On April 30, 2010, the United States Sentencing Commission submitted to Congress several amendments to the Federal Sentencing Guidelines that will expand situations where a company or other organization may reduce its risk of criminal liability by maintaining an effective compliance and ethics program. The amendments take effect November 1, 2010, unless Congress modifies or rejects the amendments. The text of the amendments is available at http://www.ussc.gov .
History
While the Federal Sentencing Guidelines (adopted November 1, 1991) provide for an array of criminal sanctions against a company, including remedial orders, disgorgement and probation, the major weapon is the monetary fine. The amount of the fine is determined by multiplying the monetary loss resulting from the criminal conduct by the company's culpability score. Under Chapter Eight of the Guidelines, a company's culpability score is calculated from six factors enumerated in Section 8C2.5:
- company involvement in or tolerance of criminal activity;
- company history of misconduct;
- whether the misconduct violated a judicial order;
- whether the company directly or indirectly obstructed justice;
- effectiveness of the company's compliance and ethics program; and
- whether, after the company discovered the criminal activity, it self-reported, cooperated and accepted responsibility.
The Sarbanes-Oxley Act of 2002 directed the Sentencing Commission to formulate guidelines for the sentencing of companies that are sufficient to deter and punish organizational criminal misconduct. Following this direction, the Guidelines provide a significant sentencing credit (penalty reduction) to convicted companies that have an effective compliance and ethics program in place at the time an offense occurs.
Section 8B2.1 of the Guidelines states that in order for a company to have an effective compliance and ethics program, the program must have at least the following nine features:
- standards and procedures to prevent and detect criminal conduct;
- active Board of Directors oversight of the content, operation and efficacy of the program;
- high-level personnel responsible for overall operation of the program with specific individuals responsible for day-to-day operations;
- periodic reporting of program operations and effectiveness to the Board of Directors;
- reasonable efforts to exclude individuals that a company knew or should have known had engaged in conduct not consistent with an effective compliance and ethics program;
- periodic monitoring and auditing to detect criminal conduct;
- periodic evaluations and a system for anonymous employee reporting of potential criminal conduct;
- consistent enforcement and promotion of compliance; and
- reasonable response to criminal conduct and reasonable steps to prevent future criminal conduct.
Amendments to the Guidelines
The recent amendments approved by the Sentencing Commission address the commentary to the Federal Sentencing Guidelines – the commentary provides explanations on how the Guidelines should be interpreted. The new amendments should expand the availability of credit (penalty reduction) a company may receive for having an effective compliance program and also suggest steps required of a company once criminal conduct is discovered.
Availability of Credit for an Effective Compliance and Ethics Program
Under the Guidelines, a company convicted of a crime is eligible to have its sentence reduced if it can demonstrate that it had an effective compliance and ethics program in place at the time the offense occurred. Under Section 8C2.5(f)(3) of the current Guidelines, a company is automatically disqualified from any benefit of having an effective compliance and ethics program in place if "an individual within high-level personnel of the organization ... participated in, condoned, or was willfully ignorant of the offense." Under the new amendments a company will now be eligible for a reduction in the sentence called for under the Guidelines if the following four conditions are satisfied:
- the top personnel responsible for the compliance and ethics program have direct reporting authority to the governing authority (the Board of Directors or a committee of the Board);
- the compliance program uncovered the problem before it was discovered by someone outside of the company or "before such discovery was reasonably likely";
- the company promptly reported the offense to the appropriate governmental authority; and
- no one with operational responsibility for the compliance and ethics program participated in, condoned or was willfully ignorant of the offense.
Clarification of Steps Necessary for Compliance Credit
The second important change included in the amendments is new guidance on what remediation steps must be undertaken after a company identifies an offense. In order to receive compliance credit, a company first must make reasonable efforts to remedy the harm that has taken place and, second, must revise its compliance and ethics program in order to prevent similar criminal conduct in the future.
Independent Compliance Monitors
The amendments as originally proposed stated that companies "may take the additional step of retaining an independent monitor to ensure adequate assessment and implementation of the modifications" made to prevent future criminal conduct. The Sentencing Commission did not adopt this proposed language and instead approved commentary stating that remediation steps taken may include the use of an "outside professional advisor" to ensure adequate assessment and implementation of any modifications. This change in language suggests that the use of risk management and compliance consultants during a company's assessment of its compliance and ethics program would be acceptable, as opposed to the often costly and intrusive outside corporate monitor that has sometimes been appointed to oversee consent decrees and deferred prosecution agreements.
The Sentencing Commission also did not adopt proposed language that highlighted document retention policies and their impact on compliance programs. In declining to adopt references to document retention policies, the Sentencing Commission decided that highlighting these policies would give them unreasonable prominence in sentencing decisions, which could cause companies to narrow their compliance focus at the expense of a broader compliance effort.
Practical Considerations
Assuming the amendments take effect as scheduled on November 1, 2010, they reinforce the existing incentives to create and maintain a vigorous compliance and ethics program. Companies should examine their organizational structure to make sure that those with operational responsibility for compliance and ethics programs have written authority for a direct reporting relationship with the Board of Directors or a Board committee. As part of a company's overall risk management, the compliance program should be reviewed periodically to confirm its effectiveness. When a potential problem is identified, it must be investigated and cannot be ignored. A company identifying a problem must carefully assess both remedial action and whether or not self-reporting to the government is warranted. While the new amendments to the Guidelines make it clear that to receive credit self-reporting is required before the government discovers the wrongdoing, self-reporting should only be undertaken after a careful examination of the specific facts and circumstances involved.
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