DEVELOPING AND IMPLEMENTING AN EFFECTIVE CORPORATE COMPLIANCE PLAN

Transcription

1 DEVELOPING AND IMPLEMENTING AN EFFECTIVE CORPORATE COMPLIANCE PLAN by BARBARA J. DAWSON* * Barb Dawson is a partner in the law firm of Snell & Wilmer. She practices business litigation in the firm s Phoenix office.

2 I. THE COMPLIANCE FRAMEWORK THE FEDERAL SENTENCING GUIDELINES During the past two decades, courts have expanded the doctrine of corporate criminal liability. With increasing frequency, corporations are being held liable for the criminal acts of their employees and agents. 1 This trend is best evidence through the inclusion in the Federal Sentencing Guidelines of specific guidelines applicable to organizations. These developments have led many corporations to implement corporate compliance programs. Compliance programs are designed to allow corporations to prevent, detect, and report criminal conduct. Although the existence of a compliance program will not immunize a corporation from liability, it is apt to minimize the chance that criminal conduct will occur. Furthermore, its existence may be considered as a mitigating factor - - by prosecutors and the courts if criminal conduct does occur. A. Introduction The United States Sentencing Commission promulgated the Federal Sentencing Guidelines for Organizations (the Organizational Guidelines ) in The Organizational Guidelines define the parameters for the sentencing of organizations that are found to be vicariously liable for the criminal actions of their agents. The Organizational Guidelines are designed so that the sanctions imposed upon organizations and their agents, taken together, will provide just punishment, adequate deterrence, and incentives for organizations to maintain internal mechanisms for preventing, detecting, and reporting criminal conduct. 3 The Guidelines define organization to include corporations, partnerships, associations, joint-stock companies, unions, trusts, pension funds, unincorporated organizations, governments and political subdivisions thereof, and non profit organizations. 4 B. Four General Principles of the Organizational Guidelines The Organizational Guidelines are based upon the following four general principles: First, the court must, whenever practicable, order the organization to remedy any harm caused by the offense. The primary purpose is not punishment, but to make the victim whole; Second, if the organization operated primarily for a criminal purpose or primarily by criminal means, the fine should be set sufficiently high to divest the organization of all of its assets; Third, the fine range should be based on the seriousness of the offense and the culpability of the organization; and Fourth, probation is an appropriate sentence for an organizational defendant when needed to ensure that another sanction will be fully implemented, or to ensure that steps will be taken 1 The term agents is used herein to include employees U.S.C. Ch U.S.C. Ch. 8 Introductory Commentary U.S.C. 8A1.1 Application Notes.

3 within the organization to reduce the likelihood of future criminal conduct. 5 C. Five Parts of the Organizational Guidelines The Organizational Guidelines are comprised of the following five parts: Part A sets out the general application principles; Part B provides the remedies for criminal conduct; Part C provides for organizational fines; Part D provides for organizational probation; and Part E briefly addresses special assessments, forfeitures and costs. 1. Part A General Applicability Part A defines the general applicability of the Organizational Guidelines. Section 8A1.1 provides that they apply to the sentencing of all organizations for felony and Class A misdemeanor offenses. Examples of applicable offenses include money laundering, bribery, fraud, trademark and copyright infringement. The Organizational Guidelines do not apply to violations of environmental, food and drug, and national security laws - - although efforts are underway to expand their application into additional areas. 6 Section 8A1.2 outlines the directions for applying Parts B and C. 2. Part B- Remedies Part B provides courts with a number of options for remedial orders. 7 In general, a court may choose from restitution, remedial, or community service orders as discussed below: a. A restitution order, or an order of probation requiring restitution, can be used to compensate identifiable victims of the offense; 8 b. A remedial order, or an order of probation requiring community service, can be used to reduce or eliminate the harm threatened, or repair the harm, when that harm or threatened harm would otherwise not be remedied. 9 Some examples of a remedial order include a product recall or clean up order for an environmental violation; 10 and 5 18 U.S.C. Ch. 8 Introductory Commentary. 6 See Sentencing Rules Point Way to Organizational Salvation. Money Laundering Alert Int l, Jan. 1, U.S.C. 8B B B B1.2 commentary

