Criminal Due Diligence Costa Rica: Before You Buy a Company

Criminal Due Diligence in Costa Rica: The Hidden Risk When Buying a Company

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Every serious M&A transaction includes legal, financial, labor, and tax due diligence. What most still leave out is a criminal due diligence review. Since Costa Rica’s Law 9699 introduced corporate criminal liability in 2019, that gap can cost a buyer far more than money. The law explicitly addresses what happens to a company’s criminal exposure when it merges, is acquired, or restructures — and the answer should change how any buyer approaches due diligence in Costa Rica.

Why Standard Due Diligence Does Not Cover Criminal Risk

Traditional legal due diligence reviews the expected: title records, existing contracts, labor liabilities, and tax compliance. But since 2019, there is an additional layer of risk that most audits still do not address with the rigor it requires — the possibility that the target company has, or has had, corporate criminal exposure for corruption, bribery, or transnational bribery. Under Costa Rica’s Law 9699, that exposure can transfer to the buyer.

This is not a theoretical scenario. The “Cochinilla” case — the first major application of Law 9699 — linked several private companies to investigations involving alleged improper benefits in public procurement. Any buyer evaluating an acquisition of one of those companies during that period would have inherited an active criminal exposure without knowing it. All it took was not asking the right question during due diligence.

Does the Buyer Inherit the Target’s Criminal Liability?

Yes. Law 9699 addresses this directly in Article 3, titled “Vicisitudes de la persona jurídica” (Vicissitudes of the Legal Entity). If a legal entity ceases to exist as a result of a merger, acquisition, absorption, or transformation, the surviving or newly created entity becomes subject to the criminal liability proceeding — and to whatever consequences follow from it.

In practical terms: buying a company through a merger or acquisition does not erase its corporate criminal record. Article 1 lists the covered offenses: corruption, bribery, and transnational bribery. If the target committed those crimes, or is under investigation for them, that liability does not disappear with a change in ownership. It transfers to the resulting entity.

What if the company is split rather than merged?

The law also covers spin-offs. If a company divides into two or more entities, all legal entities involved in the process are subject to the proceeding and any eventual sanctions. This applies both to the original entity and to the beneficiary companies.

Ten Years: The Audit Window Buyers Need to Cover

This is the detail that gets overlooked most often. Article 41 of Law 9699 amended section (b) of Article 31 of the Criminal Procedure Code. As a result, the statute of limitations for crimes committed by legal entities is ten years, rather than the two-year period that applies in other scenarios.

For a buyer, the practical consequence is clear: a review that only covers the last three to five years of the target’s activity misses a significant portion of the live risk. A serious criminal due diligence review in Costa Rica needs to work with a window of at least ten years. Additionally, formal notification of the legal entity interrupts the statute of limitations, which means that an apparently old case file may still be fully active.

Sham Dissolution: Why “Starting Fresh” Does Not Work

A predictable attempt to avoid this liability would be to dissolve the company and continue the same business under a new entity. Law 9699 anticipated that maneuver and neutralized it. The law calls it a sham dissolution (“disolución aparente”). It occurs when the legal entity continues its economic activity through a new company while maintaining the core identity of its clients, suppliers, or employees. In that case, the criminal liability of the dissolved company carries over to the new structure.

For M&A purposes, this means that restructuring or “cleaning up” the corporate vehicle before a sale is not, by itself, a valid strategy. The audit needs to look beyond the current legal name and examine whether there is real business continuity.

Judicial Authorization and Registry Freezes During Active Proceedings

Two procedural mechanisms can become serious obstacles to a transaction timeline — or make the deal altogether impossible.

Prior judicial authorization (Article 23)

If criminal proceedings have already been initiated against the target, the law requires authorization from the court before any transformation, merger, acquisition, or spin-off can proceed. This requirement remains in effect until there is a final judgment or the sentence has been served. The process is not immediate: the court grants a ten-business-day hearing to all parties and issues its ruling within the following ten business days. During that window, the prosecution can request a registry freeze or a surety bond.

Registry freeze (Article 24)

This is the most severe scenario for an M&A transaction. Once a freeze order is filed with the Public Registry, the consequence is absolute: any attempted corporate movement — transformation, merger, acquisition, spin-off, or change — will be denied and has no legal effect whatsoever, unless the court expressly authorizes it. The transaction does not just stall — it does not exist. Additionally, Article 22 prohibits the voluntary dissolution of the legal entity while proceedings are ongoing.

The time to detect either of these situations is during due diligence, not after signing a letter of intent. That difference in timing determines whether the buyer can renegotiate the terms or ends up trapped in someone else’s criminal proceeding.

