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Most employment lawyers have a basic understanding of the Sarbanes-Oxley Act of 2002 and its corporate responsibility program requirements. Few, however, know about the Federal Sentencing Guidelines and the related requirements for ethics and compliance programs. The price of that ignorance can be high. Just as an organization can be held civilly liable for harassment by low-level supervisors, it also can be held criminally responsible for acts committed by employees acting within the scope of their duties when the acts were intended in part to benefit the employer. And when the federal government prosecutes companies for such crimes, it looks to the requirements of the Federal Sentencing Guidelines for Organizations to evaluate the quality of company efforts to prevent criminal and unethical conduct in the workplace. Consider what happened at Mellon Bank in Pittsburgh as a result of actions that occurred before Sarbanes-Oxley became law. Last August the bank settled criminal charges brought by the U.S. Department of Justice related to an operation it ran for the Internal Revenue Service. Mellon was supposed to receive and process taxpayers’ federal tax payments and tax returns. Instead, employees who were desperate to meet a tight deadline destroyed tens of thousands of tax returns, vouchers and checks. A vice president then notified the IRS that the bank had completed the operation. The Justice Department charged Mellon with criminal conspiracy, theft of government property and theft of mail matter, which Mellon later admitted to as part of its settlement. In addition to its findings on these charges, the Justice Department also found that the bank’s compliance program, “while credible in some respects, fell below what best practices associated with the Federal Sentencing Guidelines for Organizations suggested, including steps that may have prevented or detected the violations at issue in this case.” Ultimately, Mellon paid full restitution and fees and submitted to extensive government monitoring and revisions to its compliance program. Under the Federal Sentencing Guidelines organizations must proactively take steps to ensure that even low-level employees acting on behalf of the organization avoid criminal conduct in the performance of their duties. This includes having in place an effective compliance and ethics program. The guidelines, issued in 1991 by the U.S. Sentencing Commission and revised in 2004 in response to Sarbanes-Oxley, initially were a mandatory reference for judges to use when sentencing criminal defendants, including organizations charged with crimes. However, the U.S. Supreme Court ruled in 2005 that the guidelines could only be advisory. Although demoted to “recommendation” status, the guidelines’ importance cannot be overstated, for many reasons. First, they have broad application. The guidelines cover “all organizations whether publicly or privately held, and of whatever nature, such as corporations, partnerships, labor unions, pension funds, trusts, nonprofit entities, and governmental units.” Organizations of all sizes are included, although size is relevant in determining the appropriate level of formality and breadth of organizational efforts to comply with the guidelines. Second, the guidelines have been endorsed by the Securities and Exchange Commission and are actively consulted by federal judges when it comes to sentencing decisions. Further, the Justice Department has made it clear that it will continue to use the guidelines to evaluate whether a company should be given leniency or even avoid prosecution for corporate crimes, the most common of which are fraud, environmental waste discharge, tax offenses, antitrust offenses and food and drug violations. The Justice Department has taken the guidelines’ importance a step further, having alleged in litigation ( U.S. v. Merck-Medco Managed Care LLC) that a company’s failure to abide by the guidelines’ requirement that companies have an effective compliance and ethics program was by itself grounds for a False Claims Act cause of action. Despite such cases as those against Mellon Bank or Merck-Medco, the real impact of the guidelines may go beyond criminal prosecutions and convictions. Indeed, very few prosecutions lead to trial. Rather, they usually end in a negotiated settlement, according to a study conducted by Gibson, Dunn & Crutcher and endorsed by the Association of Corporate Counsel. This is attributable to the fact that the government can effectively persuade a company that it is in its best interest to cooperate. Few companies will risk their reputation at a public trial on criminal charges. Unfortunately, those that are most likely to take such a risk and ultimately be sentenced are small companies that are also least likely to have compliance programs in the first place and who usually cannot afford sophisticated legal counsel (who would likely advise them to settle despite a belief in their innocence). For them, understanding and complying with the Federal Sentencing Guidelines before being subjected to government scrutiny is more important than ever. The most significant effect of these guidelines, then, will be to pressure organizations to establish or upgrade compliance and ethics programs in accordance with the guidelines’ requirements. Companies should find that having an effective compliance and ethics program improves internal operations and bolsters their reputation. They also will have protected the organization from the harshest treatment by the federal government should criminal misconduct occur later. In addition, companies may also find that they are better able to avoid becoming targets for shareholder actions, whistle-blower claims and other civil lawsuits based, at least in part, on a failure to comply with the guidelines. Indeed, the Federal Sentencing Guidelines are becoming the first clearly articulated standard of reasonableness for an effective compliance and ethics program. Employment lawyers will see in the guidelines a broad, detailed list of requirements reflective of (and yet more specific than) the “good faith effort to