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By Winthrop M. Swenson and Nolan E. Clark
The Sentencing Commission's newly promulgated sentencing guidelines governing federal crimes committed by organizations are structured so that the fines they require will be based on two principal determinations.
First, the guidelines' fines vary, depending on a determination as to the seriousness of the offense. This will be measured in a fraud case, for example, by how much loss the defendant caused the victim. Second, fines vary with what the guidelines call the organization's "culpability score." (See U.S.S.G. Sec. 8c2.5).
The Commission devised the culpability score to account for the fact that organizations can only become liable vicariously, through the acts of their agents. Recognizing that this facet of federal law can render very different kinds of corporate defendants criminally liable, the culpabil- ity score seeks to draw distinctions among the range of corporate defendants that may come before the sentencing court -- from companies that have actively (or tacitly) encouraged lawbreaking, to those that have taken a strong, consistent stand against such activity and have become liable only because of an aberrant employee.
In this sense, the guidelines’ culpability score may be thought of as a means of assessing an organization's good citizenship. When an organization has acted responsibly according to criteria specified in the guidelines, notwithstanding that an offense has occurred, the sanction will be greatly reduced.
Second, the guidelines' culpability score serves another objective. By varying potential fines depending on whether the organization has or has not engaged in the specified conduct, the guidelines create "carrot and stick" incentives. The aim of these incentives is to encourage actions by the organization that should, in turn, discourage the occurrence of white collar offenses.
At the heart of the guidelines' carrot and stick approach to crime control is the mitigation credit the guidelines give for an "effective program to prevent and detect violations of law." (U.S.S.G. sec. 8C2.5(f)). When the sentencing court determines that the offense occurred, despite the fact that the company had such a program, and no high level personnel were involved, fines are substantially reduced and can be nominal.
What, then, does it take for an organization's compliance program to qualify as an "effective program to prevent and detect violations of law" under the guidelines? While a detailed discussion is not possible here, three themes running through the Commission's pronouncements in this area are helpful to an accurate understanding.
1. Structured Flexibility. When it drafted the requirements for an "effective" compliance program, the Commission followed the same basic approach it took with the organi- zational guidelines as a whole. The guidelines should have sufficient definition to ensure that sentencing discretion will be meaningfully guided and the generally desired outcome achieved. At the same time, the guidelines should have sufficient flexibility so that judges will be able to apply reasoned judgement to the sometimes unique issues, and frequently complex facts, raised by corporate defendants.
Consistent with this philosophy of structured flexibility, the Commission's definition of an effective compliance program is framed through guideline commentary that is both general and specific. The actual definition of an effective program is generally worded: a qualifying program "means a program that has been reasonably designed, implemented, and enforced so that it will generally be effective in preventing and detecting criminal conduct." The commentary continues in general terms, stating that the principal attribute of a qualifying program - its "hallmark" - is that it evidences the organization's "due diligence" in seeking to prevent and detect violations by employees.
At this point, the commentary becomes substantially more specific by outlining seven requirements that ,'must" be fulfilled if the due diligence test of a qualifying program is to be met. it should be noted, however, that while the Commission intended these requirements to be relatively comprehensive and demanding, it labeled them "types of steps." This language signals an intent that there be a measure of flexibility in how corporations go about satisfying the listed requirements. Indeed, the listed requirements generally set forth principles rather than specific rules.
The relevant commentary concludes by echoing this theme. It states that the actual or "precise actions" necessary for an organization to establish a qualifying program "will depend on a number of factors" that are specific to the organization, such as its size, business and prior history.
In sum, while the Commission has identified definite benchmarks by which corporate compliance programs will be measured, no single approach is mandated. Recognition of this fact is extremely important. Because an "effective" program is not defined in exact detail, risk-averse companies may be tempted to adopt programs that precisely mirror those upheld in the early decisional law interpreting the guidelines.
Thus, conventions could develop that are not as effective at achieving compliance in particular corporate settings as more individually tailored approaches would be. Construing the guidelines in this way would certainly turn the Commission's intent on its head, however, since a central reason why the guidelines mitigate fines for compliance programs is to foster effective compliance efforts.
