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New Incentives for Corporations to Maintain Effective Compliance and Ethics Programs

May 21, 2010

 

On April 30, 2010, the United States Sentencing Commission submitted to Congress a series of amendments to the Federal Sentencing Guidelines that would expand the situations in which a company can significantly reduce its exposure to criminal liability by maintaining effective compliance and ethics programs. Unless Congress acts to reject or modify the amendments, they will take effect on November 1, 2010.

The proposed amendments will (1) allow a corporation to qualify for a point reduction even if high-level personnel were involved the underlying criminal conduct, so long as certain conditions are satisfied; (2) clarify the two components of remediation--appropriate response and preventive measures--required for a corporation to receive credit for its compliance and ethics program; and (3) provide courts with more discretion in managing the conditions of corporate probation.

Background

Under the basic framework of the Federal Sentencing Guidelines, the amount of a corporate criminal fine is determined primarily by two factors: (1) the loss amount associated with the criminal conduct; and (2) the corporation’s culpability score (which determines the multiplier that is applied to the loss amount). Under Chapter Eight of the Guidelines, a corporation’s culpability score is calculated based on six factors, spelled out in §8C2.5:

  • corporate involvement in or tolerance of criminal activity;
  • corporate history of misconduct;
  • whether the misconduct violated a judicial order or injunction;
  • whether the corporation directly or indirectly obstructed justice;
  • the effectiveness of compliance and ethics programs in place at the time of the offense; and
  • whether the corporation self-reported, cooperated, and has accepted responsibility.

Corporations in proactive risk management mode often focus on developing effective compliance and ethics programs, as this factor is less context-specific than some of the others. In theory, having a program that meets the seven requirements set forth in §8B2.1 entitles a corporation to a three-point reduction to its culpability score.

Historically, however, few companies have been able to take advantage of this reduction. For one thing, the guidelines currently contain a per se disqualification where a person within “high-level personnel”[1] of the organization participated in, condoned or was willfully ignorant of the criminal conduct, which is often the case in corporate prosecutions. Separately, there continues to be some confusion about some of the seven requirements for effective programs, as defined in §8B2.1. The 2010 amendments aim to address both of these criticisms. They also tweak the conditions for corporate probation.

Removal of the Per Se Disqualification

Most significantly, the disqualification language in §8C2.5(f)(3) is being modified: even if high-level personnel were involved in the underlying criminal conduct, a corporation can still receive the reduction if four conditions are satisfied:

(i) the individual or individuals with operational responsibility for the compliance and ethics program have direct reporting obligations to the governing authority or an appropriate subgroup thereof (e.g., an audit committee of the board of directors);

(ii) the compliance and ethics program detected the offense before discovery outside the organization or before such discovery was reasonably likely;

(iii) the organization promptly reported the offense to appropriate governmental authorities; and

(iv) no individual with operational responsibility for the compliance and ethics program participated in, condoned, or was willfully ignorant of the offense.

The commentary to the new language clarifies that “direct reporting obligations” means authority to communicate personally with the Audit Committee or Board. Thus, a reporting structure where the Chief Compliance Officer has a direct reporting line to the CEO and a dotted line to the Audit Committee may be sufficient. Besides encouraging corporations to adopt such a reporting structure, the new conditions also favor rigorous monitoring and self-reporting, priorities that are consistent with the Justice Department’s Principles of Federal Prosecution of Business Organizations.

Additional Guidance on Remediation

In terms of guidance about what constitutes an effective compliance and ethics program, the seven substantive requirements in §8B2.1(b) remain the same. The corporation must:

(1) establish standards and procedures to prevent and detect criminal conduct;

(2) educate its Board about the standards and procedures, assign oversight responsibility to an executive officer, and ensure that individuals with day-to-day operational responsibility for the program have adequate resources and access to management and board members;

(3) make reasonable efforts to avoid placing individuals who are known to have engaged in improper conduct in positions of substantial authority;

(4) take reasonable steps to communicate its standards and procedures to the Board, executives, and other employees and agents and provide adequate training for these groups;

(5) monitor compliance with its standards and procedures, evaluate their effectiveness, and encourage reporting without fear of retaliation;

(6) promote and enforce its program consistently, including disciplining violators; and

(7) take reasonable steps to respond appropriately to violations and prevent similar future conduct.

But the amendments will add a new section to the commentary to §8B2.1(b), explaining two distinct aspects of the remediation contemplated in subsection (7). First, the corporation should respond appropriately to the criminal conduct. This means taking reasonable steps to remedy the harm resulting from the conduct, which “may include providing restitution to identifiable victims” or self-reporting and cooperating with authorities. Second, the organization should take steps to prevent similar future conduct. In addition to monitoring and testing the program, the corporation may use “an outside professional advisor” to aid its assessment and implementation of any modifications.

The Sentencing Commission had originally proposed stronger language regarding restitution and a direct reference to corporate monitors. The restitution language was softened in response to concerns about identifying victims and allowing civil litigation to run its course. The reference to monitors was removed because of the controversy surrounding high-cost third-party monitors. Regardless, companies that uncover criminal conduct within their organization should consider the pros and cons of both of these options.

New Conditions for Corporate Probation

Finally, §8D1.4 is being amended so that courts have more discretion in managing the conditions of a corporation’s sentence of probation. There will no longer be a distinction between probation imposed on a corporation solely to enforce a monetary penalty and probation imposed for any other reason. Thus, all conditional probation terms, including the requirement that the corporation develop an effective compliance and ethics program and a schedule for its implementation, are available for the court’s consideration.

What It Means for Your Business

The amendments strengthen already existing incentives to create a robust compliance program and self-report potential criminal violations. Between now and November, corporations may wish to take a fresh look at their compliance programs to consider the costs and benefits of increasing monitoring and auditing of the program and adopting the reporting structure recommended by the Guidelines.

To view the text of the amendments as printed in the Federal Register, see http://www.ussc.gov/

 


 

[1] “High-level personnel of the organization” generally means individuals who have substantial control over the organization or who have a substantial role in the making of policy within the organization. The term includes directors, executive offices, and business leaders. See § 8A1.2, Commentary 3(b).