We are living in a worrisome commercial environment, and the temptations to cut corners are great. Organizations and the managers at all levels who are responsible for them are at risk for severe sanctions for ethical lapses and criminal conduct that occur within the organizations. Whenever an employee commits an unlawful act within the apparent scope of his or her employment, whether or not the act is contrary to company policy, criminal liability can attach to the organization and its managers.
In working to limit the liability of organizations, the U.S. Sentencing Commission adopted Chapter 8 of the U.S. Federal Sentencing Guidelines. The Guidelines are designed to assist organizations in creating preventative compliance and ethic programs which, if followed, can mitigate potential sanctions against an organization and its managers when unethical or criminal conduct occurs within the organization.
The first set of Guidelines was created in 1984 to establish punishments for individuals. Chapter 8, setting forth sentencing standards for organizations and managers, was added in 1991. In 2004, amendments to the Guidelines included changes to Chapter 8 that instituted tougher penalties and sought to strengthen the importance of compliance and ethics programs. In January 2005, a divided U.S. Supreme Court held, in U.S. v. Booker, 543 U.S. 220, that an individual defendant’s mandatory sentence under other provisions of the Guidelines violated the Sixth Amendment. Since then, use of the Guidelines is no longer mandatory, but permissive and advisory. Some organizations may be tempted to relax their focus on developing and following compliance and ethics programs that meet Chapter 8 standards. Those organizations and their employees, particularly managers, should keep in mind that sentencing discretion allows judges to hand out not only sentences below the Guidelines, but also harsher sentences above the Guideline range. Consider that two or three years in prison is still a long time, even if the Guidelines provide for 10.
Chapter 8 applies to companies of all sizes,whether small, medium or large, although it permits smaller companies (with 200 or fewer employees) to implement a less structured and more informal compliance program. Chapter 8 defines the term “organization” broadly to include all publicly and privately held companies, including all types of business entities, such as partnerships and LLCs, as well as unions, trusts, pension funds, governments and political subdivisions, and not-for-profit organizations.
The goal of Chapter 8 is to provide fair punishment, adequate deterrence and incentives for organizations to maintain internal mechanisms for preventing, detecting and reporting criminal conduct. An organization that fails to institute effective compliance programs places both itself and its responsible managers at risk. Both the individual and the organization can be charged with a crime, and, upon conviction, the individual can face a harsh prison sentence and the organization can be penalized with a huge fine. Organizations should view the Guidelines as a powerful financial reason to institute effective internal compliance and ethics programs and send a clear message to senior management that they must prevent, detect and report criminal acts.
Chapter 8 Minimum Requirements
The 2004 amendments to Chapter 8 set forth seven minimumrequirements that an organizationmustmeet in order to demonstrate an effective compliance and ethics program:
- Establish compliance standards and procedures to fit the needs of the specific organization.
- Effectively communicate standards and procedures to employees at all levels through training programs and publications.
- Assign high-level personnel to oversee compliance.
- Use reasonable efforts to not grant substantial authority to those individuals who have had past conduct or ethical problems inconsistent with the compliance program.
- Establish methods for achieving compliance and put into place a system for monitoring, auditing, and reporting possible and potential violations.
- Consistently enforce any compliance program within the organization.
- Upon detection of a violation, take reasonable steps to respond and to prevent further similar offenses.
What Can Management Do?
Management at all levels should take steps to demonstrate that legal and ethical conduct is highly valued and a priority in the organization by consistently setting good examples of ethical conduct, regularly providing and posting information about the company’s culture and compliance regulations, letting employees know that ethics will be considered in decision making, and talking about ethics in the workplace. It is important that the organization, at all levels of its operations, communicate to employees the importance of strengthening the ethical environment. Communication can take place at company meetings, by implementing training programs and through common daily interactions, among others.
Organizations and the managers responsible for them need to understand that putting effective compliance and ethics programs in place is no longer optional; it is a necessity. One of the best practices for limiting penalties against an organization is to energetically follow the Chapter 8 minimum requirements. Managers of organizations with effective compliance and ethics programs in place will have one less thing – substantial criminal sanctions – to interrupt their sleep.