4 c. The community service option is an indirect monetary sanction as it only applies if the organization uses its own resources or pays its employees or others to do so. Furthermore, the scope of community service orders should generally be related to the purpose of sentencing Part C Fines a. Criminal Purpose Organizations Section 8C1.1 provides the guideline for determining the fine for criminal purpose organizations. An organization may be deemed a criminal purpose organization if, upon an examination of the nature and circumstances of the offense and the history and characteristics of the organization, the court finds that it was operated primarily for a criminal purpose of operated by criminal means. 12 Examples of such organizations include a front for a scheme designed to commit fraud, an organization established to participate in the illegal manufacture, importation, or distribution of a controlled substance or a hazardous waste disposal business that had no legitimate means of disposing of waste. 13 If the court determines that an organization is a criminal purpose organization, the fines shall be set at an amount (subject to the statutory maximum) sufficient to divest the organization of all its net assets. 14 Net assets refer to assets remaining after all legitimate creditors have been paid. 15 b. Other Organizations Section 8C2.1 is the guideline for determining the fine for other organizations (i.e., those that do not fall under section 8C1.1). This section lists those crimes in chapter Two (Offense Conduct) for which an organization may be liable. Once it determines that the crime in questions falls under section 8C2.1, the court must then go on to apply sections 8C2.3 through 8C which are discussed below - - to determine the fine. i. 8C2.3 Offense Level: The offense level is determined by applying the Chapter Two guideline for the specific offense. ii. 8C2.4 Base Fine: The Base Fine is determined by taking the greatest of either the amount from the table in 8C2.4(d) corresponding to the Offense Level, the pecuniary gain to the organization from the offense, or the pecuniary loss from the offense caused by the organization (intentionally, knowingly, or recklessly). The base fines listed in table in 8C2.4(d) range from $5,000 to $72,5000,000. iii. 8C2.5 Culpability Score: The court determines the Culpability Score after an examination of a number of factors. These include the size of 11 8B C1.1 Background. 13 8C1.1 Background. 14 8C C1.1 Application Notes

5 the organization, the involvement or tolerance level of authority personnel, the organization s prior history, whether the action in question was a violation of a judicial order, and obstruction of justice. Mitigating factors, such as whether the organization had an effective compliance program to prevent and detect violations of the law and the organization s self-reporting, cooperation, and acceptance of responsibility, are also taken into consideration. Points are added for increased culpability and subtracted for mitigating factors. The general range is zero to ten. iv. 8C2.6 Minimum and Maximum Multiplies: The minimum and maximum multiplies are determined by applying the Culpability Score to the table of multiplies in section 8C2.6. v. 8C2.7 Guideline Fine Range for Organizations : The Guideline Fine Range is determined by multiplying the Base Fine by both the minimum and maximum multipliers under section 8C2.6. vi. 8C2.8 Determining the Fine Within the Range (Policy Statement): The court sets the specific fine from within the range after considering a number of factors. A non-exhaustive list includes: The need for the sentence to reflect the seriousness of the offense; the need to provide just punishment and afford deterrence; the organization s role in the offense; prior criminal records of high level personnel involved in the offense; prior criminal conduct by the organization; and an exceedingly high or low culpability score. vii. 8C2.9 Disgorgement: Finally, the court shall add to the fine any gain from the offense that has not, and will not, be paid as restitution or by way of other remedial measures. Part C also provides for departures from the Guidelines. Of particular note, Section 8C4.1 allows the court to depart from the Guidelines and reduce the fine if the organization provides substantial assistance in the investigation or prosecution of another organization that has committed an offense. On the other hand, the court may find an upward departure from the Guidelines appropriate if the organization s culpability score is exceptionally high C Part D Probation Under section 8D1.1, a court may sentence an organization to probation for a variety of

6 reasons. A non-exhaustive list includes: If such sentence is necessary to secure the enforcement of an order under section 8B1; if the penalty is not paid in full at the time of sentencing and restrictions are necessary; if at the time of sentencing, the organization has 50 or more employees and does not have an effective prevention and detection program; and if such sentence is necessary to ensure that changes are made within the organization to reduce the likelihood of future criminal conduct. 17 The term of probation shall be between one and five years in the case of a felony, and in any other case, the term shall be not more than five years Part E- Special Assessments, Forfeitures, and Costs Under Section 8E1.1, a special assessment must be imposed on an organization in the amount prescribed by statute. Pursuant to 18 U.S.C. 3013(a), the following amounts apply: a. $50 for a Class B; b. $125 for a Class A misdemeanor; and c. $200 for a felony. Under section 8E1.3, the court also may order the organization to pay the costs of prosecution. 6. Guidelines for Compliance Programs Under the Federal Sentencing Guidelines for Organizations, the existence of an effective compliance program may be considered a mitigating factor which can help to reduce an organization s culpability score. A lower culpability score will ultimately reduce the corporate penalty. An effective program is defined as one that has been reasonably designed, implemented, and enforced so that it generally will be effective in preventing and detecting criminal conduct. 19 Failure to prevent or detect the instant offense, by itself, does not mean that 17 8D D U.S.C. 8A1.2 Note k

