Several new amendments to the U.S. Sentencing Guidelines (USSG) took effect Nov. 1, 2010. The amendments relate to potential criminal sanctions against businesses and individual defendants. First, the amendments underscore for a business the critical importance of having a meaningful and comprehensive compliance program in place, before the Government comes calling. Second, the amendments give Courts more alternatives and flexibility when sentencing individual defendants.

Business Defendants

Chapter 8 of the USSG (“Sentencing of Organizations”) deals with the sentencing of business organizations. While a business can be placed on probation after conviction, often the most significant aspect of a business’ sentence will be the fine imposed as a result of the conviction. Those Guidelines provide a fine range for the Court to consider when sentencing a business. An important factor in determining the advisory range for the fine to be imposed in sentencing a business is the “culpability score” for that business.

There are a number of factors that go into calculating a business’ culpability score. In addition to the size of the business (based on the number of employees of the business), there are two factors that play a significant role in calculating the company’s culpability score: (1) whether an employee “within high-level personnel” or “within substantial authority personnel” was involved in the criminal conduct; and (2) whether the business “had in place at the time of the offense an effective compliance and ethics program.” U.S.S.G. § 8C2.5(b) and (f), respectively.

The higher the level of authority within the business held by a person participating in, condoning, or who was willfully ignorant of, the criminal conduct, the higher the culpability score; a higher culpability score means a higher potential fine. If a company has an effective compliance/ethics program in place at the time of the offense, the culpability score is reduced. A lower culpability score means a lower fine range, and therefore, a lower potential fine. So, it is to be expected, that if convicted of a federal crime, a business will strive to have as low as a culpability score as the facts will support. While those factors (i.e., the level of authority of the personnel involved and the company having a compliance/ethics program) have significance independent of one another in deciding the business’ culpability score, those factors can also impact one another.  

Prior to the November 1 amendment to U.S.S.G. § 8C2.5(f)(3), even if a company had an effective compliance/ethics program in place, there was no reduction in the culpability score for having such a program if “an individual within high-level personnel of the organization, a person within high-level personnel of the unit of the organization within which the offense was committed where the unit had 200 or more employees, . . . , participated in, condoned, or was willfully ignorant of the offense.” U.S.S.G. § 8B2.5(f)(3)(A) (Nov. 1, 2009). That is, there was no reduction in the culpability score for having a compliance/ethics program if a person with high enough authority in the business participated in or condoned the criminal conduct, or was willfully ignorant of the conduct. In other words, the level of authority held by a culpable person could “trump” the fact that the company had a compliance program. Having a compliance/ethics program yielded the company nothing in reducing the culpability score if a person “high enough” in the company was involved in the criminal conduct.

After the Nov. 1, 2010, amendments an organization may still get a reduced culpability score for an effective compliance/ethics program, even though high-level personnel are involved in the criminal conduct, if:

  1. the individual or individuals with operational responsibility for the compliance and ethics program . . . have direct reporting obligations to the governing authority or an appropriate subgroup thereof (e.g., an audit committee of the board of directors);  
  2. the compliance and ethics program detected the offense before discovery outside the organization or before such discovery was reasonably likely;  
  3. the organization promptly reported the offense to appropriate governmental authorities; and  
  4. no individual with operational responsibility for the compliance and ethics program participated in, condoned, or was willfully ignorant of the offense. U.S.S.G. § 8C2.5(f)(3)(C) (Nov. 1, 2010).  

There are two important considerations to keep in mind: (1) a business that does not already have a compliance/ethics program in place, should promptly confer with counsel to develop and implement a compliance/ethics program; and (2) a business with a compliance/ethics program in place should review its current reporting structure and consider changes in that structure so that there are “direct reporting obligations” for those personnel having operational responsibility for the compliance/ethics program.

The other three factors for getting a compliance/ethics program reduction are essential and should not be overlooked; all four factors must be present to get a lower culpability score. For example, no one with operational responsibility for the compliance/ethics program can be involved in the criminal conduct. But the change in the Guidelines to include the “direct reporting obligations” requirement is perhaps the most noteworthy for business-defendants, as it is a significant change from prior USSG internal reporting requirements.

What are “direct reporting obligations”?

The amended USSG define “direct reposting obligations” as follows:

[A]n individual has “direct reporting obligations” to the governing authority or an appropriate subgroup thereof if the individual has express authority to communicate personally to the governing authority or appropriate subgroup thereof (A) promptly on any matter involving criminal conduct or potential criminal conduct, and (B) no less than annually on the implementation and effectiveness of the compliance and ethics program.

U.S.S.G. § 8C2.5, Appl. Note 11.

A compliance/ethics program for purposes of the Sentencing Guidelines must include several important characteristics to be deemed “effective.” U.S.S.G. § 8B2.1. One of those characteristics is that “after criminal conduct has been detected” by the business, the business is required to “take reasonable steps to respond appropriately to the criminal conduct and to prevent further similar conduct, including making any necessary modifications to the organization’s compliance and ethics program.” U.S.S.G. § 8B2.1(b)(7).

