The U.S. Sentencing Guidelines Chapter 8 Revisions of 2010: What does it mean for you and your company?

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1 The U.S. Sentencing Guidelines Chapter 8 Revisions of 2010: What does it mean for you and your company? An overview prepared for ACC members by Susan Hackett, ACC s Senior Vice President and General Counsel The U.S. Sentencing Commission issued final comments on revisions they are proposing to Chapter 8 the Corporate Sentencing Guidelines of the U.S. Sentencing Manual. As most of you know, the Guidelines are relatively rarely applied to companies at sentencing most criminal allegations are settled or otherwise resolved before adjudication and formal sentencing. The real power of the Guidelines is in its proffer of what constitutes an effective corporate compliance program that someone (like a prosecutor or regulator) might consider as a mitigating factor when assessing the company s culpability or that someone (like a compliance leader in the company) might lean on to help define the benchmarks of effective corporate compliance initiatives. Indeed, rather than being the regular stuff of Sentencing, Chapter 8 is consulted by corporate compliance leaders who wish to adopt standards that are recognized as worthy, and by prosecutors, regulators, and other stakeholders who wish to assess whether they believe the company should be held responsible for the acts of individuals who committed crimes or harmed others. ACC filed comments with the USSC and offered testimony before the Commissioners (on March 17, 2010, offering supplemental comments on March 26) in an effort to address our members concerns with some of the proposed changes. We are gratified that the Commission incorporated much of what ACC asked for and look forward to working with the Commission on future proposals. What the Commission Proposed/Adopted: Collectively, the Commission proposed in this comment cycle to address the requirements for earning sentencing credit for having an effective compliance and ethics program, as well as the possible conditions of probation for organizations. Summary of the Commission s Proposed Amendments: Two of the Commission s proposed amendments and an issue they published for comment deal with the requirements for earning credit by having an effective compliance and ethics program.!

2 1. The Commission proposed to add an application note clarifying what is needed to meet the seventh requirement of an effective compliance and ethics program taking reasonable steps, after criminal conduct has been detected, to respond appropriately to the criminal conduct and to prevent further similar criminal conduct. As currently drafted, the application notes do not explain what would constitute reasonable steps under this requirement. The Commission proposed to change this by stating, first, that the organization should respond appropriately to the criminal conduct, and [i]n 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. The proposed language added that [o]ther appropriate responses may include self-reporting, cooperation with authorities, and other forms of remediation. It concluded: Second, to prevent further similar criminal conduct, the organization should assess the compliance and ethics program and make modifications necessary to ensure the program is more effective. The organization may take the additional step of retaining an independent monitor to ensure adequate assessment and implementation of the modifications. The explanation accompanying the proposal stated: Notably, restitution is already a significant remediation step considered under current Department of Justice guidelines in determining whether to prosecute business organizations. (Citing the U.S. Attorney s Manual, which now contains the guidance contained in the so-called Filip Memo issued in 2008.) As for the proposed references to self-reporting, cooperation and other forms of remediation, they are not surprising. These actions are expected of a company that wishes to lower its culpability score if convicted of criminal conduct. Finally, references to retention of a monitor foreshadow another Commission proposal mentioned below that the conditions of probation available to a judge be expanded to include the appointment of a monitor. 2. A second two-part proposal appeared in brackets. Each part dealt with the need to make members of the organization aware of document retention requirements. The first would have required, as an element of an effective compliance and ethics program, that high-level personnel and substantial authority personnel be aware of the organization s document retention policies and conform any such policy to meet the goals of an effective compliance program and to reduce the risk of liability under the law (e.g., 18 U.S.C. 1519; 18 U.S.C. 1512(c)). The second part would have added similar language to the requirement to assess periodically the risk of criminal conduct and modify those steps taken to!!

3 meet the requirements for an effective compliance and ethics program. Under this proposal, the risk assessment would include [t]he nature and operations of the organization with regard to particular ethics and compliance functions. It would have gone on to state: 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 and to reduce the risk of liability under the law (e.g., 18 U.S.C. 1519; 18 U.S.C. 1512(c)). 3. The issue for comment was intended to increase the number of convicted organizations that could get credit for having effective compliance and ethics programs. The Commission sought comment on whether it should make a limited exception to its rule that an organization gets no credit for having an effective compliance and ethics program if high-level personnel were involved in the offense. The three requirements for earning this exception would be: (A) the individual(s) with operational responsibility for compliance have direct reporting authority to the board level (e.g., to the board directly or to a board committee, such as the audit committee); (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. Needless to say, this would place a premium on direct-report lines between a compliance officer and a board or audit committee. The final proposed amendment would have consolidated all of the optional conditions of probation for organizations by putting them under a single heading, with augmentation of these conditions in two ways. As it now stands, there are two lists of recommended conditions of probation: one for situations in which probation is imposed solely to enforce a monetary penalty and the second where probation is imposed instead (or also) for other purposes, such as to put an effective compliance and ethics program in place, where the organization or high-level personnel are repeat offenders, or to ensure that other changes put in place will make the recurrence of violations less likely. The current mandatory conditions of probation for all organizations placed on probation would remain unchanged: the organization must obey all federal, state and local criminal laws while on probation, and at least one the following must be imposed as a condition (unless exceptional circumstances warrant including none): (i) restitution; (ii) notice to victims of the offense; or (iii) an order requiring the organization to reside or refrain from residing in a particular location.!!

