The supervisory board’s role in evaluating adequacy and effectiveness of 231 Models
Overview

On June 17, 2021, the Court of Vicenza ruled on the criminal liability of senior management of Banca Popolare di Vicenza (hereinafter “BPV”), as well as on the corporate criminal liability of the same bank, for the offenses of insider trading, impeding the oversight authorities from performing their duties,[1] and fraudulent statement(s) in a prospectus.[2] The decision of the Court of Vicenza resulted in a conviction for both senior management and BPV itself.

The decision of the Court of Vicenza is extremely significant with regard to 231 compliance, since it provides a series of important indicators on the correct functioning of the supervisory board—a key player in the effective and efficient implementation of management and organizational models for the prevention of corporate criminal liability (“231 Model(s)”), pursuant to Legislative Decree No. 231/2001 (“231 Law”).

The Court of Vicenza started its reasoning by noting the elements needed to ascertain corporate criminal liability and focused on “organizational fault” by outlining the impact that deficiencies in the supervisory board’s activity may have on the detection of such liability. Furthermore, it pointed out several undesirable scenarios in which a supervisory board may not be considered independent and may not be suited to perform its duties.

Organizational fault”: The key role of the supervisory board

“Organizational fault” is a subjective criterion for attributing corporate criminal liability to the entities indicated in the 231 Law. To be exempt from liability, an entity must adopt and effectively implement the 231 Model, which shall be overseen by the supervisory board.

A supervisory board’s main duties are (i) monitoring the effectiveness of, updating of, compliance with, and implementation of the 231 Model by the relevant parties; (ii) management and oversight of training and information initiatives for implementation of the 231 Model ; and (iii) handling the flow of information to and from internal corporate bodies. Furthermore, the supervisory board must meet the requirements of independence, autonomy, expertise, integrity, and continuity of action.

In the decision discussed here, the Court of Vicenza listed several indicators that a supervisory board may be inadequate and, therefore, that its company’s 231 Model may be inadequate as well:

  1. Lack of independence of the members of the supervisory board. In the case at hand, the Court of Vicenza asserted that the supervisory board of BPV was composed of non-independent members, since (i) the internal member of the supervisory board also held the position of internal auditor at the entity; therefore, he reported to and worked under those he was required to supervise[3]; and (ii) the other two members were lawyers who provided consulting services to BPV’s special purpose vehicle company and to a subsidiary wholly owned by the bank and who received very significant remuneration over the years for their services.

 

  1. Inactivity of the supervisory board. The court noted that supervisory board meeting minutes clearly evidenced the board’s inactivity and demonstrated that it was limited to a formal exercise of its duties, meaning mere discussion between the compliance officer and the chairman of the board of statutory auditors. Indeed, the minutes did not show any planned audits in the areas where there was risk that specific offenses might be committed, especially those disputed in the case at hand. The most recent supervisory board meeting minutes were dated 2014, a sign that since 2014 the supervisory board had substantially ceased to function.

 

  1. Inappropriateness of information flows and whistleblowing system. The court indicated that (i) neither the 231 Model nor the internal structure of the bank provided a specific procedure concerning the flow of information from company offices and departments to the supervisory board about the areas where there was a risk that a predicate offense might be committed; and that (ii) the only opportunity to report violations was to email such reports to the chairman of the supervisory board, an inadequate method that did not guarantee confidentiality or whistleblower safeguards.

 

  1. Lack of autonomous powers of initiative and supervision. The 231 Law expressly provides that “[…] the task of supervising the functioning and observance of 231 Models and ensuring their updating is entrusted to a body of the entity with autonomous powers of initiative and control […].” In the case at hand, the only power granted to the supervisory board was to report activity to senior management, without any further power to act autonomously. The Court of Vicenza found that any audit activity had to be submitted to BPV management for their approval.

 

  1. Failure to impose sanctions. Finally, the court identified one more indicator that pointed to the inefficiency and ineffectiveness of the BPV supervisory board: the lack of recommendations for disciplinary action. Indeed, proposals to the appropriate company bodies to start disciplinary proceedings in case of irregularities are certainly important indicators of the effectiveness of a supervisory board’s activity, as they prove the board is focused on sanctions for noncompliance with the provisions of the 231 Model.

 

The decision of the Court of Vicenza is significant, as it outlines the role a supervisory board must play to help establish an adequate and effective compliance system. In particular, in order to ensure effective implementation of the 231 Model, the supervisory board cannot limit its activity to mere formal control; instead it must effectively monitor the 231 Model by means of adequate and specific powers, oversight, and rules that guarantee its independence from internal corporate bodies, as well as an appropriate reporting system that includes keeping detailed records of the exchange of information and audits performed.

 

You can find the decision of the Court of Vicenza at the following link: QUI

[1]Pursuant to sections 2638 and 2637 of the Italian Civil Code and section 25 ter, paragraph 1, lett. R) and S) of Legislative Decree No. 231/2001.

[2]This offense was charged only to individuals and is not included in the predicate offenses pursuant to Legislative Decree No. 231/2001.

[3] These same people were challenged with committing the offenses in the case at hand.

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