Corporate governance in Switzerland – New ESG rules in Switzerland: how to mitigate the risk of criminal liability – Corporate Governance

On January 1, 2022, the indirect counter-proposal to the so-called Responsible Business Initiative was introduced into the Swiss Code of Obligations (CO). The new rules of articles 964a ff. CO requires public-interest companies domiciled in Switzerland, such as listed companies and large companies supervised by the Swiss Financial Market Supervisory Authority (FINMA), to publish annual reports on ESG issues. Companies must report on environmental, social and social issues, respect for human rights and the fight against corruption in their report. The new reporting obligation under Swiss law corresponds to the European Directive 2014/95/EU on the reporting of non-financial aspects. The report on ESG issues must be approved by the board of directors and the general meeting. In addition, the report must be published electronically and remain available for at least ten years.

In addition to reporting obligations in non-financial matters, new due diligence and reporting obligations have been introduced for all companies having their registered office, registered office or principal place of business in Switzerland which i) import or process tin, tantalum, tungsten or gold containing minerals or metals from conflict or high risk areas (conflict minerals) or which (ii) offer products or services for which there is a reasonable suspicion that they were manufactured or provided using child labor (Article 964j ss. CO). Thus, the new due diligence and reporting obligations in the area of ​​conflict minerals and child labor apply, in principle, to all companies domiciled in Switzerland. Companies within the scope of the rules must comply with and report on due diligence requirements in their supply chain (which includes audited entities within their own group of companies). While only the conflict minerals report needs to be audited, the conflict minerals and/or child labor report needs to be approved by the board. The report must be published electronically and remain available for at least ten years. Details of due diligence and reporting obligations regarding conflict minerals and child labor are governed by an order.

Companies will have to comply with the new information and due diligence rules from January 2023 and companies whose financial year corresponds to the calendar year will have to publish their first reports in 2024 (for financial year 2023.).

Specific transparency rules for commodity companies

In addition, apart from the ESG disclosure rules mentioned above, new ESG-related transparency rules for certain commodity companies came into force in 2021 (new articles 964d to 964f CO). Companies which, directly or indirectly through a controlled entity, extract minerals, oils, natural gas or primary forest timber and which are subject to ordinary audit, i.e. comply with the applicable thresholds (listed companies, companies exceeding two of the following thresholds in two consecutive years of financial statements: i) a total of 20 million francs in assets, ii) a turnover of 40 million francs, iii) 250 FTE annual average, as well as companies required to draw up consolidated accounts) must publish a special report concerning certain payments (in cash or in kind) totaling CHF 100,000 or more to government authorities.

These special reports must be published for fiscal years that began on or after January 1, 2022.

Penal provisions

We believe the new regulations can provide a valuable business opportunity and contribute to a more sustainable economy. However, a violation of the new ESG rules may not only lead to civil liability and damage to the company’s reputation, but such a violation is also subject to criminal penalties. Since January of this year, two new criminal offenses have entered into force in the Swiss Penal Code (CP).

According to article 325bis CC, a person who i) provides false information in the report on payments to government authorities or totally or partially fails to make such a report or who ii) does not comply with the obligation to keep these reports for a period of ten years is liable to a fine of up to CHF 10,000.

Article 325ter CC provides that a person is liable to a fine not exceeding CHF 100,000 if he intentionally commits one of the following acts: i) providing false information in reports on non-financial matters, conflict minerals or child labor, failure to make required reports or (ii) failure to approve and retain such reports as required by law. If a person has acted negligently, he is liable to a fine not exceeding CHF 50,000.

On the basis of a referral rule in Swiss criminal law, which attributes criminal liability to members of the board of directors and management in the event of violation of a special obligation incumbent on the legal person (article 29 CC), the persons responsible for compliance with the ESG due diligence and reporting rules are criminally liable for violations of Articles 325bis and 325ter CC. While Swiss criminal law also recognizes the concept of criminal liability of legal persons (Article 102 CC), a legal person cannot be fined for offenses under Articles 325bis and 325ter CC, the criminal liability of legal persons cannot be does not apply to contraventions subject to fines.

In principle, anyone can file a criminal complaint for violation of Articles 325bis and 325ter CC. The cantonal criminal authorities are responsible for prosecuting offences.

How to mitigate the risk of criminal liability

In addition to damage to reputation, a conviction for violation of article 325bis or 325ter CC can represent a possible basis for civil liability against a company and its managers. In addition, a conviction for a violation of Article 325bis or 325ter CC may lead to the entry in the criminal record of the natural person concerned and, for regulated companies, there may also be reporting obligations to the supervisory authorities and potential concerns about fit and proper requirements. for board members and executives in Switzerland and abroad.

Companies must therefore first and foremost ensure that they comply with the new ESG rules and thus minimize the risk of criminal liability for their management.

Generally, companies should establish and document a strong control framework and reporting process. It is preferable to involve external experts for this process, especially if no confirmed specialist is employed by the company. All newly established procedures and requirements must be sufficiently documented and discussed by the governing bodies of the company, including the board of directors.

Although no external audit is required for the report on non-financial matters and on child labor (unlike the report on conflict minerals, article 16 of the corresponding ordinance), companies should consider providing for an audit deliberate. In particular, for an act of negligence to be punishable, the offender, for example a member of the board of directors, must not have realized that he could have published a false report, but that he would have could have realized this if he had exercised due diligence. Through a voluntary audit, a company’s governing bodies can demonstrate that they have acted diligently. Based on currently available information, some reporting companies are considering having their reporting on non-financial matters voluntarily audited to some extent.

Finally, in our opinion, a certain materiality threshold should apply regarding false information in a report. A criminal conviction can only be justified if false information contained in the report could give the reader of the report a misleading impression. It is therefore particularly important that all responsible persons align themselves with and confirm the key statements of any report. Furthermore, while it should be possible for companies to keep business secrets in their reports, companies must ensure transparent communication in this respect.

Previously published in The In-House Lawyer, Winter 2022.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

Helen D. Jessen