Is there a succession of administrative liability in M&A? Brief commentary on Judgement 179/2023 of 11 December 2023 of the Second Chamber of the Constitutional Court

The Constitutional Court (hereinafter, CC) has dismissed the appeal filed by Banco Santander against the resolutions of the Council of Ministers which, in 2019, imposed a sanction of €1,056,000 on it as the successor to Banco Popular.

The sanction arose following an inspection in 2017 by the Executive Service of the Commission for the Prevention of Money Laundering and Monetary Offences (hereinafter, SEPBLAC) of Banco Popular, S.A., an entity that was subsequently absorbed by Banco Santander, S.A.

As a result of this inspection, on 8 May 2018, a sanction proceeding was opened against Banco Popular, S.A., which resulted in the imposition of a fine of 1,056,000 euros for the commission of a very serious infringement of Art. 51.1. a) of Law 10/2010 on the prevention of money laundering and terrorist financing (hereinafter, LPBC-FT) on its successor Banco Santander, S.A. The offending conduct was the failure to report to SEPBLAC certain transactions that the bank’s employees identified as suspicious of money laundering.

According to the company, the sanctioning agreement violated the right to the legality of sanctions under Art. 25.1 of the Spanish Constitution (hereinafter, SC), in terms of the principle of culpability (no imposition of sanctions without considering the conduct of the sanctioned) and the personality of the penalty (being liable for one’s own actions and not for those of others).

In broad terms, it argues that:

  1. There are no links or continuity between the offending entity and the sanctioned entity, as there was a complete break between Banco Popular, S.A., and Banco Santander, S.A.;
  2. It was the only entity that submitted a bid in the “resolution” of Banco Popular, S.A., a procedure that avoided a public intervention that would have been very costly;
  3. After the takeover of Banco Popular, S.A., the procedures and persons responsible for the prevention of money laundering changed completely, passing without blemish the inspection carried out by SEPBLAC;
  4. The sanctioned entity has not obtained any advantage from the infringing conduct, which is unrelated to the banking business.

In the sentence, the Constitutional Court states that:

  1. The contested sanctioning decision is based on a consolidated jurisprudential criterion, both of the Supreme Court and of the Court of Justice of the European Union, according to which, in cases of merger by takeover, liability for administrative infringements is transferred provided that there is “substantial economic identity“. In other words, liability is transferred when the economic activity in the context of which the infringing conduct was committed continues in the new legal entity, in this case, Banco Santander, S.A., which acquired 100% of the shares of Banco Popular, S.A. and subsequently absorbed the entity as universal successor. Furthermore, to admit that a formal change of legal holder in the exercise of an activity entails the extinction of all liability for infringement would be tantamount to allowing the liabilities incurred by continuing the same activity under a “substantial economic identity” to be avoided (doctrine of the prevalence of substance over form or “lifting of the veil“).
  2. Despite the fact that there is no express rule in Administrative Law on penalties that includes this principle as in the criminal sphere (Art. 130.2 Criminal Code), it is present in various rules. As far as we are concerned, 55.1 LPBC-FT establishes that “administrative liability for infringement of this law will be enforceable even if the obliged party has ceased its activity or its administrative authorisation to operate has been revoked”.
    It should be noted that, in the criminal sphere, Art. 130.2 of the Criminal Code expressly provides that the disappearance of a legal person does not entail the extinction of criminal liability. Therefore, in the case of transformation, merger, absorption or spin-off of a legal person, there is no doubt that criminal liability is transferred to the entity/entities into which it is transformed, merged or absorbed and is extended to the entity/entities resulting from the spin-off. However, the law itself provides that the judge or court may moderate the transfer of the penalty to the legal person, so that in M&A operations, the adoption of an appropriate and effective Compliance methodology is particularly relevant.
  3. Through the en bloc transfer of the business, all the relations of Banco Popular, S.A. passed to the universal successor, including the operations in the management of which the sanctioned conducts were committed and the money laundering prevention obligations inherent to them. Therefore, there is a “substantial economic identity” between the business assets of the defunct Banco Popular, S.A., and those of Banco Santander, S.A., which justifies the succession in liability for infringement.
  4. In the contested judgment, the change of conduct following the succession has modulated the liability transferred, although not to the point of eliminating the sanction entirely, since the “substantial economic identity” between the absorbed bank and the absorbing bank is not broken.
  5. The absence of profit does not integrate the offence type applied, consisting of failing to report to SEPBLAC certain transactions identified by the bank’s employees as suspicious of money laundering. The profit obtained as a result of the offence can only be used as a graduation criterion [Art. 59.1 b) LPBC-FT], but it is not a requirement for the offence to be committed or for liability to be passed on to the successor.

In short, the CC concludes that the criterion applied by the Council of Ministers to impose the sanction on Banco Santander, S.A., as successor to Banco Popular, S.A., has not infringed the principles of culpability and personality derived from Art. 25.1 SC, and therefore dismisses the appeal for amparo.

At this point, it is important to emphasize that the implementation of an effective Compliance System, carried out in a preventive manner and not reactive to the commission of the infringement, is the only mechanism that would allow for an exemption from liability. Not only could the commission of the offence be avoided through the implementation of a Compliance System ex ante, but even if the offence has been committed, a sufficiently diligent effort could be accredited to avoid being liable.

Compliance Department of Molins Defensa Penal.

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