plainly from the outset.
If financial statements are the sum total of valuations – and punishing fraudulent statements is certainly expected – then the valuation criteria followed each time should be clarified in explanatory notes. That said, in my opinion, room for criminal penalties should apply only to cases of fraudulent deviation from stated valuation criteria.
By Carlo Baccaredda Boy – Baccaredda Boy Law Firm
The effects of the new crime of environmental pollution
The first rulings have attempted to shed light on the application of this provision, but many interpretative doubts remain, and these do not allow us to comment on the effective impact of the new legislation.
The crime of environmental pollution (art. 452 bis of the Italian penal code), introduced by law 68/2015, is one of the real innovations in the new legislation and represents the intermediate step within a broader criminal system aimed at increasing protection as it punishes offences that are halfway between the violations envisaged by the Consolidated Environmental Text and the crime of environmental disaster pursuant to article 452 quater of the penal code. Pollution is punished as such, as it damages the environment regardless of the danger to other assets.
The legal theory has shown how there has been a shift from an anthropocentric stance (i.e., the environment must be protected as it ultimately helps to protect other assets such as public health or safety) to an eco-centric view, in which the environment is worthy of being protected in its own right.
The offence under scrutiny here is punishable by imprisonment from two to six years and a fine from € 10,000 to € 100,000 anyone who illegally causes significant and measurable damage or deterioration to water, air or large swaths of soil and subsoil, ecosystems, agricultural biodiversity, flora or fauna.
This provision is marked by an indeterminacy, starkly highlighting the modern legislator’s departure from the respect of the principle of legal certainty. Indeed, a few months after the law came into effect, the Supreme Court offered a number of interpretations later taken up in the (few) subsequent judgements by the Supreme Court.
The first judgment on the new environmental crimes – the so-called Simonelli Supreme Court decision 3rd section 21 9 2016 no. 46170 – concerns precisely article 452 bis of the penal code concerning dredging operations to reclaim 2 piers in the port of La Spezia, whereby the company in charge allegedly violated the design requirements aimed at curbing the clouding of the water, which in fact had occurred and while causing a mass mollusc die-off.
The judgment clarified that the terms ‘impairment’ and ‘deterioration’ indicate substantially equivalent phenomena as they result in an alteration, i.e., a change in the original consistency of the environmental matrix. Such a change – when it comes to impairment – could be defined as a functional imbalance (as it affects normal correlated natural processes to the specificity of the environmental matter or ecosystem), while, in the case of deterioration, it is as a structural imbalance marked by a decay in their state or quality.
The difference between structural and functional imbalance does not seem to have provided great insights for the interpreter. In my view, any alteration of the environment that may not be subsumed under the category of disaster could be included in article 452 bis of the penal code, provided that – in keeping with the law – any changes for the worse are significant and measurable.
These cumulative adjectives have the advantage of reserving the heavy punishment response to the most serious cases that do not sporadically exceed the threshold values established by the laws applicable to the field (still punishable by a fine). On balance, it is difficult to define environmental damage as significant in the event of a single overshoot or in case of overshoots spaced out over time.
Environmental crimes are integrated into the penal code
By Federica Chiezzi
The environmental crime reform introduces five new types of crime. What will the consequences be? What innovations will this bring’ How can companies prevent environmental crimes. Some criminal lawyers share their views.
Over the last two years, environmental crimes have decreased by 7%, while arrests for such offences have increased by 20% as reported by Legambiente in its 2017 Ecomafia Report.
According to Legambiente, this is primarily due to law no.68 governing the reform of environmental crimes published on 28 May 2015 in Gazzetta Ufficiale. The provision incorporated into the penal code a new title dedicated to crimes against the environment (Book II Title VI bis art. 452 bis 452 terdecies) introducing, among other things, 5 new types of crime: environmental pollution; environmental disaster; dumping and trafficking of radioactive material: obstruction of inspection and reclamation failure.
The reform, which was welcomed positively by most legal experts, has finally materialized after a long wait, during which time a greater focus on environmental crimes linked to waste disposal and storage activities, to organized crime and to the emerging phenomenon of ‘eco-mafia’ was accompanied by an uncertain and incomplete regulatory system in which these crimes were punished with disproportionate penalties of dubious interpretation.
Legal has spoken to some well-known criminal lawyers who have taken stock of the main innovations introduced by the reform, while reviewing the first two years since the new provision came into effect.
A much-needed reform
“The reform responds to the repressive demands of environmental pollution phenomena, demands that have been put forward for several years now and by several parties against the backdrop of an inadequate sanctioning regulatory framework” – Carlo Baccaredda Boy of Baccaredda Boy law firm states. “This law – Carlo Baccaredda Boy continues – is expected to shore up the often-creative jurisprudential interpretation which, in the absence of ad hoc laws, had resorted to laws conceived for other crimes and contexts (e.g., ‘disastro innominato’ or atypical disaster pursuant to art. 434 of the penal code). This therefore brings to an end the inaction of lawmakers while finalizing the implementation of directive 2008/98 EC insofar as environmental criminal protection is concerned (a process already begun with legislative decree 7 July 2011 no. 121), which meant to ensure that the most serious environmental crimes are punished with effective, proportionate and dissuasive criminal sanctions. The reform also introduced a number of rewards in a bid to encourage remedial conducts vis-à-vis environmental damage or aggravation thereof. According to Giuseppe Fornari of Fornari & Associates – “With this new law on environmental crimes, criminal environmental law has been thoroughly overhauled. The legislative intervention – says Giuseppe Fornari – responds to a need for reform dictated in the first place by the need to overcome the superfetation of laws, decrees and emergency regulations which have resulted in a disorganized and cumbersome regulatory framework. In tandem with the need to disentangle the confusing jumble of provisions that regulate this subject matter, lawmakers intended to innovate the traditional fine-based punitive system by resorting to criminal offences that represent the most repressive face of the new sanctioning arsenal, while responding energetically to tackle pollution phenomena which are perceived as an increasingly serious threat by public opinion”. Luca Santa Maria of Luca Santa Maria & Associates is more critical. According to him: “the 2015 reform was a missed opportunity. After years of jurisprudential confusion due to the lack of adequate laws and the attempt by the judiciary to bridge the gap through creative interpretations. In 2015, lawmakers introduced new cases aimed at filling in these gaps – albeit clumsily – with the result that today the situation is, if anything, even more chaotic than yesterday. Thus, today an ounce of prevention is definitely worth more than a pound of cure.
Environmental pollution and environmental disaster
Among the newly introduced criminal offences, those of greatest interest are certainly environmental pollution and environmental disaster As Roberto Pisano of Pisano law firm explains – “the case of environmental pollution envisaged by art. 452 bis of the penal code punishes with imprisonment from two to six years anyone who illegally causes significant damage or deterioration to water, air, soil or subsoil (in these last two cases it is necessary that the damage or deterioration affects large or significant swaths); or to an ecosystem, biodiversity, including agricultural biodiversity, flora and fauna. In contrast, the type of environmental disaster is covered by art. 452 quater of the penal code which punishes with imprisonment from five to fifteen years anyone who illegally causes an environmental disaster that is the irreversible alteration of the equilibrium of an ecosystem; the alteration of the equilibrium of a system whose remedy would be particularly onerous or achievable only via exceptional measures; the danger to public safety as a consequence of the extent of the harmful effects or damage wrought on the public or for the number of injured or endangered individuals.
Although they seem to be two very similar regulations, they present considerable differences both in terms of scope of applicability and of sanctioning response. “The main difference between the two cases – Fornari points out – as affirmed by the Supreme Court judiciary, is the reversibility of the polluting activity: the damage or deterioration to the environment , even when significant and measurable, leads to a lesser criminal offence than environmental disaster, which eventuates when ‘an irreversible alteration of the balance of an ecosystem, or alternatively, an alteration whose elimination is particularly onerous or achievable only through exceptional measures, or still, a danger to public safety due to the seriousness of the damage or its aftermath. As is evident from the reading of the two provisions, the crime of environmental pollution is punished much less severely than that of environmental disaster. Indeed, environment pollution provides for a custodial sentence from a minimum of 2 to a maximum of 6 years and a pecuniary penalty from €10,000 to €100,000, whereas the most serious disaster is punishable by incarceration from a minimum of 5 to a maximum of 15 years.
