Richard Craig Smith, Michael C. Pacella and Fatema Merchant
November 4, 2010
On November 1, 2010, the most recent amendments to the U.S. Sentencing Guidelines Manual (“Guidelines”) went into effect. These amendments, which were promulgated by the U.S. Sentencing Commission and submitted to Congress, do not reflect a sea change in the way corporations are evaluated or sentenced under Chapter 8 of the Guidelines. They do, however, provide important guidance to corporations in designing and evaluating the effectiveness of corporate compliance and ethics programs. More specifically, the amendments reward companies that provide their chief compliance officers with direct reporting responsibility to the governing authority of the company, such as the Board of Directors, or a subgroup thereof, such as the Audit Committee. The amendments also promote self-reporting to, and cooperation with, the government as examples of “effective” remedial measures taken by companies when responding to criminal conduct.
In light of these new amendments, and in order to preserve potential sentencing reductions under the Guidelines, companies should ensure that their chief compliance officer has direct reporting responsibilities to the Audit Committee and/or Board of Directors as outlined below. Similarly, companies should consider whether to self-report and cooperate with the government when evaluating available remedial measures after misconduct is uncovered.
Availability of Effective Compliance & Ethics Program Reduction Despite High-level Employee Involvement in or Knowledge of Criminal Conduct
Section 8C2.5(f) of the Guidelines provides companies with a three-point reduction in their recommended Guidelines sentence if they can demonstrate the existence of an effective compliance and ethics program at the time of the offense (as outlined in Section 8B2.1(b)). Prior to the 2010 amendments, this three-point reduction was unavailable if a person within high-level personnel “participated in, condoned, or was willfully ignorant of” the criminal conduct. As of November 1, 2010, companies can benefit from this three-point reduction—despite the participation or knowledge of high-level personnel—if they can demonstrate the existence of an effective compliance and ethics program at the time of the offense and meet the following four conditions:
- The individual(s) with operational responsibility for the compliance and ethics program (generally the corporate compliance officer) had “direct reporting obligations” to the governing authority or sub-group thereof (generally the Board of Directors or Audit Committee);
- The compliance and ethics program detected the criminal conduct before it was discovered, or reasonably likely to be discovered, outside the company;
- The company “promptly” reported the criminal conduct to the appropriate governmental authorities; and
- No individual with operational responsibility for the compliance program participated in, condoned, or was willfully ignorant of the misconduct.
Application Note 11 to Section 8C2.5 defines “direct reporting obligations” as having the “express authority to communicate personally to the governing authority or appropriate subgroup thereof,” such as the Board or Audit Committee, in two different scenarios: (1) “promptly” when reporting potential criminal conduct; and (2) at least annually when evaluating the implementation and effectiveness of the compliance and ethics program.
In the Foreign Corrupt Practices Act (“FCPA”) context, U.S. enforcement authorities often expect and demand that chief compliance officers have such direct access to their companies' Board of Directors and/or Audit Committee. In recent deferred prosecution agreements with Daimler AG and Technip S.A., for example, the government required each company to establish a compliance program in which the chief compliance officer would have the authority to report matters directly to the appropriate committee of the Board of Directors.
Providing the chief compliance officer with such direct reporting authority is also recognized as a compliance “best practice.” Yet many multinational companies have not yet established such a compliance structure. For example, in Compliance Week’s 2009 Global Integrity Survey of global public companies and large private entities with more than $5 billion in revenue and more than 10,000 employees, less than half of all respondents had their compliance and ethics function report either directly (19.7%) or indirectly (dotted-line reporting) (29.3%) to the Audit Committee of the Board of Directors. However, more than three-quarters of them (77%) said their compliance and ethics function had regular contact with the Board, with 47.4% reporting to the Board on a quarterly basis.
In light of the recent Guidelines amendment, U.S. enforcement authorities’ expectations, and compliance best practices, companies should reexamine their internal compliance structures and ensure that their chief compliance officer has such “direct reporting obligations” as outlined in the Guidelines in order to preserve the availability of the three-point sentence reduction.
“Reasonable Steps” Companies Must Take When Responding Appropriately to, and Preventing Further, Criminal Conduct
Section 8B2.1(b) of the Guidelines outlines seven components of an “effective” compliance and ethics program, which, if established, can mitigate a corporation’s recommended Guidelines sentence. Although the recent amendments to the Guidelines did not alter the overall composition of an effective compliance and ethics program (i.e., there are still seven components), they did clarify the remedial steps required to satisfy the seventh component under Section 8B2.1(b)(7).