7 the program was not effective. 20 The hallmark of an effective program is that the corporation exercises due diligence in seeking to prevent and detect criminal conduct by its agents. 21 The following minimum requirements are needed to demonstrate due diligence: a. The organization must have established compliance standards and procedures for its agents that are reasonably capable of reducing the prospect of criminal behavior; b. Specific high-level employees of the organization must have been assigned responsibility to oversee compliance with the standards and procedures; c. The organization must have used due care not to delegate substantial discretionary authority to individuals whom the organization knew, or should have known, had a propensity to engage in illegal activities; d. The organization must have taken steps to effectively communicate its standards and procedures to all employees and other agents; e. The organization must have taken reasonable steps to achieve compliance with its standards (e.g., the use of monitoring, auditing, and reporting systems); f. The standards must have been consistently enforced through appropriate disciplinary mechanisms; and g. The organization must have taken all reasonable steps to respond appropriately to the offense and to prevent further similar offenses, including any necessary modifications to its program to prevent and detect violations of the law. The structure of the program necessary to prevent and detect violations of law depends upon a number of factors, including: a. The size of the organization; b. The likelihood that certain offenses may occur because of the nature of the business; and c. The prior history of the organization Id. 21 8A1.2 Note k. 22 8A1.2 Note k

8 II. CORPORATE COMPLIANCE PROGRAMS A. Program Goals The term Corporate Compliance Program is generally used to describe an organization s formal statement of ethics, law, or policy (or some combination thereof) delineating the obligations of one or more classes of corporate employees. 23 The goals of an effective Compliance Plan must be to: 1. Prevent foreseeable acts of non-compliance; 2. Identify acts of non-compliance when they occur; 3. Minimize exposure to acts of non-compliance; 4. Specify how the corporation will deal with non-compliance; 5. Adjust policies and procedures after an act of non-compliance is detected to minimize the possibility of reoccurrence; and 6. Identify and react to internal and external changes. 24 B. Developing an Effective Compliance Plan 1. Scope and Objectives the Needs Assessment The first step in creating an effective Compliance Plan is to develop the scope and specific objectives of the program. A good way for the program designers to go about this is through a needs assessment based on interviews with, or surveys of, pertinent individuals in the corporation. Through this assessment, the program designers can gain a full understanding of the issues and concerns the program should address. There are three factors that the program designers must address in developing an effective program. First, they must clearly delineate the standards of behavior required in the corporation s industry; Second, they should pay particular attention to pertinent regulatory and statutory standards; and Third, they must design a program that is appropriate to the corporate s own culture 23 Walsh and Pyrich at Stephen K. Clarke, Making the Compliance Plan Effective: Deterring, Detecting and Dealing with Non-Compliance, The Arizona Compliance Manual Ch. 6 (1993) at

9 and structure Written Code of Conduct and Administrative Procedures The next step is to develop a written code of conduct and written administrative procedures for the corporation. The goal in preparing a code of conduct is to provide guidance in particular areas where issues may arise but to keep the code of conduct as brief as possible in order encourage its use. Common areas covered under a code include: The company s philosophy and ethical expectations of employees Antitrust Bribes, Kickbacks and Rebates 26 Business Entertainment Business Opportunities Company Assets Company Records 27 Confidential Information Conflicts of Interest Employment Practices Employment Practices Environmental Compliance Health and Safety Intellectual Property Internet Privacy Political Contributions 25 Walsh and Pyrich at Compliance with the Foreign Corrupt Practices Act may need to be separately addressed. 27 The mention of company records in the Code of Conduct is most likely to cross-reference a more detailed document retention policy

10 Sales and Marketing Suppliers General information regarding the compliance program should be disseminated throughout the workforce before the formal roll out of the code and procedures. Program designers should focus substantial attention on how to educate agents as to the specifics of the program once it is in place. A corporation may plan training sessions to explain and reinforce appropriate compliance behavior. It may even require that its agents sign certifications indicating that they have read and understood the compliance policy Supervision The development of an infrastructure to support the Compliance Program once it is in place also is critical to its success. Compliance officers or committees should be organized to facilitate and enforce the compliance program. The compliance officers should be responsible for: Disseminating information to agents and answering their questions; Monitoring agents activities; Disciplining agents; Updating and revising the compliance program; and Investigating and/or reporting acts of non-compliance Reporting Mechanisms Compliance programs must include clearly defined procedures by which agents can report questionable conduct to management or law enforcement officials. They should also provide for internal investigation procedures, as well as procedures for cooperating with any government investigations Monitoring and Auditing Finally, the corporation should monitor and audit the program on an ongoing basis. Monitoring should involve day-to-day review and oversight and the auditing should involve project-oriented and periodic review by either internal or external auditors. Compliance programs must be reviewed and updated regularly to take account of new developments in the 28 Walsh and Pyrich at Walsh and Pyrich at Walsh and Pyrich at 648; see also footnote????