To demonstrate how incomplete the regulatory system was before the introduction of the crime of environmental disaster, Pisano refers to the well-known Eternit case concerning a case of disaster with numerous casualties and injuries caused by the dispersion of asbestos particles not only at the work site but also in the surrounding areas.
Dumping and trafficking of highly radioactive material, obstruction of inspection and reclamation failure
As Baccaredda Boy explains – “art. 452 sexies of the penal code punishes any illicit trafficking of radioactive material with imprisonment from two to six years and with a fine from 10,000 to 50,000 euros. An increase in the penalty occurs if the fact causes a risk of environmental damage or deterioration as described by the law. An increase of up to half of the penalty is contemplated if the fact results in danger to life or public safety. Art.452 septies (obstruction of inspection) provides for a prison sentence from six months to three years for anyone denying access, obstructing or artificially changing the appearance of the site, in an attempt to elude environmental checks or work safety and hygiene, thus affecting the overall outcome. In short, any conducts aimed at impeding or hindering the outcome of the supervisory control is punishable by law, e.g., whenever sampling is hindered. The regulation provides for a severability clause (except for more serious cases): the most serious offences that could be considered according to the Supreme Court legal maxims in its report on the new law 68 of 2015 are art. 336 (violence or threat against a public official) or art. 337 of the penal code (resisting arrest). The crime of reclamation failure (art. 452 terdecies) is punishable by imprisonment from 1 to 4 years and with a fine from €20,000 to € 80,000 anyone, despite being obliged by law or by order of the judge or a public authority, fails to reclaim or restore the environment. This is a final rule aimed to ensure the effectiveness of measures geared towards repairing the damage no matter its origin”.
Statute of limitation terms
The reform has also been brought to bear on the statute of limitations with art. 1 par. 6 which, – as Pisano says – “provides for a doubling of the statute of limitations with respect to the ordinary stature of limitations for all crimes against the environment referred to in title 6 bis book II of the penal code. In this case, too, lawmakers intervened a few months after the aforementioned judgment by the Supreme Court on the Eternit case, having ordered the acquittal of the defendant due to the statute of limitations with reference to the so-called ‘disastro innominato’, or atypical disaster charge referred to in Art. 434 of the penal code as to the dispersion of asbestos fibres not only at the work site but also in the environment near the production plants, resulting in multiple deaths and injuries caused by the inhalation of these harmful asbestos fibres. especially in relation to the Casale Monferrato area. This provision, which doubles the terms, does not appear to be entirely well-received. On the one hand, because it does not seem to be necessary, especially in the light of the new framework introduced by the reform. And on the other hand, it seems to stand for the kind of legislation inspired more by a logic driven by emotions and a sense of emergency than by that of a rational balancing of the interests at stake.
Voluntary rectification
The input on the subject of voluntary rectification has also been significant. Fornari explains that, unlike in the past, lawmakers have aimed to encourage, in a broad sense, any remedial conducts on environmental matters in an effort to ensure the effectiveness of the safeguards originally introduced by EU law. “The importance the reform legislators attributed to the restorative role – Fornari states – emerges from the provision of voluntary rectification as an extenuating circumstance, a provision governed by art. 452 decies of the penal code, which applies to all new crimes including to the crime of criminal conspiracy, where the latter intends to commit crimes against the environment (as contemplated by the new art. 452 octies of the penal code) and for illicit trafficking of waste referred to in art. 260 of legislative decree no. 152/2006 (aka consolidated text on the environment). The reward system establishes that those penalties sanctioning the crimes indicated above are reduced by half to two thirds in favour of those who take steps to prevent the criminal activity from being brought to further consequences or of those who effectively ensure safety protocols, reclamation and, where possible, restoration to the original condition provided that this takes place before the opening of the first-instance proceedings.
By contrast, penalties are reduced by one third to half in the event of defendant collaboration, more specifically in cases in which the offender actually helps the police or judicial authorities in reconstructing the fact, in identifying the perpetrators or in subtracting any relevant resources to commit the crime. Clearly, to benefit from any penalty reductions derived from voluntary rectification, the collaborative commitment of the defendant must prove to be serious and genuine. Likewise, it is necessary for the defendant to provide effective help to bring about tangible – even if not decisive -results both in remedial terms and for the activities of the authority. The importance that the legislator attributes to the offence and remedial action is strictly connected with the inapplicability of asset forfeiture as established by art. 452 bis of the penal code, which otherwise is always applied if convicted or plea bargaining vis-à-vis the newly introduced types of crimes, should the defendant have actually put in place safety measures, reclaimed or restored the site in question. Similarly, less serious offences are dealt with by legislative decree no. 152/2006 (aka the Consolidated Text on the Environment), where law no. 68 establishes a mechanism for extinguishing the offence consisting in the fulfilment of the prescriptions imposed by the supervisory authorities in addition to a simultaneous payment of a sum equal to one quarter of the maximum fine established for the offence.
Businesses and prevention of environmental risks How can companies prevent environmental crime? Today, more than ever, companies have to be serious about environmental risks associated with their business- says Baccaredda Boy. Law 68/ 2015, modifying art. 25 undecis of legislative decree 231/2001, establishes severe penalties also for legal entities. If sentenced on grounds of environmental pollution or environmental disaster, a ban provided for by art. 9 of legislative decree 231/2001 is also contemplated (a ban on business activities; suspension or revocation of authorizations, licences or concessions; ban from entering into contracts with the public administration; exclusion from subsidies, loans, contributions or subsidies and possible revocation of those already granted; ban on advertising goods or services). Businesses are therefore advised to update their organizational and environmental management models as well as devising an effective system to delegate competencies in these technical areas. The supervisory board also needs to study in depth to keep abreast of any changes. “The real and most effective defence for a company and its managers – Luca Santa Maria argues – is to avoid becoming entangled in criminal proceedings. It seems obvious yet Italian businesses rarely look at criminal lawyers as useful consultants in their day-to-day management of the company and not just experts to turn to when notified of the opening of a criminal case. Our clients have understood this and have already reaped the benefits both in terms of prevention of criminal litigation, not only as far as environmental law is concerned, but also in terms of a greater effectiveness of the defence in criminal trials. An example? A large company has to deal with variously serious environmental problems almost daily (loss of process water, air monitoring campaigns with results not entirely in line with the values set by the law, actual or supposed risks of exposure of workers to toxic or carcinogenic agents in the production process). It’s a common misconception among companies to believe that they can manage these problems with the sole support of an environmental consultant or at best an administrative lawyer who liaises with auditors. And it’s a mistake because in a chaotic, complex and often inconsistent legal system such as the Italian one, even the best and most enlightened administrative technical stance runs the risk of clashing with criminal law. This is when things come to a head
before a judge in a criminal court and things become quite complicated and costly in human terms for the defendants and financially for the company.”
Interpretive questions
Although this represents an important step, some argue that the reform still has some obscure aspects. “There’s no doubt – Pisano argues – that, in the first place, the reform contains significant improvements compared to the previous framework. That being said, a number of unsatisfactory aspects cannot be underestimated. As for the statute of limitations, for example, the aforementioned provision aimed at doubling the statute of limitations yields to repressive demands well beyond the threshold of adequacy and reasonableness. Furthermore, the lawmakers’ failure to environmental misdemeanours – which would indeed benefit from being regulated more extensively in terms of statute of limitations, since they are likely to go unpunished on account of the minor nature of the offence – risks exempting them from any sort of punishment, thus running the risk of failing to protect the environment in the process.
Taking stock of the reform
Two years after its application, the reform seems to have given good results. The 2016 Ecomafia Report highlighted a slight decline in environmental crimes after the introduction of crimes against the environment in the penal code.
As Baccaredda Boy points out – “A recent report by Legambiente of 16 May 2017 – eloquently titled Integrating environmental crimes into the penal code, figures and case studies from a law that works – claims that the outcome of this reform is undoubtedly positive. Attention must certainly be paid on monitoring the practical results of the new legislation, so much so that even a parliamentary commission of inquiry on the illegal activities connected to waste disposal approved on February 23rd a report on the implementation of law 68/2015 after analysing data collected from 167 judicial offices. The report reveals that about 60% of judicial offices have already applied the law throughout Italy with a greater frequency across the islands and in the south. These included, in total, 74 criminal charges for the most part environmental pollution crimes. All this is reflected in my professional experience as I observe how the new environmental crimes begin to be challenged by the prosecutors. However, I believe that in order to comment on the real effectiveness of the new system, it is necessary to wait a few months to observe the jurisprudential evolution.
