Friday 26 October 2012

New Criminal Code to punish bad management and financial scandals

The concept of embezzlement is widened · Leading a company to bankruptcy to be punished
MADRID Among several measures announced by the Minister for Justice, Alberto Ruiz-Gallardón after last week's Council of Ministers meeting, is one that is aimed at expanding coverage of financial and business-related scandals. The idea is to punish those responsible for financial scandal and bad company management, as well as those who provoke bankruptcy or enter a business into what in the US is called Chapter 11 ,and in the UK bankruptcy protection, as a way of avoiding paying creditors and or shareholders. To put it as the Minister said: it will punish 'disloyal management committed while abusing or being disloyal to the patrimony of third parties thus causing damage or simply danger to that patrimony.'COMING SOON: SUBSCRIPTION INFORMATION>>>
Sources at the Ministry of Justice have explained that these changes to the articles related to business fraud and management comes after several serious mismanagement cases, and the public perception regarding millionaire pension plans and golden parachutes in recent events linked to banking scandals. The new legislation seeks to allow for more effective persecution via criminal prosecution of this kind of behaviour - but would not affect cases currently being investigated.

These current cases include such behaviour -until now regarded as a civil matter and not under the Criminal Code- as serious damage, loss of part third party patrimony (i.e. wealth) through bad or disloyal management. Recent cases have shown shady deals such as unauthorized and unguaranteed credits for board members or lack of debt collection to 'preferred' customers (often those same members of a company Board).

Other shady activities being newly classified as criminal are: unauthorized sale of assets at below their true value; contracting services that are never rendered; carrying out unaithorized operations that create damage to the company, or which lead to the creation of 'black boxes' (the Spanish term for 'double book-keeping') that are 'kept out of sight,  reach or knowledge of the owner of the assets being managed.' 

One attorney, expert in Company Law, remarked, "From now we will have a framework that is clearly defined about disloyal management, which until now had to be deduced from sentences handed down by the Supreme Court."

The same law will also expand the concept of misappropriation of funds (malversación, similar to  embezzlement, which historically has referred basically to the theft of public monies, and in lesser degree, of the deviation of such funds to other uses.

Bankruptcy without due diligence can now be punished
The new Criminal Code creates the new crime of bankruptcy, when it is found that a company declares itself bankrupt as the result of fraudulent or simply bad management that has no justification. The Ministry explains the need for this part of the new law 'to offer a penal response that is adequate for punishment of actions or decisions that lack due diligence, particularly those that are carried out in the context of a financial crisis', be that national, private or of the company. This is a clear reference to various bank executives and/or boards who have gained personal fortunes as the result of their businesses downfalls.

Included here, too, are those activities that unduly or illegally (details to be established) shrink company assets with which it would be possible to pay creditors, as well those that make it difficult or impossible 'for creditors to get a clear picture of the company's real situation'. In cases where the debtor is a public entity, the new Criminal Code applies larger sentences, jail terms varying from one to six years, as opposed to the general sentence of from one to four years' jail.

The new code also covers the activities of those who organize creditors' meetings (called administradores concursales), or liquidators, and their possibly illicit conduct, which could be subject to charges of embezzlement and/or bribery.

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