A new Application Note (Appl. Note 6) provides additional guidance on the “reasonable steps” to be taken by a company after criminal conduct has been discovered, such as self-reporting, cooperation with authorities, restitution, and revision of its compliance/ethics program:

(1) The company “should take reasonable steps, as warranted under the circumstances, to remedy the harm resulting from the criminal conduct.” Those steps “may include, where appropriate,” restitution to identifiable victims, other forms of remediation, self-reporting, or cooperation with authorities.

(2) The company “should act appropriately to prevent further similar criminal conduct,” including assessing and changing its compliance and ethics program as “necessary to ensure the program is effective.” Those steps are to be consistent with other Subsections of the Guideline and “may include the use of an outside professional advisor to ensure adequate assessment and implementation of any modifications.”

Another USSG amendment relates to a business being placed on probation and the development of an effective compliance/ethics program. The Court may impose a condition of probation that requires the company to develop, and submit to the Court for approval, a compliance/ethics program. U.S.S.G. § 8D1.4(b). This means that a condition of probation imposed only to enforce a monetary penalty and a condition of probation imposed for another reason (e.g., development of an effective compliance/ethics program) are no different; all conditions of probation are available to the Court in sentencing a business.

Individual Defendants

In addition to the amendments dealing with the sentencing of businesses, there was an amendment to the USSG that enlarged the alternatives to imprisonment available to Courts in sentencing individual defendants.

The advisory sentencing range for an individual is taken from the Sentencing Table in Chapter 5 of the USSG, determined by where on the Table the defendant’s Offense Level and Criminal History Category intersect. The options available to Courts as alternatives to imprisonment in sentencing some individual defendants were increased by expanding 2 of the “Zones” on the Sentencing Table in the Guidelines.

A sentencing Court has the option of imposing a sentence of probation, incarceration or in some instances a “split sentence” (a sentence including some incarceration and some period of supervised release or probation) depending on where a defendant’s Offense Level and Criminal History Category place that person within certain “Zones” on the Sentencing Table. For example, when a defendant is found to be in “Zone A” of the Table (i.e., when the advisory Guidelines sentencing range is 0 to 6 months), the Court has the option of (1) imposing a period of probation; or (2) imposing a period of incarceration.

A defendant in Zone B could be sentenced to (1) a period of incarceration; (2) a period of incarceration, for at least 1 month, followed by a period of supervised release that includes community confinement (half-way house) or house arrest as a condition of the company’s supervised release; or (3) a period of probation that includes a period of intermittent confinement, community confinement or house arrest. The amount of time a person could be required to serve in community confinement or under house arrest is based on a schedule that substitutes 1 day of community confinement or house arrest for 1 day of incarceration. U.S.S.G. § 5C1.1(c) and (e). Thus, if the advisory sentencing range is 4 to 10 months, the sentence is to include at least 1 month of imprisonment and at least 3 months of house arrest during the period of supervised release.

A defendant in Zone C could be sentenced to (1) a period of incarceration; or (2) a period of incarceration for at least one-half of the minimum term (e.g., if the minimum term was 8 months, the defendant is to be incarcerated for at least 4 months) followed by a period of supervised release that included community confinement or house arrest. The amount of time a person could be required to serve in intermittent confinement, community confinement or house arrest is based on a schedule that substitutes 1 day of confinement or house arrest for 1 day of incarceration. U.S.S.G. § 5C1.1(d) and (e). Thus, if the advisory sentencing range is 8 to 14 months, the sentence is to include at least 4 months of imprisonment followed by at least 4 months of house arrest during the defendant’s supervised release.

Defendants in Zone D could expect to be sentenced to incarceration.

While Zone A was not modified in the most recent set of amendments, Zones B and C were expanded by one Offense Level; “taking away” one Offense Level from Zone C and placing it in Zone B, and “taking away” one Offense Level from Zone D and placing it in Zone C. This means that after Nov. 1, 2010, some defendants who would have been in Zone D will be in Zone C, and some defendants who would have been in Zone C will be in Zone B. In either situation, those defendants may have sentencing options available to them that were previously not available.

For example, Zone B now encompasses Offense Level 11, Criminal History Category I (8-14 months) and Zone C now includes Offense Level 13, Criminal History Category I (12-18 months). This means that sentencing Courts have the discretion to exercise some leniency by imposing a sentence of probation or a split sentence on defendants for several higher Offense Levels than was previously available.

Another amendment addresses “specific offender characteristics” of the defendant such as considering his/her military service (U.S.S.G. § 5H1.11) as a relevant factor like, age (U.S.S.G. § 5H1.1), mental/emotional health (U.S.S.G. § 5H1.3) and physical condition (U.S.S.G. § 5H1.4) in deciding whether a departure from the advisory sentencing range is appropriate.

Another amendment eliminates the “recency” points in calculating the defendant's Criminal History Category (U.S.S.G. § 4A1.1(e)). A defendant’s criminal history category is determined by assigning various “points” for aspects of the defendant’s criminal history. For example, 3 points are added if a defendant has been convicted and sentenced to more than 1 year of imprisonment (a felony conviction).

Before the amendment, if the defendant had been sentenced to more than 1 year of incarceration and the “defendant committed the instant offense less than two years after release from imprisonment” on that sentence, 2 points were added to his/her criminal history score. A defendant with a higher criminal history score (“category”) faces a longer sentence.