The first rulings have concerned cases of precautionary measures, but it is necessary to wait for a greater number of judgments on the merits of such cases to understand if we can solve some vexed interpretive questions and if – slogans aside – the new law has given us the tools to respond to the need for effective environmental protection, which many have called for for many years now.”
According to Pisano – “because the law came into effect on 29 May 2015 and because of its relatively short existence, it is difficult to establish a cause-and-effect relationship based on the slight decrease in environmental crimes. All the more so if you consider that, in the broader meaning of environmental crimes adopted by the Legambiente report, certain offences are not affected by the reform. And even if we extended the observation period by one more year to the present day, it would be equally premature to formulate an accurate analysis of the effectiveness of the new law in the absence of a solid statistical and legal foundation to the overall real application practice.
However, some data, albeit partial, seem to indicate a quite successful application of the new law. In fact, as regards the period going from 29 May 2015 to 31 January 2016, based on the data provided by law enforcement agencies, there were 118 charges of environmental pollution as referred to in art. 452 bis of the penal code, with 156 people being reported and 50 cases of assets forfeiture worth over 10 million euros.
By contrast, as regards the new crime of environmental disaster referred to in art. 452 quater of the penal code, in the same period, there were 30 charges with 45 individuals being reported. Until these cases of alleged environmental crimes are examined by the judicial authorities and subsequently cross-examined in compliance with the provisions of art. 111 of the Constitution, there is no doubt that such numbers point to a particularly successful application of the new law (at least during the investigation stage). According to Fornari, the introduction of the new legislation has been instrumental in the fight against environmental crimes and ecomafia – “since its introduction, we’ve experienced a trend reversal and a decrease in the number of environmental crimes and seizures. In my opinion, the emergence of this comforting data represents the effect of the tougher nature of the reform and its much-awaited deterrent effect. One of the main strengths underlying the reform is the legalization of the principle according to which anyone who commits an environmental crime commits a serious crime for which up a 15-year imprisonment sentences is contemplated. The provision of particularly tough sanctions has certainly helped combat the serious phenomenon of the eco-mafia and to protect those lands, especially in southern Italy, that have experienced very serious crimes that have all too often gone unpunished. Today those crimes may be prosecuted by law and this is certainly an important step in our legal system, especially in terms of civilization. To ensure this positive trend, however, it is necessary for the State to give adequate resources to law enforcement agencies involved in the fight against environmental crimes. Otherwise, this tug-of-way may risk being an impressive framework lacking the necessary strength to be brought to bear on the battlefield.”
Private sector corruption: will the new law crack down on it?
The new law provides for the expansion of punishable offences. There are still many questions, however, as to whether it can effectively counter an often-underestimated phenomenon, which is a serious obstacle to Italy’s development.
By Milenia Treccarichi
After numerous reprimands by the European Union, Italy finally stepped up to the plate to regulate corruption in the private sector with legislative decree no. 38 of 15 March 2017 with the aim of patterning private sector corruption after the public sector model. However, the intervention by Italian lawmakers would seem to have arisen from the risk of infringement rather than the actual awareness of the damage that this phenomenon can cause. The greatest challenges concern the prosecution on complaint by the injured party rather than automatic prosecution, which in fact limits the application of the rule. Equally disappointing was the introduction of a lacking and somewhat ineffective punitive framework contemplating a sentence from 1 to 3 years. In any case, the legislative intervention could send a strong message to raise awareness of this matter, while helping bring about a much-needed cultural change in the private sector, too.
These are some of the thoughts that were shared at the round table organized by Legal, during which comparisons with other European and non-European countries were also made. The roundtable ”New private corruption offences and the Council of Europe Convention against corruption” moderated by Angela Maria Scullica, director of Le Fonti’s financial publications, was attended by industry experts including Carlo Baccaredda Boy of Baccaredda Boy law firm, Gaia Caneschi of Orlando and Fornari, Jean-Paule Castagno of Clifford Chance, Gaia d’Urbano of Cagnola & Associates, Matteo De Luca of Krogh, Giacomo Fenoglio of Giuseppe Iannaccone & Associates, Chiara Padovani of Padovani law firm, Nicola Pietrantoni of Isolabella and Roberto Pisano of Pisano law firm.
What are the measures that have been adopted by the draft law in the fight against corruption in the private sector?
Pisano: The criminal offence of corruption in the private sector, officially introduced for the first time with law no.190 of November 2012 has virtually no application today due to its severe limitations.
For instance, cases in which corruption causes harm to a company, when in fact phenomena of private corruption often have the effect of facilitating the company in securing contracts or tenders (with consequent bonuses and career advancements for the very same managers involved). Establishing harm to the company is therefore an element which is difficult to pinpoint, and this requirement has been eliminated, therefore improving the new formulation. Another element that has always hampered its application is prosecution on complaint. As far as the law currently in force is concerned, it is necessary for the company to lodge a specific complaint except for cases introduced by law no. 190/2012 which gives the law a partial public connotation through its anticompetitive practices.
Castagno: A few years ago, we had the opportunity to assist an important foreign financial institution which was damaged by breach of trust (in the formulation of art. 2635 in the pre-Severino version) by the managing director who had granted loans to friends in violation of internal policies while receiving a bribe in exchange. Unlawful credit lines that had resulted in millions of euros in damages to the financial institution. Experience of criminal proceedings can shed some light on the formulation of the regulatory provision and interpretative points to help compare against the previous version, which have been partially superseded in the new one. For example, the range of people engaging in the crime, which is a typically Italian categorization method patterned after corporate law and which had to be brought back under subjective qualifications types to suit international framworks inspired by a different organizational model such as matrix management. Or still, the issue of harm or detriment and the company net worth related to it. To be sure, the Severino reform had limited itself to modifying the title of the law from ‘breach of trust’ to ‘private sector corruption’ but was unable to make structural changes that would establish a public-law safeguard which foregrounded fair competition as a legal asset protected by the law rather than the protection of the private interests of employers to be then identified in acts committed in violation of their duties.
Fenoglio: I happened to follow a case about breach of trust (in its pre-Severino version), which entailed prosecution only on complaint by the injured party. Our evaluation, which led the Prosecutor’s office to eventually dismiss the case, was based on the absence of any economic damage. In other words, there were a number of clues that could have proved a case of collusion between two private subjects, but it was impossible to prove the existence of pecuniary damage. On the contrary, the investigation showed how the alleged corrupt person had ended up giving the company an advantage. In my opinion, this is a case that epitomizes the first major critical aspect of the current legislation on bribery between private individuals. the existence of an economic damage (in addition to the prosecution on complaint) can be exploited to deny the very existence of the criminal offence. The other major flaw is the provision of an excessively light penalty framework.
D’Urbano: The system of admissibility, which provides for prosecution on complaint, except for the existence of damage from competition, represents one of the limits of the reform. This regime is in fact one of the main reasons why the law has remained inapplicable until now. Even so, lawmakers incorporated art.2635 bis into the civil code, thus envisaging incitement to bribery as a crime, as demended by the international community. This type of criminal offence can be prosecuted on complaint (though it would not have been possible to act otherwise given the wording of art. 2635: requiring ‘damage to competition’ for the offence committed as grounds for automatic prosecution would still have required ‘incitement to bribery’, which can be prosecuted only upon complaint). One wonders what the purpose is: on the one hand, the logic behind seemingly aims to crack down on corruption between private individuals – hence the introduction of the criminal offence of incitement to bribery – while, on the other hand, the admissibility regime remains unchanged, which is one of the reasons that has led to the inapplicability of this law.
How has the structure of the legislative decree changed compared to the previous art. 2635 of the civil code?
