Retroactive insolvency laws making board directors nervous

More businesses in Spain and Portugal instructing white collar crime lawyers as investigations into financial mismanagement during the crisis increase

Law firms in Spain are experiencing an increase in instructions related to white collar crime with board directors in fear of being held retroactively liable for companies entering into receivership during the crisis. Similarly in Portugal, clients – particularly those in sectors such as pharmaceuticals and banking – are increasingly turning to lawyers for advice due to a surge in investigations into white collar crime.
Europe’s economic crisis, causing bankruptcy proceedings, divestments and subsequent restructuring, has spawned investigations into financial mismanagement, including financial manoeuvres enacted for the company’s good, resulting in proceedings against individuals for negligence.  
Spain’s 2010 legal reforms have put more crimes on the statute books, such as investment fraud, disloyal management and the illegal funding of political parties, causing concern among board members whose actions are up for scrutiny, says Jesús Santos, a partner in criminal law at Baker & McKenzie in Madrid.  
“Apart from procuring a solid defence lawyer, clients also seek legal advice on implementing control mechanisms to prevent such crimes from taking place,” Santos adds. “Our clients know that if they implement an effective compliance mechanism, they can avoid potential conviction.”
“Concerned by the extension of criminal law and an increase in the criminalisation of conduct, clients are eager to find a prestigious and experienced law firm to defend them,” he says.
As a result, Santos perceives an increase in the firm’s workload going forward. “More people will require defence and counselling in financial crime, given the new regulations regarding legal responsibility,” he says.
Spain’s insolvency law contains a clause establishing criminal responsibility, allowing members of a board to be held liable for entry into receivership, for example. “This causes concern because the law is retroactive,” Alfredo Guerrero, a partner at King & Wood Mallesons in Madrid, says, pointing out that punishments go beyond fines and forbid executives from holding board membership, particularly in listed companies.
Directors named members of the board are now concerned they could be implicated in crimes while acting in the best interests of the company, particularly companies that faced insolvency during the crisis, Guerrero explains. “And the fact that a company has recovered and restructured, or even been acquired by a third party, does not eliminate the possibility of prosecution for a financial crime committed during that process.”
Striving for greater transparency, the law obliges more investigations into companies’ financial affairs, potentially uncovering acts of negligence punishable as so-called white collar crimes. He cited the case of Barcelona FC, implicated in the tax evasion committed by its Brazilian striker Neymar through undeclared transfer payments, though the football club has denied any wrongdoing.
The law will also lead to the scrutiny of contracts awarded to firms through public tenders, and in which both the private and public sectors may be implicated, Guerrero said. And even though a similar law does not exist in Portugal, compliance remains key, says Sofia Ribeiro Branco, a partner at Vieira de Almeida & Associados in Lisbon.
“If we can show evidence to the court that a company has implemented compliance measures, it could be acquitted in corruption proceedings, even though the courts are not always sensitive to our arguments,” she explains.

Fraudulent insolvency
Ribeiro Branco says investigation of white collar crime is increasing in Portugal. “A board of directors’ main concern is to investigate the causes and find out how such crimes can be prevented, and they ask us to design compliance programs,” she adds, with the result that the law firm’s workload is increasing.
She cites cases of alleged “fraudulent insolvency”, where the crisis served as an excuse for bankruptcy, but the increase in scrutiny by the courts has yet to result in convictions, given the lengthy legal proceedings.
Though the sectors most prone to financial crimes in Portugal are the pharmaceutical industry and public hospitals, Ribeiro Branco says that investigations are increasingly focused on the banking sector.