Global Anti-Corruption Initiatives Task Force
Corporations Benefit From Sentencing Guidelines Amendments … In Four Easy Steps
The U.S. Sentencing Commission has changed how the U.S. Sentencing Guidelines calculate fines for certain defendant companies, including companies charged with FCPA violations. The amendments, effective November 1, 2010, make more readily more available a long-standing three-level total offense level reduction. This change shifts the inquiry away from the (mis)conduct of the company’s high-level personnel towards the effectiveness of the company’s compliance and ethics program – a move that is surely to benefit corporate defendants.
Of course, crime prevention, that is, implementing and maintaining an effective compliance program, is a company’s best chance to avoid ever having to consider the benefits of the three-point reduction in the first place. Thus, instituting and complying with the new amendments' requirements serves two corollary functions: it both prevents liability through deterrence and rapid response, and mitigates the misconduct's impact should it nevertheless occur.
As the benefits of incentivizing companies to adopt proactive compliance, ethics, and self-reporting programs gain wider recognition, other countries eager to beef up their anti-bribery efforts can be expected to follow suit.
20-Year-Old Categorical Bar on Fine Reduction Now History
As FCPA practitioners know, since the adoption of the Sentencing Guidelines some 20 years ago, Section 8C2.5(f) has permitted corporate defendants able to demonstrate that they, at the time of the offense, had an effective compliance program in place to significantly reduce their fines by way of a three-level reduction in their total offense level.
For a company that finds itself in the unenviable position of having to calculate its guidelines range, a three-level offense reduction translates into significant real-world results—effectively reducing the applicable fine by at least 50%. For example, at the lower end of the range, a three-level decrease drops the fine from $15,000 to $5,000; and toward the higher end of the range, a three-level reduction moves the fine from $72.5 million (level 38) down to $36 million (level 35).
For the past two decades, however, companies seeking to benefit from a Section 8C2.5(f) reduction faced a considerable stumbling block—an automatic bar in cases where "high-level personnel" participated in, condoned, or were willfully ignorant of the offense. As of this writing, however, the actions of high-level corporate personnel no longer foreclose the possibility of receiving a significant compliance credit.
Introducing the New Four-Part Eligibility Test
Though the amendments may only provide cold after-the-fact comfort to a charged company’s shareholders or directors, the reality is that the three-level drop affords substantial benefits. Under new Section 8C2.5(f)(3)(C), a company with an effective compliance program, as defined in Section 8B2.1, can benefit from the three-level reduction if it meets four distinct criteria:
- The individual or individuals with operational responsibility for the compliance and ethics program have direct reporting obligations to the company’s governing authority or appropriate subgroup thereof;
- The compliance and ethics program detected the offense before discovery outside the company or before such discovery was reasonably likely;
- The company promptly reported the offense to the appropriate governmental authorities; and
- No individual with operational responsibility for the compliance and ethics program participated in, condoned, or was willfully ignorant of the offense.
The amendments respond to public concerns that (1) the categorical bar to the reduction operated too broadly, and (2) internal and external reporting of criminal conduct is, in appropriate cases, better encouraged by providing an exception to the general prohibition.
Effective Compliance Programs and Appropriate Responses to Criminal Conduct
Section 8B2.1(b)(7) requires that, in order to have an "effective compliance program," a company that has detected criminal conduct must take "reasonable steps to respond appropriately to the criminal conduct and to prevent further similar criminal conduct, including making any necessary modifications to the company’s compliance and ethics program."
Application note 6 now helpfully explains what constitutes (1) an appropriate response to criminal conduct, as well as (2) proactive steps designed to avert similar conduct in the future. Specifically, the application note provides that such steps "may include the use of an outside professional advisor to ensure adequate assessment and implementation of any modifications." (Emphasis added.)
Answering Questions Raised by the New Amendments . . . .
The amendments should be warmly received by companies making a significant effort to develop and implement effective internal compliance and ethics programs. Such proactive steps translate into robust compliance programs reducing corporate exposure to risk.
However, the appearance of the amendments also raises some important questions in need of answers:
· What role, if any, can and should general counsel now play in internal investigations and in reporting offenses to the government? Are general counsel still able to instruct outside counsel on how to conduct internal investigations, or must such directions now principally come from the compliance/ethics officers?