Padovani: The decree is a positive element in a transition from a typically asset-based model of the crime of corruption between private individuals to a typically French loyalty-based model, also adopted by many other European countries. Thus, the asset-based element no longer acts as the pivot of the structure of the crime, the event causing harm to the company being eliminated. This is replaced by the violation of duty of trust combined with the modified market competition. Nonetheless, the new type of criminal offence of corruption between private individuals seems to be excessively patterned after the traditional model of public corruption in which, given the interests entailed, a decidedly more forceful legislative intervention is expected. Where private sector corruption is concerned, this heightened expectation creates considerable friction. In my view, this aspect is a key point of the reform together with the decision not to raise the penalty threshold except for legal entities, which are now liable for a punishment from 400 to 600 shares. Moreover, a significant change has also been effected by the introduction of an injunction, including for this type of criminal offence, per art. 9 par. 2 of legislative decree 231/2001.
Caneschi: It is necessary to understand that the decree does not arise from a continuing need to criminalize certain conducts or from the awareness that the crime as conceived presents an evident disapplication in practice. The regulatory intervention originates from the need to prevent the risk of an infringement procedure brought about by the late application of the framework decision 2003/568/Gai of the Council of the European Union. To be sure, Italy has repeatedly been urged to take steps towards the fight against corrupt practices even in contexts other than the public sector. One need only reflect on the fact that the United Nations convention drawn up in Merida in 2003 or the Strasbourg convention of 1999; a series of supranational stimuli aimed at introducing new types of criminal offences and to exacerbate any penalties already in place.
Pietrantoni: For nearly twenty years, Europe has urged us to introduce the criminal offence of corruption between private individuals based on a public-sector model with the aim of protecting competition in a market that must be impervious to any form of corruption. This stance clearly needs to focus on the criminal nature of the act of corruption, which is the link constituting the pathological element interfering with market equilibrium. With the 2012 reform (law 190/2012), Italy had already taken steps via art. 2635 of the civil code, though only by adopting a private-sector model aimed at protecting the economic interests of the legal entity fallen victim to a corrupt deal. The private-sector view of the criminal offence consequently suggested prosecution on complaint by the injured party rather than automatic prosecution. This law has been scarcely applied in practice and corruption between private individuals under the current regulatory framework has not yet found an effective penalty benchmark to refer to, despite Costa intervening on art.2635 of the civil code by adhering, albeit partially and inconsistently, to the EU-based model. First of all, any reference to harm to the company has been eliminated, which is certainly a positive move towards a much-awaited public-sector connotation of the law. Attributing a criminal nature to corrupt deals (and not whether or not the act of corruption actually took place) is a welcome improvement as it mirrors the structure of the law punishing corruption in the public sector. On balance, however, the new wording of art. 2635 of the civil code is patterned only lexically after the public-sector model as the provision of prosecution on complaint remains unchanged. If the criminal offence of private-sector corruption must be aimed at preventing serious distortions of competition in a market in which everyone operates, why not allow for automatic prosecution?
De Luca: I agree with the national anti-mafia prosecutor Franco Roberti. It is necessary to overcome the dichotomy between public and private sector. The goal is to align the private sector (especially as regards ‘hybrid’ companies such as associate companies) with the public sector when it comes to corruption offences. The introduction of the art. 2635 of the civil code appears to be to an insufficient instrument to tackle offences such as widespread corruption in the private sector. The three-year conviction threshold, coupled with the provision of prosecution on complaint (excluding the case in the last paragraph of art. 2635 of the civil code, which contemplates automatic prosecution if the fact derives from an instance of distortion of competition in the acquisition of goods and services) and the looming statute of limitations appear to be elements capable of defeating Italy’s attempt to comply with the directives coming from the European Commission in the fight against corruption. Despite the changes made by legislative decree 38/2017, which extended the scope, both from a subjective and objective point of view, by introducing the case of incitement to corruption, the law seems to have gaps that mostly affect its application. In particular, with regard to admissibility of prosecution, companies will continue to manage this problem internally by removing the offender from the corporate structure.
Baccaredda Boy: Let’s not forget that private corruption was totally unknown by companies until recently. Today we are faced with an array of legislative changes aimed at expanding the scope of application of the law, with solutions that are not always consistent. For example, by applying the rule not only to commercial companies, but also to all private entities, which can be a vague and all-encompassing expression, which I find not very respectful of the precision canons of criminal law. Even downright excessive, as it could also include unincorporated bodies such as political parties, sports associations, etc.. This is definitely a change in mentality. It means spelling out clearly something that represents a yardstick for the company in an effort to change its outlook on certain issues. It’s a first major step towards change and towards an evolution in corporate awareness.
Padovani: The positive aspect is taking a stand vis-à-vis the phenomenon of private sector corruption. The flipside is that this is still perceived as an ‘emerging’ phenomenon, even though – as we all know – it’s deeply rooted in the past. The problem therefore lies in the erroneous perception of the actual criminal nature of private-sector corruption, which has always characterized the economy and business exchanges in many commercial or para-economic entities. From this perspective, I believe that the legislative decree could pave the way for criminal justice to crack down on corrupt practices. However, the problem is identifying – in terms of corporate compliance – those measures companies should adopt to avoid the danger of commodification of one’s business relationships. In my professional experience of assisting many international groups, I have found out that, as one of the fundamental and more effective rules to prevent corruption between private individuals is rotating corporate roles that are most susceptible to the risks of corruption. Let’s keep in mind that corruption is a criminal offence involving multiple individuals and, as such, the deal-making process has its roots in interindividual relationships that are built over time.
Fenoglio The decree is flawed in multiple ways, but it’s a first important step towards a much-awaited regulatory improvement. Comparatively speaking, I would like to stress how France, which used to have a regulatory structure very similar to Italy, has introduced – in keeping with EU demands – a set of laws on private sector corruption with a number of noteworthy aspects, such as the 5-year imprisonment provision, a pecuniary sanction of € 500,000 (which could double) as well as automatic prosecution. In France, anti-corruption legislation is therefore better than the Italian legislation, with statistics indicating a greater repressive effect in France than in Italy.
Padovani: Furthermore, the French law is currently included in the penal code and, for the first time, it has become a common offence and no longer an offence specific to a certain class of offender. In Italy, on the other hand, corruption between individuals is still under the umbrella of a specific class of offender. This means that, in Italy, private sector corruption is still perceived as a power crime: the power lies with the offender, though this is not the case. In fact, corruption can originate from the bottom of the corporate pyramid spurred by performance-driven goals. This law thus lacks foresight.
Castagno: Corruption is pervasive across the board and, as such, it should be incorporated into the civil code in a bid to protect the public-sector market and competition and not only to counter violations of corporate duties and trust in the private sector.
How important are corporate codes of ethics in terms of governance? How do they affect behaviours and internal dynamics?
D’Urbano: The code of ethics can play a significant role as it can help define the obligations inherent in the ‘duties of office’ and ‘duty of loyalty,’ whose violation is required by the law in order to establish a criminal offence. In this sense, the rules of conduct contained in the company’s internal policies can therefore help define what constitutes the crime.
Castagno: I believe that certain behaviours are an absolute duty of loyalty to the company, and they shouldn’t even be written down. The code of ethics only offers the philosophical framework, but it does not show employees how to behave in their day-to-day duties.
Caneschi: Because the dysfunctional regime of admissibility to prosecution has not been modified – thus leaving the power to file a lawsuit in the hands of a company – it is clear how the choice to take legal action is one of expediency. In other words, the decision to trigger the lawsuit could be hampered by the fear of further losses, including from a reputational point of view.
Castagno: In corruption cases permeated by criminal conspiracy between natural persons, it is impossible not to identify the offender and saddle the company itself with liability pursuant to art. 8 of legislative decree 231/01. This is more likely the case with cybercrimes where it is more difficult to identify the offender.
Caneschi: Against this background, there’s also the extension of penalties for the corporate body, which in my opinion is a welcome step forward. Art. 6 of legislative decree 38/2017 introduces important changes to art. 25 ter of decree 231/2001. In addition to the extension of the pecuniary sanction quotas, the application of a ban on corporate activities is also contemplated. In fact, it must not be forgotten that decree 231 on criminal liability of legal persons was specifically established to bring into effect an international convention aimed at preventing and criminalizing corruption. Thus, the fact that the new regulatory text may to be at least a step towards adopting an adequate organizational model is certainly a positive aspect. Similarly, the choice of extending the punishment from commercial companies to any private entity seems to follow this direction and, though the definition may be ambiguous, it shows the willingness to extend the scope of application of the law to include bodies other than companies and consortia.