11 law or new activities in the corporation. 31 C. Benefits of an Effective Compliance Program The benefits of compliance programs have been widely recognized by the corporations that have implemented them. For example, in response to a national survey, corporate counsel identified the following benefits derived from an effective compliance program: a. 83 % of those surveyed found that it educated agents to be alert to activities that are potential violations; b. 83 % noted that it may detect and deter potential misconduct earlier so as to minimize the impact; c. 76% thought that the program would force the company to assess the adequacy of existing controls; d. 66% thought that it may help them avoid becoming corporate targets and being indicted in the first place; e. 55 % thought that a program would lessen the likelihood of claims against directors and officers; f. 51 % emphasized the potential for reduced fines if convicted; suits; and rates 32 g. 13% thought a program would discourage derivative shareholder h. 12% understood that a program could result in reduced insurance Thus, the benefits of a compliance program are recognized to go well beyond the most widely publicized goal of giving corporations an edge if they are prosecuted based upon the criminal acts of their agents. Crime prevention through education and internal enforcement are by far the strongest benefits. III. RECORD RETENTION PROGRAMS A. Statutory and Regulatory Compliance A sound record retention program ensures compliance with the laws and regulations governing those records, including emerging federal and state laws that facilitate the creation and maintenance of electronic documents without the need for paper copies. The federal government 31 For a discussion of the monitoring and auditing responsibilit ies, see William A. Arbitman, Stephen K. Clarke, and Barbara J. Dawson, Monitoring and Auditing Your Compliance Program and Conducting Internal Investigations, The Arizona Compliance Manual (to be published in 1995 Supp.) at Tab Donna Gill, 1993 General Counsel Survey: Organizational Sentencing Guidelines, Chicago Lawyer (Nov. 1993)

12 alone has issued more than 10,000 laws affecting records and the states have promulgated similar document retention requirements. Knowledge of the relevant legal responsibilities clearly stated in a record retention program is the first step toward insuring legal compliance. B. Lower Storage Costs While certain material must be stored, the warehousing of records no longer required for operational or legal purposes is an unnecessary and wasteful expense. A study by the Texas State Government estimated that it costs $1, per year to maintain a single five-drawer file cabinet in office space. Even the cost of maintaining records in an off-site location can be substantial, particularly when long-term leases are required. C. Manage and Electronic Files The ease with which and electronic data can be created, distributed, forwarded, and automatically stored means the creation of numerous sources of company information. Get control of your electronic messages and data by knowing what computer records you have and how they are stored. Maintain control with a record retention program that is consistently applied to electronic data and adheres to the newly emerging federal and state laws governing electronic records and signatures. D. Expand Office Space The maintenance of valueless records requires the use of space which can be utilized for much needed offices, conference rooms or other productive work areas. By eliminating unnecessary material, or converting them to electronic records, the reacquired space can be reallocated to accommodate future records or other productive purposes. E. Reduce Equipment Expenses The disposal of needless records frees storage equipment which can be used for future record maintenance. The constant purchase of cabinets, storage shelves and bankers boxes is a significant added expense which can be avoided. F. Improve Time Management When valueless material is discarded, current information can be located and retrieved much faster and staff can be assigned to manage and control important records. Stop wading through obsolete records and improve efficiency. G. Consistent Program Application A common reason for the failure of a record retention program is the frustration inherent in the application of vague or outdated policies to stacks of records. A contemporary record retention program establishes a time table and procedures for discarding records and purging electronic data and reduces the risk of inconsistent or reckless destruction of records

13 H. Protect Documents Required for Litigation, Government Investigation, or Audits An effective records management program also protects the organization during litigation, a government investigation or an audit. The program insures that records will be maintained whenever a legal duty exists to maintain those records, even if the retention period would have otherwise called for their disposal. A well-managed records program also helps identify material needed to support a claim, as well as those required by an adversary in litigation. I. Defend Spoliation of Evidence of Claims In litigation, when necessary records exist and can be found, an organization is in the best position to defend itself. When necessary records no longer exists for unexplained reasons or cannot be found, the courts have imposed significant sanctions during litigation (e.g., adverse jury instruction, monetary sanction, default judgment). Fortunately, the law provides that a consistent, comprehensive and reasonable record retention program is an acceptable reason to explain the absence of otherwise relevant material. J. Efficient Response to Document Subpoenas Typically, the preparation of a response to a subpoena duces tecum requires a significant investment of manpower to identify and retrieve the required documents. A current record retention program dramatically reduces the time associated with document collection since document types and location are known