By Bryan D. Daly and Peter Morris
On May 3, 2010, the United States Sentencing Commission issued amendments to the Sentencing Guidelines that will become effective November 1, 2010. As the amendments relate to government contractors, the relevant Guidelines concern the organizational guidelines. In sum, the changes are to compliance and ethics programs. The changes expand the ability of an organization to obtain the three point reduction in the offense level calculation for having an effective compliance and ethics program and provide a more detailed explanation of what constitutes an appropriate response to criminal conduct as part of an effective compliance program. Most significantly, the amendments require that the (1) compliance/ethics officer have “direct reporting obligations” to the Board of Directors or subgroup thereof, and (2) organization promptly report offenses to the government. These changes raise potentially troubling issues concerning the (1) relationship between the compliance/ethics officer, the general counsel and others in executive management, (2) privileged nature of internal investigations, and (3) ability to conduct internal investigations at the direction of the general counsel.
Expansion of Organization’s Ability To Obtain Three-Point Reduction
The proposed Guidelines amendments expand the availability of the three point reduction in the offense level calculation for organizations that ensure the autonomy of compliance personnel. Under the previous Guidelines, convicted organizations could receive a reduced sentence for having an effective compliance and ethics program in place at the time of the offense, but only if no “high-level personnel” were involved in, or willfully ignorant of, the crime. This disqualification rule prevented many corporations from obtaining the three point reduction, as the term “high-level personnel” was defined broadly by the Guidelines and applied broadly in practice. The amendments (§ 8C2.5(f)(3)(C)) eliminate this automatic disqualification based on the offender’s organizational rank, and enable the organization to obtain the three point reduction, provided that the organization can establish the following four elements.
First, “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., a board of directors or an audit committee of the board) (§ 8C2.5(f)(3)(C)(i)). In Application Note 11, the Guidelines state that “an 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.”
Second, “the compliance and ethics program detected the offense before discovery outside the organization or before such discovery was reasonably likely.”
Third, “the organization promptly reported the offense to appropriate governmental authorities.” In Application Note 12, the Guidelines state that “‘[a]ppropriate governmental authorities’ . . . means the federal or state law enforcement, regulatory, or program officials having jurisdiction over such matter” (e.g., the Department of Defense Inspector General’s Office). “[T]he report to appropriate governmental authorities must be made under the direction of the organization.”
Fourth, “no individual with operational responsibility for the compliance and ethics program participated in, condoned, or was willfully ignorant of the offense.”
Note that the four elements discussed above are required to obtain the three point reduction in the offense level calculation only if high-level personnel were involved in the offense. In other situations, it may be possible for an organization to demonstrate an effective compliance and ethics program without direct reporting and the other three elements in place. However, since an organization cannot predict who will commit an offense, it may be best for the organization to implement a compliance and ethics program that satisfies all four elements.
Meaning Of What Constitutes An Appropriate Response To Criminal Conduct
Prior to the amendments, in order to have an effective compliance program, the Guidelines required that “[a]fter criminal conduct has been detected, the organization shall take reasonable steps to respond appropriately to the criminal conduct and to prevent further similar criminal conduct, including making any necessary modifications to the organization’s compliance and ethics program.” (§ 8B2.1(b)(7)).
The amendments add commentary to explain the meaning of what constitutes an appropriate response to criminal conduct. In Application Note 6, the Guidelines state as follows: “First, the organization should respond appropriately to the criminal conduct. The organization should take reasonable steps, as warranted under the circumstances, to remedy the harm resulting from the criminal conduct. These steps may include, where appropriate, providing restitution to identifiable victims, as well as other forms of remediation. Other reasonable steps to respond appropriately to the criminal conduct may include self-reporting and cooperation with authorities.”
In Application Note 6, the Guidelines also explain the meaning of what constitutes reasonable steps to prevent further similar criminal conduct as follows: “Second, the organization should act appropriately to prevent further similar criminal conduct, including assessing the compliance and ethics program and making modifications necessary to ensure the program is effective. The steps taken should be consistent with subsections (b)(5) and (c) and may include the use of an outside professional advisor to ensure adequate assessment and implementation of any modifications.”
Key Rejected Proposed Amendments
The Sentencing Commission declined to adopt several proposed onerous amendments. First, the Commission rejected a proposal that effectively would have required payment of presentencing restitution to victims of the criminal conduct that an organization detects. Second, the Commission rejected a proposal regarding document retention policies. The rejected proposal provided that executive management and members of the Board of Directors must be aware of the organization’s document retention policies and conform such policies to the objective of an effective compliance plan. Third, the Commission rejected a proposal that required, as a condition of probation, that an organization would be required to retain an independent corporate monitor, agreed upon by the parties or appointed by the court.
The practical application of the amendments is unclear. However, the amendments may create serious problems for government contractors. The amendments raise the following troubling concerns: (1) Is the compliance/ethics officer obligated to bypass the general counsel and report potential offenses only to the Board? (2) Can the general counsel direct outside counsel to conduct internal investigations or must such direction come from the compliance/ethics officer? (3) Is it still possible to treat internal investigations as privileged? (4) What role can the general counsel play with respect to internal investigations and the reporting of offenses to the government? It is important to note that the organization need only comply with the changes in the Guidelines if the organization wants to obtain the three point reduction. It is likely, however, that these Guidelines amendments will morph into the type of compliance and ethics programs expected by DoD and other regulatory agencies.
Bryan D. Daly