Fenoglio: The existence of a liability of the entity that is independent of the identification of the person who committed the crime seems conceptually inexplicable to me. In other words, I believe that the current art. 8 of legislative decree 231/2001 clearly contradicts our fundamental principles, including first and foremost, art. 27 of the Constitution. I was personally involved in a number of well-known lawsuits where the entity was unreasonably sentenced without first identifying the offender. Ironically, these cases often meant that the offender who committed the crime had full knowledge of the company’s financial state. Therefore, in such cases, placing the liability on the company without previously identifying the offender is unacceptable.
D’Urbano: The reason for integrating the act of ‘instigation’ with art. 2635 is unclear since the offence of inciting corruption between private individuals has already been introduced. Indeed, incorporating this provision appears to be unnecessary. If instigation has taken place to reach the corrupt deal, the criminal offence committed will still hold true and the act of instigation will be absorbed by the collusive agreement between the parties. If, however, the act of instigation was rejected, the criminal offence to be applied should instead be that of inciting corruption referred to in art. 2635 bis.
What are the contradictions of the reform when all is said and done?
Baccaredda Boy: I’d like to stress that this is about a change in the legal culture and mindset. So far, the introduction of this law into our legal system has had few applications and very few trials concerning this type of offence. While efforts have increasingly been made to align private sector corruption with public sector corruption, it is equally true that a direct equivalence has not been achieved yet. For example, the law punishes corruption between private individuals only if it occurred previously. No mention is made as to any subsequent acts of corruption or rewards deriving from them gained by the corporate offender.
Pisano: My experience gained in the field of international corruption proceedings is that even where there have been episodes of private corruption following a complaint by the company, there was no real incentive for the investigators to look into the offence of private corruption, given the mild sanctions regime for these offences. Companies occasionally do not need to investigate the relationship between their manager and any intermediary, nor the actual nature of the activity carried out by the latter, since obtaining the contract ultimately benefits the company itself. As a rule, in these cases, once the contract has been won – sometimes through corruption – the intermediary will return a portion of its brokerage fee to the manager in question. It’s fair then to wonder whether the new wording of the corruption law is well-suited to counter such widespread offences, especially when there’s no evidence of the manager’s criminal involvement in international corruption.
Padovani: From a paradigm perspective of the structure of the crime, the introduction of the role of the intermediary and instigator (art. 2635 bis of the civil code) represents an interesting fact. The focus on this role, which, as we know, is virtually always present in all corruption trials, sends an important message. On the other hand, failing to recognize this type of offence as detrimental to market competition is problematic, as this would have been the real innovation that would have led to harmonizing the methods of repressing corruption between private individuals with those present in other states. Overall, it is a failed reform, though it offers a glimmer of hope for cultural as well as legislative progress.
Pietrantoni: Private sector corruption in some Italian companies is a tried and tested operating method which seeks to drastically reduce fair competition between companies. The current regulatory system does not seem to be well-equipped to combat this worrying phenomenon, which many consider to be less serious or harmful than corruption in the public sector.
Padovani: One of the salient aspects of the framework agreement is that it is also open to non-member states. As a matter of fact, the United States signed it, too, in October 2000, though it never ratified it. In reality, the US has had its own Foreign Corrupt Practices Act since 1977, a federal law passed by Congress prohibiting US companies and commercial businesses from bribing foreign officials to undertake or maintain business relations. It’s a strict law that punishes companies with a two-million-dollar fine and the offenders – whether senior managers, employees or shareholders – with a one-hundred-thousand-dollar fine and a conviction sentence ranging from one to five years. However, since its enactment over thirty years ago, only 20 cases have been reported, and of these only five have led to a formulation of charges, the most serious of which was a one-year prison sentence, later suspended.
Baccaredda Boy: In many respects, the application of this rule is quite challenging. Criminal proceedings must be initiated by the company if there are grounds for suspicion concerning senior management. This is a mechanism that is even more unwieldy given the potential damage to the company’s corporate image. And this is precisely why, in terms of corporate image, the model 231 approach is bound to be increasingly adopted, especially after the introduction of the new law.
Caneschi: It is true that much more could have been done and much better. It is equally true that it’s always disappointing when reforms often don’t stem from the awareness of a criminal phenomenon and the impact it has on the entire economic system, but from the need to avoid disciplinary measures or constant prodding by the EU. The improvements made by the recent reform (expansion of subjects and conducts involved including instigating conducts and the enhancement of the sanctions regime) does not offset the serious risk of ineffectiveness primarily caused by prosecution on complaint.
Fenoglio: The reform is not the result of a spontaneous need of our country, but merely the result of obligations imposed by the EU. In any case, regardless of the reasons for which a legislative change is made, what matters is the introduction of better provisions than past ones, which will hopefully be immediately enforceable and effective.
Castagno: it seems to me that the problem can be summed up as follows: limiting the 3-year sentence could actually produce just the opposite effect, since the rule must have a preventive role. If three years is the maximum penalty, it means that the offender will hardly try to avoid committing a crime, given the statute of limitations. On the other hand, the administrative penalty imposed on the entity don’t expire. Hence the paradox whereby companies are saddled with any and all liability incurred by the offender (natural person). This short-circuits the system and shows, once again, our lawmakers are unable to fully appreciate how the corporate world works.
De Luca: As the Greco report indicates, Italian lawmakers did not fully take on board the contents of the framework decision 2003/568/ Gai, thus effectively creating an inapplicable and scarcely effective law. As ANAC director, Raffaele Cantone, reiterated on multiple occasions, an effective preventive strategy must necessarily be combined with transparent mechanisms that can highlight any conflicts of interest. Only in this way will we be able to safeguard the rules of fair competition and free market.
Edited by Carlo Baccaredda Boy – Baccaredda Boy Law Firm
The importance of the role of supervisory boards in financial markets
Our legal system guarantees the correct exercise of the supervisory functions in the financial markets through a number of regulations which, while traditionally viewed as a way of guarding “optimal relations between the controlled body and the controlling body”, also ensure indirectly the correct functioning of the market. The rules that underlie this defence are based on art. 2638 of the Italian civil code and two cases in the T.U.F. (Consolidated Text on Finance), art. 170 bis and art. 187 quinquiesdecies which specifically protect the activities of Consob and the Bank of Italy. The first provision laid down in the T.U.F. provides for a common offence causing an obstruction identical to the crime of the civil code, whereas the second provision involves an administrative offence based on the timeline of the conduct (i.e., not complying with the required deadlines or delaying the duties Consob and Bank of Italy must carry out). The provisions set out in the T.U.F. are secondary circumstances (as these are applicable “outside those cases provided for by art. 2638 of the Italian civil code”) and this may be the reason why they have been supplanted by the virtually all-encompassing judicial application of the much more serious art. 2638 of the Italian civil code which, not surprisingly, has been defined by the jurisprudence as an “omnivore crime” due to the absolutely generic notion of “obstacle”. Art. 2638 of the Italian civil code (so-called “cumulative mixed law”) contemplates two autonomous types of crime that have the peculiarity of being punished with the same penalty (imprisonment from 1 to 4 years). In the first paragraph, providing false information to the supervisory authority is punished.
