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A revised set of sentencing guidelines applicable to corporations and other organizations became effective on Nov. 1, 2004. The revisions result from the work of the Ad Hoc Advisory Group on Organizational Sentencing Guidelines established by the U.S. Sentencing Commission in response to the Sarbanes-Oxley Act’s invitation to further deter organizational criminal conduct. Using a carrot and stick approach, the guidelines create incentives for organizations to self-police with compliance and ethics programs. See www.ussc.gov/2004guid/gl2004.pdf. No organization ever plans on facing a federal criminal prosecution, much less a sentencing judge. Nonetheless, organizations should review their compliance and ethics programs because of their potential mitigating impact on an organization’s punishment, should the unexpected conviction become a reality. Even though the recent U.S. Supreme Court ruling in United States v. Booker and United States v. Fanfan, 125 S. Ct. 738 (2005), changed the guidelines from mandatory to advisory, organizations should anticipate that judges will use the organizational guidelines to fashion sentences. This article provides an overview of the more significant changes to the Organizational Sentencing Guidelines and identifies the specific factors an organization should consider now, to minimize potential sanctions later. Beginning with the revised introductory commentary, the new Organizational Sentencing Guidelines promote “enhanced” organizational responsibility. As in the past, the introduction stresses that an organization operated “primarily for a criminal purpose” or “primarily by criminal means” will face a fine intended to divest it of all of its assets. Other organizations will be fined based on a culpability score. The culpability score is based on a set of six factors: the existence of any of four can increase punishment: the involvement in or tolerance of criminal activity; the prior history of the organization; the violation of an order; and the obstruction of justice. The existence of either of the remaining two factors can decrease punishment: demonstrating the existence of an effective compliance and ethics program; and self-reporting, cooperation or acceptance of responsibility. These days, many prosecutors and regulators expect that true “cooperation” requires corporations to waive the attorney-client privilege and work-product protections. The new guidelines address this frequent point of contention by stating that a waiver “is not a prerequisite to a reduction . . . unless such waiver is necessary in order to provide timely and thorough disclosure of all pertinent information known to the organization.” In practice, however, corporations should expect that this provision will be interpreted strictly by prosecutors to lever corporations to disclose promptly the details and results of internal investigations conducted by their counsel. As in the past, the introduction notes that an organization’s sentence will require it to remedy any harm caused by its criminal conduct. Expenditures made for paying a remedy will not reduce an organization’s punishment because such payments are considered solely as a means to make victims whole; they are not punitive. In addition, the introduction notes that, on top of any fines, probation will be imposed if necessary to ensure implementation of any sanction or to reduce the likelihood of future criminal conduct. Compliance and ethics The centerpiece of the revised Organizational Sentencing Guidelines is � 8B2.1, which formally defines for the first time an “Effective Compliance and Ethics Program.” Whether an organization meets the standards aspired to by this section will have a direct bearing on any penalties the organization will receive if it is convicted and sentenced for a criminal offense. The criteria for an “effective” program, previously addressed only in guidelines commentary, have been “elevate[d]” to a separate guideline to emphasize the importance of such a program and provide “ more prominent guidance.” To reflect the “emphasis on ethical conduct and values incorporated into recent legislative and regulatory reforms” including the Sarbanes-Oxley Act, this addition mandates the promotion of a culture that encourages ethical conduct and compliance with the law. In other words, the U.S. Sentencing Commission and Congress have apparently concluded that good corporate citizenship follows from the right “tone at the top.” On the other hand, the new guidelines recognize that no program is foolproof, and that a failure to prevent or detect the crime in question does not necessarily mean that the program was ineffective. The guidelines also recognize that industry practice and governmental regulations, and the size of an organization, are all relevant factors in determining whether an organization has met the requirements of establishing an effective program. Larger organizations are expected to have more formal operations and to devote greater resources than smaller organizations. The new section on compliance and ethics programs sets forth a series of minimum requirements labeled the “hallmarks of an effective program.” While the requirements are not new, the guidelines as amended put more meat on the bone. For example, the “governing authority” (the board of directors for corporations) must assume added responsibilities and must be “knowledgeable about the content and operation of the compliance and ethics program” and “exercise reasonable oversight” with regard to its implementation. In addition, “high level personnel,” i.e., those who have “substantial control” or who have a substantial role in making company policy, must ensure that a program exists. One or more “high-level personnel” must also have overall responsibility for the program, even if others are delegated the duty of implementing it. Individuals with day-to-day responsibility for carrying out the program must be given enough authority to do the job and must have direct access to the “governing authority” or an appropriate subgroup (such as a committee of the board). Reports concerning the program must be made periodically to the organizational leadership and, as appropriate (at least annually depending on the division of responsibility), to the “governing authority” or a subgroup thereof. ‘Adequate resources’ required Recognizing that compliance programs might starve as a result of budgetary resistance, the new guidelines require that “adequate resources” be devoted to individuals who have day-to-day responsibility for implementing the program. In addition, the standards and procedures of a program must be widely communicated and taught, not only to senior personnel, but to all employees, and, “as appropriate,” to the