4 The conditions that the Commission proposed as consolidated under one heading are only recommended conditions (i.e., the Guideline states that the following conditions may be appropriate ). A judge need not impose any of them. The new formulation of the list under the proposals would also include two additional potential terms: (i) the retention of an independent corporate monitor with appropriate qualifications and no conflict of interest in the case, whose scope of role shall be approved by the court, and whose compensation and costs shall be paid by the organization; and (ii) submit to a reasonable number of regular or unannounced examinations of facilities subject to probation supervision. The proposals also suggested amendment of the application notes to include retention of an independent corporate monitor as a way for the court to assess the efficacy of a compliance and ethics program submitted by the organization. Here is what the Commission passed, after hearing comments from a number of organizations, including ACC (see our comments filed, here and here): The Commission eliminated ALL of the proposed references to document retention and monitors. In the new commentary paragraph that discusses what an organization should do when it discovers criminal conduct, they toned down the reference to restitution. Instead of a reference to monitors in that same remediation commentary, the Manual will say that to have an effective compliance program, an organization that discovers criminal conduct should do a reassessment that "may include the use of an outside professional advisor to ensure adequate assessment and implementation of any modifications." This is exactly what ACC asked for: that they not assume monitors were the best "help" that could be hired for a company with a need to remediate bad practices, and that experts hired can help evidence a company s remediation efforts, but are not requirements. In conditions of probation, not only did the Commission drop the proposed monitor language, they also dropped proposed language that would have listed surprise facility inspections as a probation condition. The one area where we did not make much headway was the language making compliance program credit available even if high-level personnel played some role in the criminal conduct. The Guidelines will still offer credit to companies even if there was high level personnel involved, which is good, but they kept in as a condition for that credit the "direct report" language that ACC had protested in its comments (that is,!!

5 language requiring a company to authorize the person with day-to-day operational responsibility for compliance to have a direct reporting authority to inform the board or a committee of the board of suspected criminal conduct). The Commission also did not ease back on the language ACC had asked them to reconsider regarding timely discovery and self-reporting requirements for compliance program credit when high-level personnel have some involvement in the criminal conduct. ACC protested the proposed language requiring "prompt" reporting in light of our concern that someone judging the promptness of a report who is armed with 20/20 hindsight that a violation did indeed occur might not be able to objectively assess whether the reporter of such conduct was reasonable in taking time to collect, further investigate or assess the information before sending it outside the organization as a to report to the government. Going Forward Practical Steps and Issues to Prepare to Address Here s perhaps the most significant issue going forward: the Commission announced at the end of the hearing that they plan to place significant priority on Chapter 8 in the next amendment cycle. In this instance, I am reminded of the Chinese symbol for change, which can be read as meaning both "danger" and "opportunity." In the meantime, for those of you who are wondering if you need to brush off your compliance manuals and call a meeting to discuss changes to your plans, I think most folks I ve spoken to plan to focus their attention on the direct reporting language that will now become part of the definition of an effective compliance program. It is now key to revisit the three criteria that must be met in order to qualify for triple credit in assessing whether your compliance program is effective even if a high level personnel was involved: The three requirements are: (A) the individual(s) with operational responsibility for compliance have direct reporting authority to the board level (e.g., to the board directly or to a board committee such as the audit committee); (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. Here's the language from the Guidelines' Application Notes as adopted: "For purposes of subsection (f)(3)(c)(i), 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!!

6 conduct, and (B) no less than annually on the implementation and effectiveness of the compliance and ethics program." So a possible suggestion I would offer is that a company might wish to create an opportunity for the board to have an executive session during every meeting, and that a standing agenda item for that session is whether persons within the company with operational responsibility for compliance have a compliance concern to report. You will therefore need to title someone or a few designated people in the company - the GC, the CCO, the ethics officer, whomever - as the person(s) in your company with operational compliance authority, since you don't want that undefined or you won t be able to evidence their ability to report. And since most folks don t know what that term means otherwise (it s not a term or art or a generally accepted title for someone in the company), you need to decide in advance who that will be so you can set up direct communications capacities, and prevent the notion that anyone in the company with compliance responsibilities should have a direct reporting line to the board. Then, you want the board member responsible for reporting on the board s standing agenda item and making a yearly report on compliance initiatives, and who is also available by phone to talk to any of the designated persons with operational compliance authority, to have these roles specifically defined in your board s manual. It is likely that many folks will consider the Audit Committee Chairman for this role. As to the other factors of prompt reporting and discovery inside of the company, I don t anticipate that compliance leaders will have many ideas on how to change their policies to address these concerns most companies with established compliance initiatives have already addressed reporting routes as best they can. Efforts could be beefed up, but I don t believe there are many new ideas out there. As you consider adjustments to your current compliance and reporting programs, consider this: what is the risk attendant to making some of these more simple changes versus not making them? What is the likelihood that you'll ever need to call upon exception to the high level personnel rule to show the effectiveness of your compliance efforts? (I ll just leave you with this important Mel Brooks reminder: No one expects the Spanish Inquisition!) Susan Hackett Senior Vice President and General Counsel hackett@acc.com HackettInHouse@twitter.com!!