Section 8B2.1(b)(7) requires companies to “take reasonable steps to respond appropriately” to criminal conduct after it is detected and to “prevent further similar criminal conduct” from occurring, “including making any necessary modifications to the organization’s compliance and ethics program.” Prior to the 2010 amendments, corporations had no formal guidance as to what “reasonable steps” were required by this Guidelines provision. As of November 1, 2010, corporations can look to several specific examples contained in Application Note 6 for such guidance.
Application Note 6 recognizes that Section 8B2.1(b)(7) requires companies to respond appropriately to criminal conduct and provides three examples of such an appropriate response: (1) self-reporting the criminal conduct to the government; (2) cooperating with U.S. enforcement authorities; and (3) providing restitution and other forms of remediation to identifiable victims. Application Note 6 also acknowledges that Section 8B2.1(b)(7) requires companies to act appropriately to prevent further similar criminal conduct from occurring, which includes evaluating, and modifying if necessary, its compliance and ethics program after criminal conduct is uncovered. In doing so, the Application Note recognizes that companies may wish to retain outside professional advisors, such as legal counsel or corporate compliance monitors, for assistance. Companies should keep these considerations in mind when evaluating available remedial measures after misconduct arises, in order to potentially preserve the three-point sentencing reduction for having an effective compliance and ethics program.
This article was prepared by Richard C. Smith (email@example.com or 202 662 4795), Michael C. Pacella (firstname.lastname@example.org or 202 662 4774) and Fatema Merchant (email@example.com or 202 662 4626) from Fulbright’s White Collar Crime Practice Group and FCPA and International Anti-Corruption Practice Group.
Fulbright’s White Collar Crime Practice Group
Fulbright’s White Collar Crime Practice Group is experienced in the management of complex federal and state civil and criminal litigation on behalf of U.S. companies, including Fortune 500 corporations, their officers and directors, international corporations and entities, and individuals. Fulbright’s White Collar Crime Practice Group also is experienced in the practice of preventative counseling and compliance programs. From a strategic perspective, this is important for reducing the risk of civil and criminal litigation. Our representation includes all phases of governmental investigations and criminal and civil litigation.
 See generally U.S. Sentencing Guidelines Manual (2010) (hereinafter “U.S.S.G.”).
 See U.S. Sentencing Comm’n, Amendments to the Sentencing Guidelines (May 3, 2010), available at http://www.ussc.gov/2010guid/20100503_Reader_Friendly_Proposed_Amendments.pdf.
 U.S.S.G. § 8C2.5(f)(3)(C) (2010).
 U.S.S.G. § 8C2.5(f)(3)(A) (2010).
 U.S.S.G. § 8C2.5(f)(3)(C) (2010).
 U.S.S.G. § 8C2.5, cmt. n.11 (2010).
 United States v. Daimler AG, 10-CR-063 (D.D.C. Mar. 24, 2010), Deferred Prosecution Agreement, Att. C, at 2, available at http://www.justice.gov/criminal/fraud/fcpa/cases/docs/daimlerag-def-agree.pdf (“The assignment of responsibility to one or more senior corporate officials of Daimler for the implementation and oversight of compliance with policies, standards and procedures regarding the FCPA and other applicable FCPA laws. Such corporate official(s) shall have the authority to report matters directly to Daimler’s Board of Management and Supervisory Board.”).
 United States v. Technip S.A., 10-CR-00439 (S.D. Tex. June 28, 2010), Deferred Prosecution Agreement, Att. C, at 2, available at http://www.justice.gov/criminal/fraud/fcpa/cases/docs/06-28-10-technip-agreement.pdf (“The assignment of responsibility to a senior corporate official of Technip for the implementation and oversight of compliance with policies, standards, and procedures regarding the FCPA, French anti-corruption laws, and other applicable anti-corruption laws. This senior corporate official shall have authority to report matters directly to the Ethics and Governance Committee of the Board of Directors.”).
 Compliance Week, 2009 Global Integrity Survey, at 10.
 U.S.S.G. § 8B2.1(b) (2010).
 U.S.S.G. § 8C2.5(f) (2010).
 U.S.S.G. § 8B2.1(b)(7) (2010).
 U.S.S.G. § 8B2.1, cmt. n.6 (2010).
Richard Craig Smith
Michael C. Pacella