It is a dangerous offence and a ‘crime of result’ compounded by the exposure of untrue material facts and – by the concealment by fraudulent means – of facts that are relevant to the company’s assets and liabilities, with the aim of obstructing oversight. The second paragraph punishes the creation of an effective obstacle to the supervisory function through omissive or commissive wrongful conduct (executed offence). The “obstacle” is thus transferred from the realm of intentions (i.e., from the object of wilful conduct of the subject acting in the first paragraph) to the realm of facts and therefore becomes the event on which the existence of the crime referred to in the second paragraph depends. Not any disobedience or impropriety committed by the supervised entity constitutes a conduct that effectively leads to risk or damages the exercise of the supervisory function. Hence, based on the offence principle, it is necessary that the offence committed by the defendant has been aimed at posing or has posed an effective and significant obstacle to the institutional functions of the public supervisory authorities. One of the interpretative problems arising from it was whether it is possible to recognize some potential “interference” between the two offences. For example, I have witnessed trials in which the prosecution strategically challenged both offences referred to in art. 2638 of the Italian civil code, leaving the judicial body with the onus of placing the factual allegation under the umbrella of either dangerous offence or damage and of resolving any conflict between the cases. In this regard, the decision of the Supreme Court of Appeal (5th division, no. 6884/2015) cannot be considered acceptable. Indeed, in a case in which information to the supervisory authority had been omitted, the Court considered it a formal concurrence of crimes, pursuant to the provisions of penal code art. 81 paragraph 1 (and, as such, with a possible increase of up to three times the penalty to be imposed). By contrast, the reasoning of the Court of Siena seems to be more correct in relation to the Monte dei Paschi case which – when faced with fraudulent concealment leading to the event, that is, obstruction to the supervisory function, “which represents the maximum damage caused by the incriminating fact to the legal asset” – decided to hold the defendant liable solely on the grounds referred to in paragraph 2 of art. 2638 of the Italian civil code deemed to be thoroughly intentional harmful conduct.
MARKET ABUSE
Italy gets in line with the EU
Tougher penalties and greater powers to Consob. These are the main innovations of the draft decree which aims to rationalize the system of financial crimes while ensuring transparency in negotiations
By Federica Chiezzi
On 16 May the Council of Ministers approved, as a preliminary consideration, the new decree on market abuse. The decree adapted to the provisions of EU regulation no. 596/2014 of the European Parliament and of the Council, which harmonized the regulatory framework, known as Market Abuse Regulation (Mar) by introducing market abuse preventive measures as indicated in the press release “including those illicit behaviours already set out in Directive 2003/6/EC, such as insider dealing and market manipulation. Some of the new innovations introduced include a wider scope of application; a series of exemptions of legitimate conducts and accepted market practices; the extension of cases of market manipulation including trade processing services carried out electronically; the notion of insider dealing and the obligation of its disclosure to the public by the issuers. Furthermore, the decree has designated Consob as the competent administrative authority to ensure the correct application of the regulation by extending its powers. The provision has been positively received by legal experts because it can ensure full transparency in negotiations at a time of economic crisis, which has facilitated financial crimes and abuses. To help shed some light on the main innovations introduced by the decree, on the implementation difficulties, on the trend in financial crimes and on the latest jurisprudential rulings, we spoke to Carlo Baccaredda Boy of Baccaredda Boy law firm; Dario Bolognesi of Bolognesi law firm, Federico Consulich of Giannangeli Consulich Associates; Giuseppe Iannaccone of Giuseppe Iannaccone and Associates; Francesco Isolabella and Enrico Maria Canzi of Isolabella law firm; Chiara Padovani of Padovani law firm and Roberto Pisano of Pisano law firm.
Innovations introduced by the decree
The approval of the new decree on market abuse is an important step in the fight against financial crimes. According to Federico Consulich of Giannangeli Consulich Associates: “the decree would make it possible to remedy a series of discrepancies concerning the protection of the financial market that have arisen between Italian national law and EU law, after the so-called Mad II directive no. 2014/50 EU and relating EU registered Mar regulation no. 596/2014 came into effect. With these legislative acts, EU lawmakers have regulated a number of aspects that had been neglected by the Italian legal system.” Giuseppe Iannaccone of Giuseppe Iannaccone and Associates considers the attempt by European legislators to rationalize the system of financial crimes to be “extremely topical” “by introducing rules that – at least in their intentions – aim to protect market transparency”. As for the most relevant innovations in criminal matters introduced by the decree, Carlo Baccaredda Boy of Baccaredda Boy law firm points to “the new and more extensive notion of ‘financial instrument’ per art. 108 of the T.U.F. which will help broaden the scope of application of the law. To this end, this will include those financial instruments available on the MTF multilateral trading facility; the OTF organized trading facility; transactions carried out on the aforementioned financial instruments outside trading venues or unlisted financial instruments on trading venues, whose prices depend on instruments admitted to such venues or ultimately affect them. Lastly, even benchmark manipulation offences are specifically included in the law. In this respect, Consob has been added as the competent administrative authority with adequate supervisory and sanctioning powers. The decree – Dario Bolognesi of Bolognesi law firm goes on to say – “also repeals article 181 TF referring to the notion of insider dealing to Reg. 596/14/EU, which also includes any intermediate stages of a prolonged process. This last amendment is relevant for the drafting of legal models per legislative decree no. 231/2001 since the correct management of information that is relevant to the market is instrumental in preventing market abuse offences. Finally, the decree only partially solves the problem of the violation of the ne bis in idem principle by establishing that the judicial authority or Consob take into account any penalties already inflicted when imposing and executing penalties.” Chiara Padovani of Padovani law firm is also vocal about this latter aspect when considering the choice to save the ‘dual-track’ system: ”it’s the main limitation of this decree because, even though the will to coordinate the penalties to reduce their sanctioning power is there, there’s still a risk of violating the prohibition of the dual-track sanctioning system as dictated by EU law. However, Padovani finds art.4 of particular interest, which outlines a dual approach to crimes provided for in art. 184 and 185 of the T.U.F..” As far as insider dealing is concerned”, Padovani explains “the framework proposes, on the one hand, to count among the sanctionable conducts those relating to OTF financial instruments, financial derivatives and emission quotas, while excluding, on the other hand, any criminal liability for disclosing inside information as part of market surveys. As for the crime of market manipulation, too, the innovation the government intends to introduce is, on the one hand, extending the scope of application so as to align it with administrative sanctions, while, on the other hand, establishing that whoever acted on behalf of someone else or for legitimate reasons and compliant with accepted market practices may not be liable for punishment.
Roberto Pisano of Pisano law firm also stresses how important this attempt by Italian lawmakers was to regulate -albeit partially – the principle of the dual-track sanctioning system currently in force in order to tackle market abuse. “It is well known fact”, Pisano explains “that the Italian law in question has been the subject of a fundamental sentence condemning Italy by the European Court of Human Rights on 4 March 2014 in the Grande Stevens v. Italy case for violating the so-called ne bis in idem principle. This judgment was followed on 20 March 2018 – albeit with subsequent oscillations by the ECHR – two decisions by the EU Court of Justice concerning Italian legislation on market abuse, which essentially established that the accrual of criminal and administrative sanctions can be provided if ‘strictly necessary’( to achieve the goal of protecting the integrity of the financial markets and the public’s trust in financial instruments), but that the Italian laws applicable to this area ‘exceed’ what is deemed ‘strictly necessary’ (to achieve the aforementioned goal), The draft legislative decree, implementing delegated law no. 163/2017, is expected to include an amendment to art. 187 terdecies of the Consolidated Law on Finance (TUF) in a bid to offset any excessive sanctions deriving from the aforementioned dual-track system. In particular, by requesting that, upon imposing any sanction within their remit, the judicial authority or Consob ‘take into account’ any punitive measures previously adopted and that the execution of criminal or administrative sanctions of the same nature be limited to the’ part exceeding’ the punishment already inflicted.”
Insider dealing
By insider dealing (Art. 181 Tuf) we mean specific and detailed information that directly or indirectly concerns one or more issuers of financial instruments (corporate information) or one or more financial instruments (market information), which, if made public, could greatly
affect the prices of these financial instruments (price sensitivity). “This information”, Carlo Baccaredda Boy explains “if used or communicated unlawfully by ‘anyone’ represents not only
the offence of ‘insider trading’ laid down in art. 184 of the T.U.F. and punished with imprisonment from 1 to 6 years and with a fine from 20,000 to € 3,000.000, but also the administrative offence laid down in art. 187 bis T.U.F (the so-called dual-track system introduced in 2005 and implementing Directive 2003/88/EC”.
“Insider information”, Dario Bolognesi goes on to say “is price-sensitive, non-public and can be traced back to the issuers. It can significantly affect the price of financial instruments on the market thanks to the expectation it can potentially arouse among the recipients once it has been disclosed. The law sanctions any profit-oriented exploitation of such information by both primary and secondary insiders as it prevents transparency on the market. To protect investors, the decree of 16/05/ 2018 has modified the provision referred to in par. 1 letter B of article 184 T.F., allowing the disclosing market participant to communicate insider information as part of market surveys carried out under the conditions envisaged by Reg. 59 6/14/EU. Compliance with these provisions implies presumption of legitimacy of the conduct”.