What a Criminal Due Diligence Review Should Cover

A serious criminal risk audit before an acquisition in Costa Rica should review, at a minimum:

• Active or archived criminal proceedings linked to the target, its directors, legal representatives, or key employees, covering a window of at least ten years.
• Registry annotations and freeze orders that could block the transaction entirely.
• Government contracts and the target’s public procurement history — most offenses covered by Law 9699 are linked to dealings with the government.
• Existence and quality of a compliance program under Article 8 of Law 9699. Its absence is itself a risk signal; its presence may be relevant for invoking mitigated liability.
• Recent corporate history: mergers, spin-offs, or name changes that could mask a sham dissolution.
• Inherited tax crime exposure: whether the target has contingencies for tax fraud that the buyer could inherit. See our guide on Tax Crimes in Costa Rica.
• High-risk business relationships: intermediaries, agents, or partners in jurisdictions or sectors with a track record of corruption.

Most of this information does not appear in a standard corporate due diligence package. It requires a review with a specific criminal law lens, including queries to the relevant judicial registries and, when warranted, directed interviews with key personnel.

How to Protect Yourself in the Purchase Agreement

When the audit reveals a risk that does not kill the deal but needs to be managed, the purchase agreement becomes the next line of defense. In practice, the standard tools include:

1. Specific representations and warranties regarding the absence of criminal proceedings, compliance with Law 9699, and no known corrupt conduct.
2. Special indemnification clauses that shift to the seller the economic cost of any corporate criminal sanction arising from pre-closing conduct.
3. Price holdback or escrow for a reasonable period, tied to the resolution of any pending criminal investigation or proceeding. Given the ten-year statute of limitations, that period needs to be negotiated carefully.
4. Conditions precedent to closing requiring judicial authorization where an active criminal proceeding is known to exist.

The Service: Pre-Acquisition Criminal Due Diligence

AG Legal offers a focused, time-bound engagement for local and international buyers evaluating an acquisition in Costa Rica — a Pre-Acquisition Criminal Due Diligence designed to integrate into any M&A timeline without delaying it:

• Review of active and archived criminal proceedings and registry records for the target and its key officers.
• Verification of registry annotations and freeze orders that could block the transaction.
• Assessment of Law 9699 exposure, including the target’s public procurement history.
• Evaluation of the existing compliance program, if any.
• Executive report with findings, risk level, and specific recommendations for deal structure.
• Drafting or review of criminal-corporate representations, warranties, and indemnification clauses.

It is a short-term engagement, typically two to four weeks depending on the complexity of the target. It is designed to work alongside the corporate law team already handling the transaction.

Frequently Asked Questions

Does a buyer inherit the criminal liability of a company it acquires in Costa Rica?

Yes. Article 3 of Law 9699 provides that if the target ceases to exist through a merger, acquisition, absorption, or transformation, the surviving or new entity becomes subject to the criminal liability proceeding and its consequences.

How far back should a criminal due diligence review go in Costa Rica?

At least ten years. Article 41 of Law 9699 set a ten-year statute of limitations for crimes committed by legal entities — that is the minimum audit window.

Can you dissolve a company to avoid its criminal liability before selling it?

Not if it amounts to a sham dissolution. If the business continues through a new entity while keeping the core identity of its clients, suppliers, or employees, the law preserves the criminal liability on the new structure. Article 22 also prohibits voluntary dissolution while criminal proceedings are pending.

Can you merge or sell a company while it has an active criminal case?

Only with judicial authorization (Article 23), and that requirement stays in effect until there is a final judgment or the sentence has been served. If the court has also ordered a registry freeze under Article 24, any attempted corporate transaction has no legal effect.

What should a criminal due diligence review include before buying a company in Costa Rica?

At a minimum: review of active or archived criminal proceedings over a ten-year window, registry annotations and freeze orders, public procurement history, existence of a compliance program under Law 9699, recent corporate restructuring history, and high-risk business relationships.

What happens if criminal risk is discovered after the purchase agreement is signed?

It depends on how the contract was structured. Specific representations and warranties, special indemnification clauses, and price holdback or escrow mechanisms can shift that cost to the seller — but they must have been negotiated before closing.

Related Reading

• Corporate Criminal Liability in Costa Rica (Law 9699)
• Corporate Law in Costa Rica
• Tax Crimes in Costa Rica

This article is for informational purposes only and does not constitute legal advice. Laws and their judicial interpretation may change; always consult an attorney before making decisions based on this content.