Editor’s note: The following guest commentary is from Roscoe C. Howard, Jr., the former U.S. Attorney for the District of Columbia.
The United States Sentencing Commission not only provides the federal criminal judicial system with its framework for sentencing federal criminal defendants, but it also provides rules as well as guidance for imposing penalties on individuals and organizations convicted of federal crimes. The U.S. Sentencing Commission ensures that the Guidelines change and adjust as experience and history dictate.
Since 1991, the Guidelines have provided a working framework for what constitutes an effective compliance program. In Chapter 8 Part D, the Guidelines have provided a working list of rules that corporations and their counsel have used as a benchmark for effective compliance programs. Not only do the federal courts rely on the Guidelines for imposition of criminal penalties and post conviction supervision, but also, governmental departments and agencies refer to the Guidelines in making prosecution determinations of organizations and the individuals who run them.
In the two decades that the guidelines for effective compliance programs have been in existence, their meaning and practicality are taught, reviewed and referred to in the corporate world every day. It is rare for a discussion of compliance programs or corporate investigations to take place without a reference to Chapter 8 of the Guidelines. Corporations and the compliance experts who assist them use the Guidelines in implementing the lessons and policies designed to prevent and detect corporate crimes.
With the attention that corporations now give to compliance programs, and the prominence of the Guidelines in most corporations’ cultures, it is rare for the U.S. Sentencing Commission to lack some notice that a change or adjustment to their policies or guidelines is needed. Compliance officers, corporate and criminal attorneys, as well as general corporate officers will notify the Commission or its staff when there are changes in the world of corporate compliance that need to be reflected in the Guidelines. If such a notice does not come to the Commission directly, it certainly will indirectly. Commission staff regularly monitor court decisions and trade publications to see how to make the Guidelines fit the reality of corporate America. Indeed, corporations, especially those who are politically active, will reach out to Congress to suggest or demand that changes be made. However, at least one of the suggested changes by the Commission defies logic and does not seem to be born of a hue and cry from the compliance world.
Proposed Amendments That Reflect Justice Department Policy
On January 12, 2010, the Commission voted to make public for comment its proposed changes to the Guidelines. Among the proposed amendments are suggested sentencing changes which appear to focus on the impact of a corporation’s crime on the community, as well as making the detection of the organization’s crime more likely.
The Department of Justice already considers a corporation’s restitution afforded to a victim in its calculus in deciding whether to charge the organization. The Department of Justice Manual lists among the “Factors to be Considered” in charging a corporation, in part, as:
[T]he corporation’s remedial actions, including any efforts to implement an effective corporate compliance program or to improve an existing one, to replace responsible management, to discipline or terminate wrongdoers, to pay restitution, and to cooperate with the relevant government agencies. See Chapter 9-28.300(A)(6); see also Chapter 9-28.900(A)&(BJ).
The proposed amendment to the Organizational Guidelines amends the Commentary to §8B2.1 (Effective Compliance and Ethics Program), and adds language describing reasonable steps a corporation can take after detecting illegal activity, including restitution to victims:
The seventh minimal requirement for an effective compliance and ethics program provides guidelines on the reasonable steps that an organization should take after detection of criminal conduct. First, the organization should respond appropriately to the criminal conduct. In the event the criminal conduct has an identifiable victim or victims, the organization should take reasonable steps to provide restitution and otherwise remedy the harm resulting from the criminal conduct.
In this proposed amendment to the commentary on the application of subsection (b)(7), the Commission reflects the practice of the Justice Department in assessing how to treat corporations after their criminal activity has been detected and addressed. With this proposal by the Commission, the Guidelines are brought into conformity with the federal practice known in the industry.
Strengthening the Evidentiary Gathering Process
The proposed amendments also make it clear that knowledge and adherence to the organization’s document retention policy is a prominent factor in determining the effectiveness of a compliance program. The proposed commentary to subsection (b)(2) of §8B2.1 would now read that:
Both high-level personnel and substantial authority personnel should be aware of the organization’s document retention policies and conform any such policy to meet the goals of an effective compliance program under the guidelines and to reduce the risk of liability under the law.
In addition, the commentary to subsection (c) would further state in section (iv) that:
The nature and operations of the organization with regard to particular ethics and compliance functions. For example, all employees should be aware of the organization’s document retention policies and conform any such policy to meet the goals of an effective compliance program under the guidelines and to reduce the risk of liability under the law.
The Guidelines would put the onus on all members of the organization, from the mail room to the executive suite, to maintain the “rope” that may be used at the “hanging.” However, this is reflective of the reality of a corporate investigation. The evidence that drives the truth finding process will always be the subject of preservation efforts and attempts at destruction by those whom it may inculpate. Thus, these types of “tweaks” by the Commission make sense and will always be part of their process.
Where is the Hue and Cry for Monitors?
But, in the aftermath of a criminal investigation, as the corporation is mending its ways and demonstrating that the company is putting its house in order, the corporate monitor does not appear to be a tool that cries out for increased implementation. Yet, the proposed commentary specifically calls for them:
6. Application of Subsection (b)(7). – The seventh minimal requirement for an effective compliance and ethics program provides guidelines on the reasonable steps that an organization should take after detection of criminal conduct. First, the organization should respond appropriately to the criminal conduct. . . . The organization may take the additional step of retaining an independent monitor to ensure adequate assessment and implementation of the modifications.
Although the language is permissive, the understandable desire of corporations to obtain the greatest leniency will result in this requirement becoming de facto mandatory. So, pursuant to the Guidelines, a reasonable and effective compliance program will include the use of a corporate monitor.