organization’s agents. An “effective” program also requires organizations to “use reasonable efforts” to avoid giving “substantial authority” to people who have engaged in illegal conduct or in any conduct inconsistent with an effective program. “Substantial authority personnel,” a term that depends on a case-by-case analysis, range broadly from “high-level personnel” to anyone who can “exercise substantial discretion when acting within the scope of their authority,” even if not part of management. This definition of “substantial authority” arguably includes even nonsupervisory employees, depending on the facts and circumstances. This provision by no means bars employment of employees with blemished records. Prior to hiring or promoting such an employee, however, an organization should consider such factors as the relevance of the prior misconduct to his job responsibilities and how recent the misconduct occurred. Employees should be made to feel comfortable reporting a criminal incident without fear of retaliation from the organization. The organization must also take a reward/punishment approach with its employees when promoting and enforcing the program. In other words, the amendment requires an organization to provide incentives for employees who perform in accordance with the compliance and ethics program, and to discipline those that engage in criminal conduct or those who fail to take reasonable steps to prevent or detect it. Whether an organization has met its responsibility to impose appropriate discipline will necessarily require a case-specific determination. Finally, the guidelines make it the duty of the organization to monitor and audit the effectiveness of the program. The organization should periodically assess the risks of criminal conduct and take steps to design, implement or modify the program in light of new risks. If an organization detects criminal conduct, it must take reasonable steps to respond appropriately and modify the program to prevent similar conduct in the future. Reducing a culpability score Procedurally, the guidelines work the same way as they have in the past. Initially, a “base fine” is determined by measuring the greatest of the organization’s gain from the offense, the loss caused by the offense or a figure from a table that provides for increasing fines depending on the seriousness of the offense. A court may sentence an organization to pay a fine that is anywhere from 5% to 400% of the base fine, depending upon the organization’s “culpability score.” A sentencing judge will apply the guidelines to determine whether an organization’s culpability score is good (zero), bad (10 or more) or something in between. To promote the creation of compliance and ethics programs, the guidelines grant a three-point culpability score reduction if the organization’s offense occurred while an “effective” program was in place, as now formally defined in the new guidelines. Such a reduction can mean that an organization will pay a substantially smaller fine than it would otherwise pay. For example, the minimum fine for a culpability score of six is 120% of the base fine, while the minimum fine for a score of three is 60% of the base fine. However, the three-point reduction does not always apply. The organization’s program must have been voluntarily instituted-not pursuant to a judicial or administrative order-for the court to take off three points. The organization also loses the three-point benefit if it unreasonably delays reporting the offense to the proper governmental agency, allowing for “reasonable time to conduct an internal investigation.” In addition, there is a rebuttable presumption that an organization lacked an effective program if the employee who participated in, condoned or was willfully ignorant of the offense was within the band of “high-level personnel” of a small organization or had “substantial authority” in an organization of any size. An organization that does not have an effective program not only loses the chance for a three-point culpability score reduction but also stands to be sentenced at the higher end of the final fine range. Moreover, while the guidelines do not by themselves require all organizations to implement an effective program inasmuch as the guidelines apply only to convicted organizations, some organizations, such as banks, are otherwise required by law to have an effective compliance and ethics program. Under the new guidelines, if an organization is otherwise required by law to have an effective program but fails in this regard, the sentencing court can upwardly depart and impose an even harsher sentence than that called for by the guidelines. Steps to take Now that Congress has approved the amendments to the Organizational Sentencing Guidelines that were recommended by the U.S. Sentencing Commission, organizations bear the burden of ensuring compliance with laws and ethics. Organizations will have a hard time seeking leniency if they failed to effectively police themselves in the first place. Practically speaking, what do these amendments mean for organizations? At a minimum, the amendments strongly encourage all organizations to establish an “effective” compliance and ethics program, or to fortify their existing one. This compliance program should be based on formal procedures, and should have appropriately senior people in charge. The board of directors or other “governing authority” should be thoroughly informed. Second, an organization should devote sufficient time and resources to establish an environment and culture that encourages ethical conduct. This commitment should include periodic training on the law applicable to the organization and workshops that educate the employees on ethical behavior. Promoting such principles should make enforcement of the law and ethics less onerous. Organizations should be serious about making sure its employees comply with its programs and maintain high ethical standards. Finally, the organization should periodically audit its compliance and ethics program. Organizations should consider using rigorous outside audits to test the effectiveness of its programs. A truly effective compliance and ethics program may produce more than a three-point culpability score reduction. Indeed, it may do precisely what Congress and the Sentencing Commission are apparently trying to achieve, namely prevent unethical and even criminal activities in the first place. David Meister is a partner in Clifford Chance’s New York office who specializes in white-collar criminal defense. He represents institutional and individual clients in SEC, regulatory and criminal matters. Albert Berry III is a litigation associate in that office who works on securities and white-collar criminal defense matters.

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