On April 29, 2010, the United States Sentencing Commission submitted new amendments for the Sentencing Guidelines to Congress for approval. Some of these amendments are significant and should be carefully studied by companies and their compliance personnel. In the right circumstances, the amendments could save several million dollars for companies facing substantial criminal charges, provided that the company has an effective compliance program in place.
Scheduled to take effect on November 1, 2010 absent congressional intervention, the amendments will change the Organizational Guidelines, which advise federal courts on how companies should be sentenced for any federal crime. Among other things, the Organizational Guidelines provide credit to any company that has an "effective compliance and ethics program."1 If a company is charged with a crime, that credit can result in a substantially lower fine or a substantially lower settlement agreement with the Department of Justice.
There are three significant changes to the Organizational Guidelines. First, in very limited circumstances, the amendments allow a company to obtain credit for an effective compliance program even when one of its senior officials is involved in the misconduct. Second, the amendments clarify how a company with an effective compliance program may be expected to respond upon learning of misconduct. Finally, the amendments clarify that a court has significant authority to monitor companies as a condition of probation.
- Obtaining Credit for an Effective Compliance Program Even When a Senior Official Is Implicated
The most significant change to the Organizational Guidelines makes it easier for companies to claim credit for an effective compliance program even when high-ranking officers participated in an offense. Currently, the Organizational Guidelines state that a company is not eligible to receive any reduction in the sentence for an effective compliance program if a high-level officer or employee within an organization participated in, condoned, or was willfully ignorant of the offense.
Under the amended guidelines, even when a senior level official is implicated in the offense, a company can still receive credit for an effective compliance program under four conditions. Those conditions are:
- the individual or individuals with operational responsibility for the compliance program must have direct reporting obligations to the governing authority or an appropriate subgroup thereof (such as an audit committee of the board of directors);
- the compliance program must have detected the offense before discovery outside the organization or before such discovery was reasonably likely;
- the organization must have promptly reported the offense to appropriate governmental authorities; and
- no individual with operational authority for the compliance and ethics program participated in, condoned, or was willfully ignorant of the offense.
This amendment should cause any company to undertake a practical evaluation of its compliance program and reporting structure. Does the company's reporting structure give it the opportunity to claim this credit if it is needed? Has the company selected the appropriate person to be responsible for the operation of the company's compliance program and provided that person with a sufficient level of authority? Is the company's compliance program likely to detect misconduct at all levels of the organization? If a company waits to undertake this evaluation until it has discovered misconduct, it will be too late.
If the company officer ultimately responsible for the operation of the compliance program is not reporting directly to the board of directors or a committee of the board, the company should give serious consideration to revising its reporting structure. Under the amended guidelines, at a minimum, the chief compliance officer must report to the governing body on an annual basis about the implementation and effectiveness of the company's compliance program.
- Clarifying How a Company Should Respond to Discovery of Misconduct
The amendments also provide additional guidance to a company on how it should respond once it learns of misconduct. In order for a company to have an "effective compliance and ethics program," a company is required to "take reasonable steps to respond appropriately to criminal conduct and to prevent further similar misconduct . . . ."2 However, the current guidelines do not provide guidance on what this standard requires.
Under the amended guidelines, the Sentencing Commission has provided additional examples of what companies may be expected to do. Where appropriate, a company may be expected to (1) provide restitution to identifiable victims; (2) provide other remediation; (3) self-report and cooperate with authorities; and (4) evaluate its compliance program and modify it to ensure its effectiveness. In evaluating its compliance program, a company "may include the use of an outside professional advisor to ensure adequate assessment and implementation of any modifications."
This guidance will present challenges to companies that have learned of potential criminal conduct. The guidelines do not describe any of these examples as absolute prerequisites. However, companies may be pressed by courts to explain why misconduct was not self-reported or why restitution was not provided to victims. Similarly, prosecutors may expect companies to take these steps prior to discussing a pre-indictment resolution. The bottom line is that companies must be prepared to explain why their response to the discovery of misconduct was both reasoned and proportioned. If this explanation is not delivered to a court or prosecutor's satisfaction, the company may lose the benefit of any sentencing credit for its compliance program.
- Clarifying the Judicial Role in Monitoring Companies After Sentencing
Third, the amendments were intended to remove any ambiguity that judges have significant authority to impose continuing obligations on companies as a condition of probation. The amendments eliminate the Guidelines' current distinctions between conditions of probation imposed solely to enforce a monetary penalty and those imposed for any other reason. Courts have the authority to order companies to make their books and records available to court-appointed experts and to make their employees available for interrogation, all at the companies' expense. Courts also have the authority to order companies to adopt effective compliance programs.
However, some ambiguity still remains. The Sentencing Commission did not enact a proposal that would allow courts to appoint independent monitors as a condition of probation. Some judges have expressed dissatisfaction with independent monitors retained by companies as part of deferred prosecution agreements and may be tempted to undertake more active supervision of these companies. It is unclear if this tension between judges and the Department of Justice will manifest itself in future cases and, if so, whether courts will interpret the Commission's refusal to adopt this proposal as a constraint on the courts' authority to order the retention of an independent monitor.
- The Importance of Retaining Documents
Finally, it should be noted that the Sentencing Commission declined to enact one of its proposals concerning the retention of documents. In that proposal, the Commission proposed requiring all senior level officials and employees to be aware of the company's document retention policies and to conform those policies to meet the goals of an effective compliance program.
The Commission's decision not to enact this proposal should not diminish the importance of document retention for a company's compliance program. If a company does not have a strong document retention policy that is fully implemented (and that includes steps to suspend any routine destruction of documents in appropriate circumstances), it may be challenging for the company to execute an effective compliance program. The ability to recover documents is often critically important to the ability of auditors or compliance personnel to investigate allegations of misconduct. The inability to detect misconduct, as many cases have shown, can be costly for companies in varied and substantial ways.