prevent harassment and discrimination” standard for hostile work environment claims established in the late 1990s. In the 1998 companion cases of Burlington v. Ellerth and Faragher v. City of Boca Raton, the U.S. Supreme Court ruled that in a claim of harassment � assuming that the harassment did not culminate in an adverse employment action � an employer can avoid liability for “hostile environment” harassment if it can prove that: (1) the employer took reasonable care to “prevent and correct promptly” any harassing behavior and (2) the harassment victim unreasonably failed to complain. A year later, the Supreme Court, in Kolstad v. American Dental Association, held that an employer may avoid punitive damages for harassment and discrimination if the employer can show that it has made good-faith efforts to prevent harassment and discrimination. In defining good faith, the court noted that the purposes underlying federal anti-discrimination laws “are advanced where employers are encouraged to adopt antidiscrimination policies and to educate their personnel on Title VII’s prohibitions.” Lower federal courts quickly adopted the Kolstad standard, sometimes with harsh consequences. For example, in Swinton v. Potomac Corporation, the Ninth Circuit U.S. Court of Appeals in 2001 affirmed a punitive damage award of $1 million in a racial harassment case. The court pointed out that while the company had an anti-harassment policy, it chose not to educate its employees sufficiently on the policy and of the importance of avoiding racial harassment in the workplace. Similarly, the Federal Sentencing Guidelines require companies to have compliance and ethics policies, educate their personnel regarding those policies, oversee compliance activities, and hold violators accountable. The guidelines require that companies “exercise due diligence to prevent and detect criminal conduct” and “otherwise promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law.” To this end, the guidelines set forth seven elements of an effective compliance and ethics program: 1. Establish standards and procedures. The organization must have a written Code of Conduct and/or Code of Business Ethics that reflects the organization’s expectations for behavior. Procedures should be sufficient to allow the organization to prevent and detect criminal conduct. 2. Maintain a top-down approach to the ethics and compliance program. The guidelines state that the organization’s governing authority and senior management should be responsible for the overall program and provide it with adequate funding to be effective. Day-to-day operations may be handled by lower-level employees but they must have direct access to senior management. In-house counsel and ethics officers who have difficulty getting budget approval for their program or gaining access to senior level meetings to provide compliance reports can take comfort in this provision. 3. Those with substantial authority in the organization can’t be criminals or be likely to exhibit unethical behavior. This one seems obvious. The commentary adds, however, that the guidelines are not intended to authorize behavior that would be inconsistent with state hiring laws, including laws that prohibit discrimination based solely on a person’s arrest record. 4. Train all employees and agents on the organization’s standards of conduct and procedures for reporting violations. Such training programs should be interactive and provide real-life examples of the ethical dilemmas that employees may encounter as they perform their job duties. Since the guidelines contemplate that companies will distribute their codes of ethics as well as provide training, a training program that does little more than restate the code itself may not be sufficient when it comes to fulfilling the training requirement. 5. Self-audit to detect problems. A company must monitor the workplace and audit its functions in an effort to detect criminal conduct. In addition, it must have and publicize a system for reporting violations and seeking guidance regarding ethical concerns. The reporting mechanisms may include anonymous and/or confidential reporting mechanisms. 6. Enforce the program consistently, provide incentives for positive conduct, and discipline violators. Any company that is subject to internal and external pressures � from shareholder scrutiny to price competition to internal politics � is likely to have employees who commit ethical violations. The guidelines require that the program be promoted through appropriate incentives but also that appropriate disciplinary measures be taken against employees for engaging in criminal conduct and for failing to take reasonable steps to prevent or detect criminal conduct. As in harassment situations, organizations must take prompt action to correct and prevent future violations and to demonstrate to others that such violations will not be tolerated in the workplace. And, of course, those who witness and report violations must not be retaliated against in any way. 7. Respond appropriately to criminal conduct. Although companies cannot prevent every violation of the law, they must take reasonable steps after a violation has occurred to respond appropriately to the criminal conduct and to prevent further similar criminal conduct. This includes making any necessary modifications to existing ethics and compliance programs. It is no longer a safe bet for companies to have in place a “good enough” set of policies and procedures. Just as former best practices in harassment prevention have become a new minimum threshold for employers to avoid liability for employee misconduct, following the Federal Sentencing Guidelines and ensuring that companies have established an effective compliance and ethics program is quickly becoming required activity to avoid criminal and other liability in a host of other areas. Katrina Campbell Randolph is the general counsel at Brightline Compliance, a Washington, D.C., company that provides consulting services and programs on workplace ethics, harassment prevention, investigations and other compliance topics.

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