Market manipulation
As regards cases referred to in art. 185 T.U.F., and following the rationale of avoiding that the trust that savers place in the market is undermined by conducts aimed at affecting the regular dynamics of price formation of financial instruments, lawmakers have brought under scrutiny both information manipulation and operational manipulation as Chiara Padovani points out. “The former consists in the dissemination of false information (broadly speaking this also includes current market rumours and reports), whereas the latter concerns fictitious operations simulating a certain market trend or security that does not reflect economic reality. Conducts that may translate into a crime or a fine depending on the type of financial instrument used. As mentioned earlier, the draft legislative decree recently approved by the government aims to expand the scope of application of these offences.”
Stock Manipulation
Stock manipulation is a crime dating back to the very birth of trading on organized markets. In other words, it’s the malicious disruption, or rigging, of the mechanisms underlying the formation of prices of goods or services exchanged between economic operators. “Today our legal system provides for two main types of stock manipulation that are criminally relevant: Art. 2637 of the Italian civil code which aims to suppress any insider dealing affecting unlisted financial instruments and the so-called stock manipulation (which aims to shake investor confidence in the economic stability of a bank or a banking group) and art. 185 T.U.F. which punishes price-rigging of listed financial instruments.” Federico Consulich says before carrying on:”This latter type of offence is also punished administratively by art. 87 ter T.U.F., which substantially mirrors the offence punished by art. 185 (the only real difference being the fact that this offence lies outside the scope of criminal law and, as such, may lead back to culpable liability, which, however, constitute jurisprudential considerations), thus triggering the notorious problem of violating the ne bis in idem principle. Where natural persons are concerned, criminal forfeiture (art.187) and administrative forfeiture (art. 187 sexies) complete the picture, in both cases also by equivalent measures. As for the crime of market manipulation, a legal person in whose interest or advantage a natural person has acted is liable in accordance with legislative decree 231/2001. The liability of entities is exceptionally provided for by art. 187 quinquies, including as regards the administrative offence of market manipulation. Additionally, there are two wholly unenforced offences that still survive within the folds of the penal code, sorts of jurisprudential fossils: art. 501, which punishes the fraudulent rise and fall of prices on the money markets or stock exchanges and art. 501 bis which proscribes any disruptive practices on prices of goods and commodities.”
Obstacles to reform
Reforming market abuse crimes has been a long and tortuous path riddled with various setbacks along the way. According to Padovani: “We can’t see the light at the end of the tunnel just yet. At least not until Italy’s adjustment plan to the Mar regulation is not completed and I wouldn’t rule out even after that.” Padovani believes that the main factor that has hampered the implementation of EU provisions in this sector can be traced back in the communication challenges (due to linguistic inhomogeneity) between the EU legal system and the systems in individual member states, which has hindered understanding among Italian lawmakers in their effort to harmonize Italian laws with EU laws. “In particular”, Padovani adds “when faced with the request by the European Union to impose criminal penalties for market abuse offences relating to every type of financial instrument as well as benchmark alterations, complying with the European framework could have at first been hampered by the Italy’s belief – possibly on account of the decisions by the Strasbourg Court – that it had to relinquish its firmly embedded dual-track system. According to Pisano: “The solution adopted by the aforementioned draft legislative decree with respect to the problem of sanctioning excesses deriving from the accrual of criminal and administrative penalties (and proceedings) has been described by the technical report on the decree as a ‘minimal’ solution pending further investigations on the correct application of the principles contained in the aforementioned judgments of the EU Court of Justice of 20 March 2018 concerning the ne bis in idem principle. The same report foreshadows the possibility of a new legislative delegation with a view to a broader review of the relationship between criminal and administrative proceedings, which may lead to a more complete assessment of the scope of the principles endorsed by the aforementioned judgments of the CJEU”. “Consob itself”, Pisano goes on to say “expressed strong reservations on the draft decree, placing emphasis on the reasonableness and distorting effects that would characterize some aspects of the legislation. To sum up, the proposed solution cannot truly represent a satisfactory and definitive balance nor, in particular, a complete and correct transposition into Italian law of binding principles governing the prohibition of bis in idem as ruled by the ECHR and CJEU”.
THE ROLE OF CONSOB
The decree also covers the role of Consob, which, as Giuseppe Iannaccone states, “has been specifically designated as the competent administrative authority to ensure the correct application of the regulation, it being equipped with more far-reaching sanctioning powers.” Even before the introduction of the Mar and the preparation of the preliminary draft legislative decree, Consob had already long been given a central role in tackling market abuse. Consulich is positive about this. “Just think that in November 2005, Consob provided a breakdown of market manipulation offences. This has since been considered the essential go-to template by business operators, ex ante, and by prosecutors and judges, ex post, to identify manipulative practices, since art. 185 had not adequately defined what constituted a criminally relevant behaviour. Furthermore, in the light of art. 187 ter par. 4 T.U.F, since 2005, Consob has been empowered by the legislator to exempt from administrative liability (and therefore criminal liability) certain market conducts as long as they complied with practices allowed by Consob.”
Financial crimes and legislative decree 231
A significant role in preventing financial crimes is played by legislative decree 231 of 8 June 2001 which, as Iannaccone points out, introduced the principle of administrative liability of legal persons following crimes committed in the interest of ‘entity by subjects placed at the top of the corporate hierarchy or subordinated to the supervisory control of others. “In these cases,” Iannaccone explains “proving the adoption of an internal compliance geared towards preventing crimes, which has subsequently been tampered with by an offender, is the only way that allows the company to be exempted from property liability. For this reason, to avoid incurring fines that might jeopardize the very existence of the entity, companies must be equipped with an internal organizational model whose correct functioning must be entrusted to a supervisory body with independent powers.
Disputes trends
“Based on my professional experience” Carlo Baccaredda Boy says, “the financial crime (in its broader sense) I have found myself to deal with more frequently in recent years is the crime of obstructing the exercise of the functions of the public supervisory authorities. One of the reasons behind the great frequency of such disputes can be found in the economic and financial crisis that has affected the world market in the last decade. Following numerous scandals, public supervisory authority checks have consequently increased and the vetting criteria with which some corporate banking operations were interpreted have become increasingly more stringent. If, on the one hand, the greater incisiveness of the checks put in place by the supervisory authority certainly has the advantage of activating a virtuous circle aimed at promoting market equilibrium, on the other hand, there’s a risk of hyper-application occurrences of the case referred to in art. 2638 of the civil code by leveraging the well-known aspects of legal indeterminacy.” According to Bolognese, with law no. 62/2005, the choice of the state legislator has been to provide greater protection of the financial market through criminal law: “The case of self-laundering was subsequently incorporated into the criminal code before adopting legislative decree no. 21/2018 covering counterfeiting offences and improper use of credit cards and charge cards. These are complex crimes marked by low visibility as they camouflage behind strictly technical economic processes. In particular, the three most frequently reported crimes include money laundering, insider trading and market manipulation. A statistical analysis has revealed that the number of complaints from banks is negligible possibly due to the damage wrought to the financial operator’s image following criminal proceedings. According to Pisano: “the most frequent disputes certainly concern the crimes of money laundering and self-laundering also in connection with predicate offences of a fiscal and bankruptcy nature and potentially giving rise to administrative liability of entities per legislative decree no. 231/2001. This is due to the fact that, on the one hand, the tendency to underestimate the negative social value connected to money laundering and self-laundering crimes has not yet been completely overcome. On the other hand – as it was abundantly foreseeable – the introduction of the case of self-laundering and the progressive weakening of the requirement aimed at verifying the origin of the offence have led to a significant expansion of the area of what may be criminally relevant and to a consequent increase in complaints.”
Edited by Carlo Baccaredda Boy
Self-laundering and entity liability
Self-laundering in legislative decree 231/01. The lingering doubts left by the legal theory and the jurisprudential vacuum.
Three years after the legislation on self-laundering came into effect nationally, the interpretative issues to be resolved concerning the inclusion of the case in question in the catalogue of so-called predicate offences per legislative decree 231/01 for the liability of entities are still quite numerous.
Following a long legislative process on money laundering, art. 3 of Law 15.12.2014, no. 186 has introduced art. 648 ter.1 of the Italian penal code.
