Originally published May 14, 2004
U.S. Sentencing Commission Expands the Requirements for Effective Programs
On April 30, 2004, the U.S. Sentencing Commission (the Commission) sent to Congress its proposed changes to the Sentencing Guidelines for Organizations (the Amendments) which establish the framework for compliance and ethics programs. The Amendments expand and clarify the requirements for an "effective" compliance and ethics program. These changes will require entities to evaluate whether their existing compliance and ethics programs meet the new criteria and to make appropriate modifications if they don’t. The Amendments are likely to lead to a new generation of compliance and ethics programs. Even the name, "Compliance Program," used in the former guidance has been changed to reflect the new requirements. Programs are now to be evaluated as "Compliance and Ethics Programs."
The organizational guidelines apply to a wide variety of entities, including corporations, partnerships, associations, joint-stock companies, unions, trusts, pension funds, unincorporated organizations, governments, and nonprofit organizations. The Amendments reflect the importance the Commission and a host of enforcement agencies place on lawful and ethical behavior. They also reflect the government’s aggressive response to Enron and other recent corporate scandals, including the Sarbanes-Oxley Act and related regulations. In making the decision to pursue civil or criminal fraud prosecutions, the Department of Justice and other law enforcement agencies will evaluate organizational behavior using the criteria set forth in the Amendments. The Amendments include a new guideline that addresses the minimal requirements for an "Effective Compliance and Ethics Program," defined as "a program designed to prevent and detect criminal conduct." Below is a summary of the revised elements necessary for an effective compliance and ethics program.
Summary of Revised Seven Elements:
1. Standards and Procedures: An organization must establish standards and procedures to prevent and detect criminal conduct. Standards and procedures include "standards of conduct and internal controls" reasonably capable of reducing the likelihood of criminal conduct.
2. Organizational Leadership and Culture: The organization’s governing authority1 is now required to be "knowledgeable about the content and operation of the compliance and ethics program" and to exercise reasonable oversight over the program’s implementation and effectiveness. "High-level personnel … shall ensure that the organization has an effective compliance and ethics program" and specific individuals among this level of personnel shall be assigned overall responsibility for the program. The Amendment requires that an individual(s) be assigned responsibility for the "day-to-day" operations of the program. This individual(s) shall have direct access to the governing authority, report periodically to the governing authority and shall have adequate resources.
3. Reasonable Efforts to Exclude Prohibited Persons: The organization must make reasonable efforts to ensure that personnel with substantial authority have not engaged in illegal activities or conducted themselves in a manner inconsistent with the compliance and ethics program.
4. Training and Communication: The Amendment requires training and the dissemination of information relevant to the compliance and ethics program and its objectives. It lists the types of individuals within the organization that need to be trained, which include "the governing authority, the organizational leadership, the organization’s employees, and, as appropriate, the organization’s agents."
5. Monitoring, Auditing and Evaluation of Program Effectiveness: An organization’s compliance and ethics program must include monitoring and auditing systems that are designed to "detect criminal conduct." There is also a requirement to periodically evaluate the compliance program itself for effectiveness. A reporting system is now required that will provide a means for "employees and agents" to report or seek guidance about potential or actual criminal conduct. The new language also requires that the reporting system incorporate a non-retaliation policy and should allow for anonymous or confidential reporting.
6. Performance Incentives and Disciplinary Actions: The organization shall consistently enforce, at all levels of the organization, the compliance and ethics program through incentives to perform in accordance with the program and the use of appropriate disciplinary measures for engaging in or "failing to take reasonable steps to prevent and detect criminal conduct."
7. Remedial Action: Once an organization detects criminal conduct it must take reasonable steps to respond appropriately AND prevent further criminal conduct including modifying the compliance and ethics program.
Other Relevant Changes
Risk Assessment: The organization shall periodically assess the risk of criminal conduct within its operations and shall take appropriate steps to design, implement or modify each element of the program to reduce the risk of criminal behavior. The Commission has placed new emphasis on risk assessments by making them a required component, and not merely recommended, as under the former Guidelines.
Adoption of Industry Standards/Government Regulation: An organization that fails to incorporate and follow applicable industry practice or the standards called for by any applicable governmental regulation will be found not to have an effective compliance and ethics program.
Culpability Score: An organization will not get credit for the existence of a compliance and ethics program if, after becoming aware of an offense, it unreasonably delayed reporting the offense to government authorities, or if an individual within "high-level personnel" participated in, condoned or was willfully ignorant of the offense.
Waiver of Attorney-Client Privilege: The Amendment contains language in the Commentary of §8C2.5 that states: "waiver of attorney-client privilege and of work product protections is not a prerequisite to a reduction in culpability score under subdivision (1) and (2) of subsection (g) unless such waiver is necessary in order to provide timely and thorough disclosure of all pertinent information know to the organization." However, the Department of Justice now takes into account the waiver of attorney-client privilege in making its charging decisions.
Upward Departures: In Section 8C4.10 there is new language that states an upward departure may be warranted if an organization was required by law to have an effective compliance and ethics program but did not. This means that a court is permitted to increase an organization’s sentence if it ignores, or pays insufficient attention to its compliance program obligations. This requirement applies to an increasing number of organizations, including publicly traded corporations and a broad range of "financial institutions" regulated under the USA PATRIOT Act.
Corporate Probation: The court is required to order a term of probation if the organization had 50 or more employees at the time of sentencing or was required under law to have an effective compliance and ethics program and didn’t have such a program.
Violations of Probation: A policy statement has been added that states if an organization is found to be in violation of a condition of probation, the court may (1) extend the term of probation; (2) impose more restrictive conditions of probation; or (3) revoke probation and resentence the organization.
Footnote
1 "Governing Authority" means (a) the Board of Directors, or (b) if the organization does not have a Board of Directors, the highest level governing body of the organization."
The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.