Moreover, post-conviction, in structuring the probation requirements of an organization, the proposed amendments invoke the consideration of a monitor as a regular tool for assessing the organization’s rehabilitation. These proposed amendments to the Guidelines would amend the language of §8D1.4 (Recommended Conditions of Probation – Organizations (Policy Statement) to specifically provide for unannounced visits by a corporate monitor, and also require that a corporation, at is own expense, to retain an independent, qualified, corporate monitor agreed to by the parties, or in the absence of agreement, selected by the court; in retaining a corporate monitor, the court “shall” approve the scope and role of the corporate monitor; an independent corporate monitor be allowed to make a “reasonable number of regular or unannounced examinations” of the organization’s books and records; and “a reasonable number of regular or unannounced examinations of facilities subject to probation supervision” be allowed.
The Commission proposed these amendments with little, if any, evidence that the injection of corporate monitors in more post-conviction scenarios was actually needed. Interestingly, the Commission did not seem to hold its usual fact finding hearings to assess the situation and does not seem to be armed with the type of feedback from court cases, constituents or Congressional representatives that would call for this type of amendment.
Unnecessary Erosion of Corporate Assets
What is clear is that the shift of the expense of monitoring a corporation post-conviction has gone from the government and its probation officers to the affected corporations. Monitors can be expensive and lasting. The cost of counsel is not lost on corporations, and the law firms who serve them. Many of the monitoring positions will be occupied by attorneys and their law firms whose cost, although necessary, can be considerable. It is a cost that will ultimately fall on the shareholders.
Installing monitors as a regular enforcement tool, rather than a rare one, was certainly not contemplated by the Department of Justice in its March 7, 2008 Memorandum entitled “Selection and Use of Monitors in Deferred Prosecution Agreements and Non-Prosecution Agreements with Corporations.” In that memorandum, the Department noted:
A monitor should only be used where appropriate given the facts and circumstances of a particular matter. For example, it may be appropriate to use a monitor where a company does not have an effective internal compliance program, or where it needs to establish necessary internal controls. Conversely, in a situation where a company has ceased operations in the area where the criminal misconduct occurred, a monitor may not be necessary.
The proposed amendments take no such caution in requiring monitors, and elevate them to a status not originally contemplated. The Commission was not armed with any information that the current practice of using courts’ experts and probation officers was an unsatisfactory mechanism to properly monitoring organizations. There is no evidence that the organizations themselves felt a need for a monitor in policing activities post-conviction. And, certainly, the Commission has received no information that policing by a monitor was a more efficient way to deter potential crimes.
These proposals will unquestionably, benefit the private bar. There should be little doubt that opportunities for employment will multiply as firms who have originally defended these organizations will have to turn over the monitoring to others who possess no conflict of interest. Shareholders will first be saddled with the expense of attorneys brought in to defend them and then by an additional expense for attorneys ordered in to monitor them.
What is certain is that the drain on corporate coffers will continue. An entity that only acts through individuals will have to continue to pay for an individual’s crime long after the conviction of the individual and the probable separation of that individual from the company’s payroll. The Commission provides no reason for this new amendment, but corporations will not object to these proposed amendments to ensure they are perceived as ethical and cooperative. Moreover, those who practice in the area and may become the monitors will not object. Who wouldn’t want the chance for an added payday?
The Commission May Yet Receive Comments on the Need for these Proposals
The Commission does have a period for comment. One question that they did propose for public comment on the amendments was the issue of mitigation based on the specific design of an organization’s compliance program. Specifically, the proposed question for public consideration is:
1. Should the Commission amend §8C2.5(f)(3) (Culpability Score) to allow an organization to receive the three-level mitigation for an effective compliance program even when high-level personnel are involved in the offense if (A) the individual(s) with operational responsibility for compliance in the organization have direct reporting authority to the board level (e.g. an audit committee of the board); (B) the compliance program was successful in detecting the offense prior to discovery or reasonable likelihood of discovery outside of the organization; and (C) the organization promptly reported the violation to the appropriate authorities?
Corporations who remove reporting obstacles for compliance officers in reporting to the Audit Committee would stand to reap an enormous reward for the design of a compliance program with this feature. The potential three-level adjustment in mitigation of any calculation would be a substantial incentive for corporations to restructure their program. Corporations who allow their compliance officer to circumvent executives who may be part of the criminal conduct would be rewarded for such foresight.
However, the combination of such an adjustment along with proposed amendment to the commentary for subsection (b)(7), supra, which states [in assessing an organizations’ post-conviction conduct] “[o]ther appropriate responses may include self-reporting, cooperation with authorities, and other forms of remediation,” might encourage corporations to prematurely self-report to governmental agencies, before having the opportunity for a thorough, independent investigation which would give the view and advice of an outside counsel. Although the inducement is considerable, the eventual cost may be too.
The Commission’s press release on the proposed amendments is devoid of comments on the genesis of the proposed amendments to the Organizational Guidelines. What is certain is that the cost of committing a crime will go up if they are put into effect. This will be done with no clear evidence that the added cost comes with an added benefit.
The Commission will be accepting public comment until March 22, 2010, and a public hearing will be held on the proposed amendments on March 18, 2010, in Washington, D.C. The Commission will then vote sometime in April on the proposed amendments. If the Commission votes to approve the amendments, they will be sent to Congress for approval. Unless Congress decides to strike down the amendments, they would become effective on November 1, 2010.
Let’s hope by then, something will be given to the Commission that will let us know that these changes actually make sense.
Roscoe C. Howard, Jr. served as U.S. Attorney for the District of Columbia from 2001 to 2004. He is currently a partner in the Washington, D.C., office of Andrews Kurth LLP.