With this legislative intervention, lawmakers have proposed to do away with the principle of the so-called “Self-laundering privilege”, which prevented the perpetrator or accessory in money-laundering offences from being indicted.
However, on the basis of the indications received from the Lower House Justice Committee, during the consultation session, Parliament has preferred not to proceed with the radical elimination of the non-punishable clause referred to in art. 648bis and 648ter of the penal code in order not to risk paving the way for the indictment of conducts ascribable to the category of subsequent acts not subject to punishment.
In essence, the introduction of art. 648 ter.1 is the result of a compromise which, in fact, has only curtailed the “self-laundering privilege”, while continuing to exclude penalties in the event of “mere use or personal enjoyment ” (In paragraph 4) and requesting the existence of a concrete obstacle to the identification of the origin of the ill-gotten gains (in paragraph 1).
The result of this choice lacks clarity in its formulation and undoubtedly leaves many interpretative problems to be resolved in the legal theory and jurisprudence. In its effort to combat the economics of illegality, Law 186/14 also modified the system of legislative decree 231/01, by incorporating art. 648 ter.1 of the criminal code into the catalogue of the so-called predicate offences.
This inclusion, made through the simple reference to art. 648ter.1 in the body of art. 25-octies, has aroused some perplexity. Let’s try to give some examples.
First, it is not clear how the modal clause of art. 648 ter.1 co. 1 (whereby the conduct must be held “in such a way as to effectively hinder the identification “of the criminal origin of assets or other economic benefits) will translate within the scope of the liability of legal persons, especially vis-à-vis larger businesses which – as is the case with multinational companies – engage in highly complex financial transactions on a daily basis.
The first rulings on this subject (all relating to individuals) offer some food for thought while seeking to shed some light on the legislative intent; Cass. Pen.., 2nd division, 28.07.2016 no. 33074, for example, states that by using the adverb effectively (‘concretamente’ in Italian) “the legislator requires […] that the conduct be marked by a particular capacity for concealment [that is to say] any kind of method which is however always aimed at concealing the illegal origin of the profit-making money or assets“. Pending specific judgments on the subject, the question remains open. The hope is that the jurisprudence will not agree to repeal interpretations of the adverb “concretamente”.
Furthermore, a second critical aspect can be seen in the interpretation given to art. 648 ter.1, co. 4 (non-punishable “for mere use or personal enjoyment”), if self-laundering is carried out for the benefit of an entity. In fact – as can be seen in the legal theory – assuming a scenario in which the proceeds of the offence were merely used or intended for the “personal enjoyment” of the entity is very complex, if not impossible, the clause being designed for cases relating to individuals.
Finally, the potential violation of the principle of legal certainty with regard to entity liability appears problematic.
In fact, the question arises whether the entity’s responsibility for self-laundering should be limited to cases in which the basic crime (from which assets or other benefits derives) is already included in the catalogue of legislative decree 231/01 or also occurs in the presence of different crimes (such as, for example, tax crimes). This aspect is obviously quite relevant on a practical level: if we think of the development of the organizational model and the preparation by the entity of the safeguards to contain any crime risk. A similar issue, concerning the inclusion in the 231 catalogue of articles 416 and 416bis of the Italian penal code, was resolved by the Supreme Court in compliance with the principle of legal certainty, limiting such offences only to cases in which specific-intent crimes are contemplated by the catalogue of legislative decree 231 / 01 (Supreme Court, 6th division, 24.01.2014, no. 3635).
As to this point, the legal theory seems to be divided between those supporting the applicability of a similar solution to include self-laundering and others who, on the other hand, argue the non-existence of the infringement of the principle of legal certainty on the basis of the structural difference between crimes of association vi and 648ter.1. Again, there are no specific rulings on this point.
In conclusion, as can be inferred from this brief example, three years after Law 186/14 came into effect, the applications of self-laundering in legislative decree 231/01 are still to be outlined and their interpretation is entrusted to the efforts of early commentators. To date, doubts are rife, and it would be desirable for jurists to dispel them.
TOP LEGAL FOCUS PENALE – FEBRUARY 2019
Edited by Carlo Baccaredda Boy
Ransomware and criminal liability
Applying the Italian penal code rules to new cybercrime offences.
The Ransomware 2017 in Italy survey conducted by C.R.A.M. (Anti-malware research centre) has shown a spike in ransomware attacks as these technologies become increasingly more sophisticated. It is therefore the task of the legal expert to provide an updated interpretation of the current legislation in an effort to tackle this alarmingly growing phenomenon.
The portmanteau word ‘ransomware’ describes a type of malware that can penetrate a computer through a vector, such as a website, a malicious software program or a link contained in an email, or through a software vulnerability. Last-generation ransomware (Crypto-Malware) encrypts files making them unreadable. As a result, the computer cannot be used. The person responsible for the cyberattack will then demand that the victim pay a sum
of money (usually a virtual currency) to be able to unscramble and thus restore the system.
Cybercrime poses a serious threat not only for the economy, but also for the security and the smooth running of democracy. In fact, Clusit (the Italian association for cyber security – as of June 2018) reports that cyberattacks have hit around one billion users globally, causing losses for five hundred billion dollars in 2017 alone (p.5). To this end, the European Parliament Committee on Foreign Affairs, in its Cyberdefence Report of 25 May 2018 (A8-0189/2018) urged member states to equip themselves with defence systems against cyberattacks. Ransomware attacks are considered to be among the most dangerous of all threats.
Among some of the most useful regulations focusing on cybercrime are art. 635 bis, ter, quater and quinquies under L. 48 of 18 March 2008, which ratifies the Budapest Convention of 23 November 2001. In an effort to frame this phenomenon from a legal point of view, we should first and foremost consider art. 635 ter of the Italian Penal Code (illegal access to a computer system). Most cyberattacks are launched by leveraging the victim’s cooperation to open an attachment or visit a specific website. The Court of Appeal of Bologna (2nd div. 27 March 2008) confirmed the judgment for illegal access to a computer system against an individual who had sent an email with an apparently harmless attachment, but which in fact contained a malware string inserted to harm the network, while fraudulently luring the user to open the link. Thus, the Court has not recognized, in the formal consent of the victim, any obstacle to it being classified as an offence, while stressing the element of fraudulent inducement. After the files have been corrupted, the IT system, i.e., the victim’s computer, is blocked and therefore rendered useless. Meanwhile, the virus can be spread to other network devices.
An actual case of criminal damage to a computer system is therefore actionable, as provided by penal code Art. 635 quater (or quinquies if the computer system is a public service). The Supreme Court of Appeal has verified the conduct in question, maintaining that criminal damage is the result of a conduct aimed at ‘preventing the system from working, or rendering the system useless (…) or hampering its overall performance” (Supreme Court of Appeal – criminal division II – 1 December 2016 no. 54715). The crime is perpetrated “by adopting the conduct per Art. 635 bis” and, as such, the latter must be verified.
If an encryption key is inserted, the file is left intact, albeit temporarily unreadable. It is therefore necessary to establish whether software programs, data or information have been damaged (per penal code art. 635 bis, or art. 635 if the victim of the cyberattack is a public body). The Supreme Court (criminal division V, 5 March 2012, no. 8555) has harnessed the specific term of ‘danneggiamento’ (damage), whereby damage means not only that the computer system is irretrievably compromised, but it also means “tampering with the condition of the computer, causing damage which can only be remedied subsequently”.
As for any ‘ransom’ demand, a number of principles inherent in the theme of extortion could be applied. The Supreme Court has recognized as extortion any threats to abstain from performing a task, whose execution falls under a legal obligation (Supreme Court – criminal division II, 23 April 2008 no. 19711). As such, establishing an obligation – to be fulfilled by the offending party – to restore the damaged object to its original state cannot be excluded. (Similarly, one should bear in mind that an obligation was imposed on a thief who refused to return the stolen goods – per Supreme Court, un. Division, 22 January 2009, no. 5941).
Some ideas for future consideration include: the liability incurred should the ‘ransom’ be paid through corporate assets or public body assets; the obligation to report the crime (as set out in the penal code); reporting any data breach (violation of any personal data resulting in its loss or destruction) as set out in the GDPR.
