On April 29, the United States Sentencing Commission submitted amendments of the federal Sentencing Guidelines to Congress for approval. The Sentencing Guidelines are rules adopted by the Sentencing Commission that set out a uniform sentencing policy, which is generally advisory and not mandatory in nature, for individuals and organizations convicted in the U.S. federal courts system of felonies and serious misdemeanors, including offenses under the federal securities laws. Some of the new amendments to the Sentencing Guidelines are significant and should be carefully studied by companies and their compliance personnel. In the right circumstances, the amendments could confer significant benefits on a company facing criminal charges if 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, Section 8C2.5(f)(7) of the Organizational Guidelines provides for credit to any company that has an "effective compliance and ethics program." If a company is charged with a crime, that credit can result in a substantially lower fine or a substantially more favorable settlement agreement with the Department of Justice.
The amendments will make three significant changes to the Organizational Guidelines. First, in very limited circumstances, the amendments will allow a company to obtain credit for an effective compliance program even when one of its senior officials is involved in the offense. Second, the amendments will clarify how a company with an effective compliance program may be expected to respond upon learning of an offense. Finally, the amendments will clarify that a court has significant authority to monitor companies as a condition of probation.
Providing Credit for an Effective Compliance Program Even When a Senior Official Is Implicated
The most significant change to the Organizational Guidelines will make it easier for companies to claim sentencing credit for an effective compliance program even when high-ranking officers participated in an offense. The Organizational Guidelines currently 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 could still receive credit for an effective compliance program if the following four conditions are satisfied:
- The individual or individuals with operational responsibility for the compliance program must have direct reporting obligations to the governing authority or an appropriate subgroup of the governing authority (such as an audit committee of the board of directors);
- The compliance program must have resulted in detection of the offense before discovery outside the organization or before such discovery was reasonably likely;
- The organization must have promptly reported the offense to the appropriate governmental authorities; and
- No individual with operational authority for the compliance program shall have participated in, condoned, or been willfully ignorant of the offense.
This amendment should cause any company to address some critical questions as part of a practical evaluation of its existing 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 to seek the new credit.
If the company officer ultimately responsible for the operation of the compliance program is not reporting directly to the board of directors (or the appropriate board committee), the company should give serious consideration to revising its reporting structure. Under the amended guidelines, at a minimum, the chief compliance officer will have to report to the governing body on an annual basis concerning the implementation and effectiveness of the company's compliance program.
Clarifying How a Company Should Respond to Discovery of Misconduct
The amendments will provide additional guidance to a company on how it should respond once it learns of misconduct. For a company to have an "effective compliance and ethics program," it is required under Section 8B2.1(B)(7) of the Organizational Guidelines to "take reasonable steps to respond appropriately to criminal conduct and to prevent further similar misconduct..." The current guidelines, however, do not provide guidance on what this standard requires.
Under the amended guidelines, the Sentencing Commission has provided additional examples of actions companies may be expected to undertake to establish the effectiveness of their compliance programs. 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 the program 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. Although the guidelines do not describe any of these examples as absolute prerequisites for more favorable treatment under the new guidelines, companies may be pressed by courts to explain why they did not self-report misconduct or provide restitution to victims. Similarly, prosecutors may expect companies to take these steps before discussing a pre-indictment resolution. Companies must be prepared to explain why their response to the discovery of misconduct was both reasoned and proportional to the nature and scope of the misconduct. 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
The amendments are intended to remove uncertainty regarding the scope of the courts' authority to impose continuing obligations on companies as a condition of probation. The amendments will eliminate the current distinctions in the guidelines between conditions of probation imposed solely to enforce a monetary penalty and those imposed for any other reason, thereby broadening the courts' authority to oversee the operations of companies after the imposition of sentence. Courts will 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 will have the authority to order companies to adopt effective compliance programs.
The foregoing changes will not eliminate all ambiguity regarding the judicial role after sentencing. The Sentencing Commission did not adopt a proposal that would have allowed 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
The Sentencing Commission declined to adopt a proposal that would have required 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 adopt 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, the company may have difficulty administering an effective compliance program. Document recovery 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.
Based on past experience with changes to the Sentencing Guidelines, it will be a major surprise if the amendments do not become effective on November 1 as submitted, without intervention by Congress. Accordingly, companies should begin planning now how to apply the amendments to their own organizational structure in order to obtain the maximum benefit from the new guidelines. A key consideration will be the implementation of a process for detecting unlawful acts before they are likely to be discovered by outsiders and promptly reporting the misconduct up the line to compliance personnel and the company's governing authority. Although additional expense may be necessary to revise compliance programs in light of the amendments, the expense could prove to be a wise investment if the new program results in a reduction in criminal sanctions that otherwise could severely damage or (as in the case of Arthur Andersen) destroy a company.