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Since the early 1980s, the government’s enforcement authorities have attempted to persuade companies to adopt effective corporate compliance programs. This trend began with the Department of Defense’s enforcement efforts against contractors, was formalized in the organizational Sentencing Guidelines, and continued in antitrust, environmental and health care enforcement. In large corporations with multiple lines of business, how best to establish a compliance program, particularly at what level should the compliance program be placed, is an important first decision. As that choice is made, companies should be aware that the government policy (and presumably corporate interest in an effective program) can directly conflict with the corporation’s self-interest when company officials later are required to confront potential suspension or debarment for errant conduct at a subsidiary level. Simply stated, when it comes to contract suspension and debarment, government policies and procedures look to the parent corporation’s involvement in the underlying conduct to determine at what level to impose debarment and suspension remedies. Ironically, such an approach effectively discourages parent corporations from becoming involved in subsidiaries’ compliance programs out of fear that the program will be unsuccessful. DEBARMENT CAN BE A CORPORATE DEATH SENTENCE Any business excluded or debarred by a federal agency is initially out of business with the federal government, usually for three to five years. Once debarred, companies cannot be prime or first-tier subcontractors with the federal government and cannot bill health care programs such as Medicare, Medicaid or CHAMPUS. Debarment by one agency effectively precludes the company from doing business with the entire federal government. While debarment does not terminate current contracts or current payables, the effect is quickly felt by any company dependent on the federal government for its revenue stream. In fact, it is the risk of debarment that often influences a company’s response to an investigation and the shape of any settlement. When a company doing business as a health care provider or federal contractor gets into trouble, the agencies’ views on debarment can be more important than the views of prosecutors or courts implementing the Sentencing Guidelines. A CASE IN POINT: EPA COMPLIANCE GUIDANCE EPA first embraced the Corporate Sentencing Guidelines in 1991 when it adopted the guidelines’ seven steps to an effective compliance program as a tool to measure a corporation’s “attitude” toward compliance as a basis for lifting a mandatory listing under the Clean Water and Clean Air Acts. (Listing in EPA is synonymous with contract debarment or exclusion.) EPA continued to stress corporate self-policing in a 1995 Self-Policing Policy, which EPA revised in 1999. In 2000 compliance parlance, EPA and DOJ are looking for companies to implement so-called “Environmental Management Systems.” These agencies have attempted to offer concrete incentives for businesses to adopt management programs that go beyond the requirements of mere compliance with the law, and undertake affirmative steps such as extensive internal reviewing and self-disclosure to regulatory authorities. EPA and DOJ promise companies that take such action various benefits, including lesser civil and administrative penalties and even the suggestion (but not promise) of foregoing criminal prosecution if the matter arises from self-investigation and disclosure. The issue will always be whether these incentives will be sufficient to outweigh the economic pressures of the marketplace constantly pushing companies and individual managers to cut corners. Another concern is the manner in which debarment and suspension principles are applied when compliance programs like the Environmental Management Systems fail, as some inevitably will from time to time. As discussed below, a tension exists between arguments for the home office to become fully intertwined in subsidiary operations through a compliance program and the government’s approach to debarment and suspension. EPA DEBARMENT AND SUSPENSION RULES EPA regulations limit mandatory debarments under the Clean Water Act and Clean Air Act to the facility at which the violation occurred. However, discretionary debarments under the Federal Acquisition Regulations (FAR) may extend to other facilities and/or parent or subsidiary companies if the evidence shows that other units or corporate headquarters were involved in the events leading to debarment. See 40 C.F.R. � 32.325; 48 C.F.R. � 9.403. Affiliates are exposed to debarment and suspension when one entity controls the other. See 48 C.F.R. � 9.403; 40 C.F.R. � 32.105(b). For EPA, indicia of control include interlocking management or ownership, identity of interests among family members, shared facilities and equipment, or common use of employees. Id. Even where the company is not convicted, the improper conduct of an employee or representative of a company may be imputed to that company when the conduct occurred in connection with the individual’s performance of duties for or on behalf of the company, or with the company’s knowledge, approval or acquiescence. See 40 C.F.R. � 32.325(b)(1); 48 C.F.R. � 9.406-5(a). The company’s acceptance of benefits derived from the illegal conduct can be evidence of such knowledge, approval or acquiescence. See id. Likewise, the fraudulent, criminal or other seriously improper conduct of a company may be imputed to any officer, director, shareholder, partner, employee or other individual associated with the company if the individual participated in, knew of or had reason to know of the company’s conduct. See 40 C.F.R. � 32.325(b)(2); 48 C.F.R. � 9.406-5(b). Also, the conduct of one participant in a joint venture may be imputed to the other participant in the joint venture under similar circumstances. See 40 C.F.R. � 32.325(b)(3); 48 C.F.R. � 9.406-5(c). EPA’s Suspension and Debarment Division in practice appears to consider the nature of the underlying cause for debarment. If the cause originated or was brought about only by employees of the lower entity, then there would be no reason for extending debarment up the chain. The key seems to be determining who was responsible for the decisions that caused the violations. If a middle manager made the decision that caused the violation and no one at the corporate level had knowledge of the decision, then there would be no cause to extend debarment to other facilities. By contrast, for example, if someone at the corporate level was responsible under corporate policy or practice for reviewing the key environmental decisions of the middle manager, and the debarment officials believed the higher official neglected that duty or suggested the course of action, then debarment may be extended. The issue is, to put it plainly, who was responsible for the decision that caused the violation? Some of the factors normally considered in deciding whether to extend debarment or suspension include: � Whether the misconduct is an isolated incident or a systemic problem; � The level in the organization of the culpable individuals; � The corporate culture; and � The degree of integration among various units. It is important to note that the FAR specifically provide that the suspending or debarring official may limit the action to “specific divisions, organizational elements, or commodities.” 48 C.F.R. � 9.406-1(b); 40 C.F.R. � 32.325(a). SOME PRACTICAL ADVICE The competing interests seem to add up to the suggestion that corporations must have a strong compliance program, but one that is carefully structured so that the parent corporation does not become entangled in the errant behavior of subsidiaries. While there is no benefit to the parent corporation in refraining from promoting and sponsoring compliance-program type values, the debarment rules and the way EPA and other agencies apply that remedy suggest that the actual auditing, reviewing, disclosing and even hotline operations might be better lodged in the company’s subsidiaries for action and decision. In short, let the subsidiary make the mistake. A good case can always be made that the best compliance program is placed closest to the action. When an employee essentially breaks these corporate values, it is best to keep the problem at the subsidiary level. James J. Graham is a partner and Christopher T. Koegel is an associate in the Washington, D.C., office of Jones, Day, Reavis & Pogue.

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