Company compliance officials should therefore interpret the meaning of an "effective program to prevent and detect violations of law" by seeking to determine what makes sense for their specific organization and not by slavishly adhering to possibly inapt court precedents. In- deed, courts are unlikely to be impressed with a compliance plan appropriate for another corporation but not the defendant before the court. In short, what should count is whether the program in question meets the guidelines' standards given the individual attributes of the particular company involved.
2. Serious Rather Than Cosmetic Efforts at Compliance. During the development of the organizational guidelines, some outside observers contended that the guidelines should give little credit for compliance programs. They argued that, after all, the program will have failed if the corporation is now being sentenced.
They also contended that companies will seek to create the impression of compliance efforts by establishing a paper trail of turgid employee manuals, memoranda, and the like. The Commission saw validity in these arguments but determined that the solution was not to reduce the credit for compliance programs, but rather to ensure that only serious programs would be credited.
For example, the commentary's general definition requires that a qualifying program be "designed, implemented, and enforced so that it generally will be effective in preventing and detecting criminal conduct" (emphasis added). This is a substantial requirement. To award credit the court must essentially conclude that the instant violation constitutes an exceptional occurrence; that "generally" the company's compliance program would be expected to prevent such conduct.
The emphasis on real rather than cosmetic compliance efforts is apparent elsewhere in the commentary. Companies must "communicate effectively" their standards and procedures by, for example, explaining "in a practical" - i.e., understandable - "manner what is required. " The commentary's concluding discussion on the precise actions necessary for a program to qualify shows how a company's size, business, and history all should be analyzed to determine whether sufficient attention was given to making the program actually work.
Thus, while courts will have latitude in determining whether to award credit for a compliance program under the guidelines, they will be pushed by the commentary to reject programs that were not carefully designed to get the job done. This fact points to another reason why companies should keep their focus on achieving practical results rather than simply seeking to mirror the criteria established by courts construing the guidelines in other contexts.
3. The Wedge Between "Good Citizen" Organizations and Individual Agents Who Break the Law. When the Commission accepted the proposition that punishment should be lighter for "good citizen" companies who become entangled in the criminal law solely because of what is frequently called the "rogue" employee, it wrote into the guidelines a standard of good corporate citizenship that is more than "hear no evil, see no evil, and speak no evil." The guidelines do reward good citizenship, but only when companies get involved and take a clear stand against lawbreaking.
This incentive-based approach will tend to create a "wedge" between companies that wish to be recognized as good citizens entitled to reduced punishment under the guidelines and employees who commit crimes. While other facets of the culpability score will contribute to this wedge, (see generally U.S.S.G. Sec. 8C2.5(g) Self Reporting, Cooperation and Acceptance of Responsibility), the steps required by companies to establish a qualifying compli- ance program will play a leading role.
The potential for this wedge is initially apparent in the name the Commission has given to the kind of compliance program it believes deserves credit: an effective program to prevent and detect violations of law. The requirement that a company make serious and demonstrable efforts to detect crimes is where the separation of interests between good citizen corporations and lawbreaking agents inevitably begins.
The wedge gains momentum through a special proviso the Commission has written into the guidelines governing fine mitigation for compliance programs. A company that detects a violation must also report the violation to authorities if credit is to be given for its compli- ance program. (See U.S.S.G. Sec. 8C2.5(f)). A reasonable time is allowed for internal investigation and allowance is given for a reasonable conclusion that no offense occurred.
The key point, however, is that to reduce its own exposure to criminal sanctions the company must first assiduously seek to unearth wrongdoing, and then, when it has been successful, take a step that will have the practical effect of increasing the likelihood that its employees who broke the law will themselves be held criminally accountable.
There can be little doubt that this kind of incentive-driven wedge between corporations and lawbreaking employees will create challenging decisions for in-house counsel. It is equally clear that the Commission intended that the badge of corporate good citizenship under the guidelines be real. Candid recognition of this intent - as well as the need for structured flexibility and effective- ness in program design - should aid in properly interpreting the requirements of "an effective program to prevent and detect violations of law."
Mr. Swenson and Mr. Clark are senior members of the U. S. Sentencing Commission's legal staff. They served, respectively, as Chairman and Principal Drafterl Senior Advisor of the staff task force assigned responsibility by the Commission for developing and drafting the organizational sentencing guidelines.
The views expressed are those of the authors, and should not be assumed to represent the official views of the Sentencing Commission.
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