The amendments require that the company’s compliance and ethics officers be expressly authorized to report their findings as it relates to actual or potential criminal conduct personally and directly to the company’s executive leadership (the “governing authority”). This, however, does not require the company’s general counsel to remain uninvolved in ethics and compliance issues. To the contrary, it is highly advisable that general counsel maintain a close, cooperative, and supportive relationship with the compliance and ethics officers. Likewise, the amendments do not preclude general counsels from instructing outside counsel on matters relating to the internal investigations. The only caveat is that the general counsel must take care not to function as a “gatekeeper,” who filters information between the company’s compliance and ethics officers and its executives.
· Are internal investigations still privileged?
There is no reason that the amendments’ new reporting requirements should result in, or require, waiver or forfeiture of any attorney-client privilege. The amendments simply require unfiltered, direct reporting between the ethics and compliance officers and the company’s executives, early and voluntary self-disclosure, and that the compliance and ethics officers remain free of culpability. These objectives can be achieved without sacrificing the attorney-client privilege, and nothing in the text of the amendments (or its application notes) requires companies to waive the attorney-client privilege or work-product protections in order to qualify for a reduction.
· Does a company’s retention of outside counsel for an investigation impact the analysis of whether the three-level reduction is available?
The use of outside counsel poses no obstacle, provided that they work through the company’s compliance and ethics officers, and that it is the latter who report their findings to the company’s executives. To the contrary, companies are well-advised to take advantage of outside counsel's independent investigation.
UK Anti-Bribery Act's Compliance Incentives Offer a Glimpse of the Future?
With the passage of Bribery Act of 2010, outlawing bribery of both public and private officials, the U.K. is also placing an emphasis on unimpeded reporting, early detection, and self-reporting. Similar to the Section 8C2.5(f)(3)(C), the U.K. Bribery Act of 2010, scheduled to come into force in April 2011, offers a defense for organizations able to demonstrate that, at the time of the offense, they had "adequate" compliance procedures in place to prevent the offense being investigated.
This summer, moreover, the U.K.'s Serious Fraud Office – as part of its efforts to offer DOJ-style guidance “opinion releases” to companies – announced a non-exhaustive collection of measures likely required for companies to avail themselves of the adequate-procedures-designed-to-prevent-prohibited-payments defense, which in turn would allow companies to completely avoid criminal prosecution and instead face only civil liability or no liability at all. These measures include having in place (i) an effective compliance plan, (ii) a formalized code of ethics, (iii) creation of an "anti-corruption culture" within the company, (iv) the presence of direct internal corporate reporting systems, (v) regular checks and audits, (vi) appropriate and consistent disciplinary processes, (vii) early detection of potential violations, (viii) voluntary self-referral, and (ix) remedial actions to remedy past cases of corruption.
However, the availability of such "home run" defenses for effective compliance and ethics programs appear to be the exception – not the rule – in most countries.
By way of brief comparison , Germany's 1998 Act on Combating Bribery of Foreign Public Officials in International Business Transactions, and the Turkish Law No. 4782 and the Turkish Criminal Code, while otherwise praiseworthy efforts to stem foreign bribery, afford companies no comparable codified "out" against criminal liability, even when companies can demonstrate good-faith efforts to prevent the bribery in the first place.
That said, as the benefits of incentivizing companies to set up effective compliance and ethics programs, reporting systems, self-disclosure, and whistleblower protections become more widely understood, other countries can be expected to follow the U.S. and U.K. lead.
Avoid Liability – and the Financial Consequences Thereof – In Four Easy Steps: Review, Revise, Hire, and Submit
Companies must take careful stock of their compliance and ethics programs to ensure that they are appropriately tailored to fit the amended guidelines. The four things companies must do in light of the recent Guidelines amendments are:
1. Review their compliance and ethics program to ensure the compliance and ethics officers have direct responsibility, set forth in writing, to the board of directors audit committee, or similar subgroup to immediately inform them of suspected non-compliance or criminal conduct;
2. Revise existing compliance policies and procedures to identify and promptly remedy potential internal control and compliance weaknesses;
3. Hire outside counsel to investigate cases of suspected non-compliance, and to suggest appropriate amendments to the company's compliance and ethics program to help stave off questions concerning whether the company took "reasonable steps" upon learning of the suspected criminal conduct; and
4. Submit an annual report assessing the implementation and effectiveness of the company's compliance and ethics program.
These four simple steps offer companies low-cost "insurance" against criminal conduct, as well as a means to mitigate – if not entirely avoid – the "parade of horribles" that unchecked conduct can have on a company's long-term future.
T. Markus Funk is co-chair of the American Bar Association's Global Anti-Corruption Initiatives Task Force, and a partner in Perkins Coie’s Investigations and White Collar Defense Group. Markus can be reached at email@example.com .
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