Jeff Jinnett: Amendments to U.S. Federal Sentencing Guidelines as to What Constitutes an Effective Compliance and Ethics Program, to Take Effect on November 1, 2010

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On April 7, 2010, the United States Sentencing Commission[i] voted to modify the U. S. Federal Sentencing Guidelines' standards for what constitutes an “effective compliance and ethics program”[ii]. The Sentencing Guidelines are consulted by judges in connection with companies found guilty in federal court of having violated U.S. federal law in order to determine appropriate penalties to impose, such as monetary fines, prison terms for corporate officers and/or court-supervised remedial compliance programs. However, if a company is found by the court to have had an “effective compliance and ethics program” in place, the penalties to be imposed on the company by the judge are reduced. The new amendments will take effect on November 1, 2010, unless the U.S. Congress passes legislation rejecting the amendments.

Under Section 8B2.1 of the Federal Sentencing Guidelines, an “effective compliance and ethics program” would require a company to, among other things:

  • exercise reasonable oversight through its board and officers to implement the compliance program in an effective manner
  • not place in authority any person that the company knows, or should have known, was engaged in criminal or unethical activities
  • train all employees, officers and directors on the compliance program's standards and guidelines and establish a confidential “hot line” for the anonymous reporting of criminal or unethical conduct
  • establish appropriate incentives and disciplinary measures in support of the program
  • establish standards and guidelines to detect and prevent criminal conduct
  • monitor and audit the effectiveness of the compliance program
  • immediately respond in an appropriate manner to discovered criminal conduct and act to prevent further criminal conduct

The recent amendments include new guidance as to self-reporting, cooperating with authorities, and the prevention of further criminal conduct by taking steps to assess the future risk of criminal conduct. One critical change that should be highlighted is that in the past, companies have been denied credit for maintaining an effective compliance program (and denied a reduction in penalties), because one or more of their directors, officers or other high-level personnel participated in or condoned the criminal conduct or were willfully ignorant of the criminal conduct. The new amendments to the Sentencing Guidelines permit a company to receive a reduction in criminal penalties despite the involvement of high-level personnel in criminal conduct, if the company has met the following four criteria:

  1. The head of the compliance program reports directly to the board of directors or the board audit committee;
  2. The compliance program uncovered the criminal conduct before discovery outside the company was reasonably likely;
  3. The company promptly reported the criminal conduct to the company’s regulator or other appropriate governmental authority; and
  4. No compliance officer participated in or condoned the criminal conduct, or was willfully ignorant of the criminal conduct

In light of these new amendments to the U.S. Federal Sentencing Guidelines, companies should strongly consider establishing a compliance portal and related compliance records archive prior to November 1, 2010 for the collection of information necessary to operate a compliance program that would satisfy the key elements of what constitutes an “effective compliance and ethics program” under Section 8B2.1 of the Sentencing Guidelines. The portal also could be used to support the risk assessment activities recommended to be undertaken under the amendments to the Sentencing Guidelines. Microsoft SharePoint Server 2010[i] is well-suited for such a compliance portal due to its robust communication and collaboration, business intelligence, records management and search capabilities.

 

In addition, the company’s chief compliance officer could be authorized to report directly to the company’s board of directors or the board audit committee using the portal to produce reports and information requested by the board. In light of the new amendments to the Sentencing Guidelines, Companies may wish to move away from other reporting structures, such as where the chief compliance officer produces reports for the General Counsel, with the General Counsel filtering the reports and deciding which information to report up to the board of directors or audit committee. Reporting structures where the chief compliance officer does not report directly to the board or the audit committee would not satisfy the new penalty reduction provisions under the amended Sentencing Guidelines in the event that one of the company’s high-level personnel participated in, condoned, or was willfully ignorant of the discovered criminal conduct. A side benefit of having the chief compliance officer utilize the portal would be that the General Counsel and other C-level officers with a need to be “kept in the loop” could be given access to the compliance portal without interfering with the compliance officer’s direct line of report to the board or audit committee.

[i] See https://www.ussc.gov/guidelin.htm.

[ii] See https://www.ussc.gov/2010guid/20100503_Reader_Friendly_Proposed_Amendments.pdf, beginning at page 32.

[iii] See https://sharepoint.microsoft.com/en-us/Pages/default.aspx.