Offenses of improper management, misappropriation and internal corporate regulatory compliance

On June 28, 2018, the Supreme Court handed down a ruling sentencing the former administrator of a company to 4 years in prison for a recurring offense of misappropriation and improper management for taking cash from the cash box without his partner’s consent, making transfers to his personal account, and other irregularities in the management he was entrusted with as administrator.

The ruling written by judge Magro Servet analyzes two essential issues: (i) The differentiation between the criminal offenses of improper management and misappropriation and (ii) the need to establish compliance mechanisms at companies to avoid cases such as the one being prosecuted.

A.- Differentiation between the criminal offenses of improper management and misappropriation before LO 1/2015 [Organic Law 1/2015]

The Supreme Court begins by specifying that “although both conducts are disloyal from the point of view of betraying trust, with misappropriation disloyalty entails an action outside of what the title of receipt allows, while in the other case, improper management, the disloyalty consists of the administrator exercising powers that, with the conditions of Article 295, are harmful to the company but have not exceeded the proper limits of the position of administrator.”

In Article 295 of the Spanish Penal Code, the behaviors described reflect dispositive acts of an abusive nature of the company’s assets but that do not entail appropriation, that is, executed without definitive non-compliance with the obligation to deliver or return.

On the other hand, in Article 252 of the Spanish Penal Code, the dispositive act entails an action that goes beyond the legal limits of the title of ownership that is granted, in the corporate offense of Article 295 that binds the company or disposes of its assets, does so while exercising of a genuine legal power, a decision-making ability that is legally recognized.

The legal right is also different in both cases: Whereas with misappropriation in Article 252 of the Spanish Penal Code, the legally protected right by the rule would be property, assets understood as stationary, however in improper management under Article 252, more than the property itself, it would be attacking the economic interest derived from exploiting the resources the company owns.

The substantial criterion that the majority of case law in appeals follows to delineate the criminal offense of misappropriation in the form of improper management by embezzling money (Article 252 of the Spanish Penal Code) and the corporate offense of improper management (Article 295 of the Spanish Penal Code) is that of the definitive disposal of the victim’s assets, in this case, the money. Thus, if the accused definitively incorporates the money he administers to his own assets or gives it definitively to a third party, it is clear that, since this is a definitive disposal of non-compliance, the most serious criminal offense must be applied: misappropriation. On the other hand, if the administrator commits a fraudulent abuse of his obligations by allocating the money for something other than what it is meant for, but without the intention of definitively disposing of it to the company’s detriment, so that it intends to return it but that does not subsequently occur, this would be the lesser criminal offense of improper management pursuant to Article 295 of the Spanish Penal Code.

Supreme Court ruling 574/2017 dated July 19, 2017, points out that “as it is stated in the Supreme Court’s Ruling 656/2013 of July 22, and invoked in the summary ruling 206/2014, the most correct delimiting theory between the criminal offenses of diverting money and consumables (Article 252 of the Spanish Penal Code) and the crime of improper management is focused on the degree of intensity of the illegality of the perpetrator’s behavior against the legal right protected by criminal law. So it must be understood that the behaviors stipulated in Article 295 of the Spanish Penal Code include acts of an abusive nature of the corporate assets, but without the purpose of appropriating or definitively breaching the obligation to deliver or return, hence these would be acts of improper management. On the other hand, the behavior of diverting money stipulated in Article 252 of the Spanish Penal Code, either to the perpetrator of the crime or to a third party, amounts to appropriation or a definitive breach which entails a greater undermining of the legal right.”

B.- The need to establish compliancemechanisms at companies to avoid cases like the one being prosecuted.

The ruling also points out that “a good corporate practice at companies is to implement these regulatory compliance programs that ensure that this type of incident does not happen, or hinder the continued actions of diverting money, or abuse of office that a good regulatory compliance program would have immediately detected.

The Court recalled that it was an essential part in restructuring good corporate governance of companies that good management protocols be established and implemented for the administrators of companies.

It added that the introduction of compliance programs in companies that would avoid cases like the one being prosecuted was essential for good governance of their administration since internal control at companies avoids crimes being committed by managers. It said: “If there had been an adequate regulatory compliance program, cases such as the one that occurred here would be more difficult, since in most cases the knowledge of activities, such as those of appropriation of funds and abuse of management declared to be proven here, would not have occurred and we would not have had to wait until the tax administration had intervened in order to detect the tax fraud that existed with the imported coal, and the appropriations made by the appellant would have eventually been discovered.”

Hence, the judges affirm the importance of these regulatory compliance programs at companies and the innovation that they must be, (i) not only to avoid the derivation of criminal liability for the company in cases of crimes committed by managers and employees, (ii) but also to avoid the commission of the crimes of misappropriation and improper management.