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The United States Sentencing Commission is the body responsible for establishing the sentencing policies, practices and guidelines for federal crimes. The Federal Sentencing Guidelines provide direction on both preventative steps an organization should take and possible remedial measures and sentencing outcomes should a crime occur. On November 1, 2010, changes to the Federal Sentencing Guidelines for organizations will take effect. The amendment, proposed in January 2010 and unanimously approved in April, reflects the Sentencing Commission’s desire to clarify the elements that constitute an effective compliance and ethics program. The new amendment makes several key changes:

• First, it encourages organizations to adopt a new reporting structure that requires ethics and compliance officers to report directly to the board of directors or governing authority of the organization. Companies that adopt this structure will be eligible to take advantage of a three-level reduction in their culpability score.
• Second, the amendment sets forth additional guidance regarding the reasonable steps an organization should take after criminal conduct is detected—including encouraging self-reporting of the misconduct.
• Finally, the amendment modifies the conditions of probation for organizations.

The adopted changes provide companies with clearer direction on how to build an effective compliance and ethics program that will benefit the company even if criminal activity is detected. By following the requirements set forth in the revised Guidelines, companies will be in a better position to mitigate the damage if wrongdoing has occurred.

The Sentencing Benefits of A Meaningful Ethics and Compliance Program

The most notable change to the Guidelines is the change to the calculation of an organization’s culpability score under §8C2.5(f). Under the current Guidelines, if the organization’s criminal activity involves a high-level executive, it is nearly impossible for the organization to benefit from a strong compliance and ethics program. Under the new amendment, companies will be able to take advantage of a three-point reduction in the culpability score, assuming the organization meets the following criteria:

• The reporting structure must be set up so that individuals responsible for the day-to-day operations of the compliance and ethics program have direct lines of reporting to the governing authority of the organization (the Board of Directors or a subcommittee);
• The organization’s compliance and ethics program must have discovered the offense internally before it was brought to its attention by outside sources (or was likely to be brought to its attention by outside sources);
• The organization must promptly self-report; and
• The high level bad actor cannot be someone with operational responsibility for the compliance and ethics program.

By fulfilling these criteria companies will be eligible to reduce their culpability, potentially reducing any fines or mitigating any prosecutorial outcome.

Reasonable Steps an Organization Should Take After the Detection of Criminal Conduct

Section 8B2.1 of the Sentencing Guidelines provides the foundation for an effective compliance and ethics program. Having an effective compliance and ethics program can help a company detect wrongdoing before it escalates. It can also affect the prosecutor’s decision to prosecute and mitigate corporate liability, both criminal and civil. For these reasons, companies have used the Guidelines as a blueprint when building their own programs to ensure that they meet the Commission’s standards. The Guidelines currently provide seven general requirements an organization must meet to have an effective compliance and ethics program. These minimum requirements include:

• The establishment of standards to prevent and detect criminal conduct;
• High-level and identifiable oversight of the program;
• Exclusion from authority positions of those with a history of poor conduct;
• Practical and periodic communication throughout the organization of the program’s standards and procedures;
• Reasonable enforcement, evaluation, and whistleblower protection procedures;
• Consistent enforcement of compliance incentives and non-compliance disciplinary measures; and
• When criminal conduct is detected, the implementation of “reasonable steps to respond appropriately to the criminal conduct and to prevent further similar criminal conduct.”

As to the requirement that the company “take reasonable steps to respond appropriately to the criminal conduct and to prevent further similar criminal conduct,” the amendment provides additional guidance. Under the amended Guidelines, the requirement is twofold. First, the company should “respond appropriately to the criminal conduct,” and second, the company must take steps to prevent “further similar criminal conduct.” The second prong requires that to prevent future criminal conduct companies “should assess the compliance and ethics program and make modifications necessary to ensure the program is more effective.” The revised Guidelines confirm that the practices of self-reporting, cooperating with the government and the possible use of an outside professional are considered appropriate remedial measures. In adopting these clarifications, the Commission voted against adding specific language that would have made the use of an independent monitor part of the remedial measure component, opting instead to make a more general reference to the use of an outside professional consistent with subsections (b)(5) and (c). The changes also recognize (but do not require) that restitution should be considered as part of the equation when the victims are identifiable and it is appropriate. The addition of restitution as a factor will bring the Sentencing Guidelines in line with the Department of Justice’s considerations when charging a company in the first place.

Changes to the Conditions of the Organization’s Probation

Under the current Guidelines, when an organization is sentenced to probation, the conditions of probation vary based on whether the penalty is meant to cause monetary harm or serve some other non-monetary purpose. The newly amended §8D1.4 eliminates this distinction and allows a court to consider the full range of conditions for probation. The revised Guidelines also provide several additional conditions that the court may consider when sentencing an organization to probation, including requiring the company to submit to the court a schedule for implementing changes to its compliance and ethics program, requiring the company to notify its employees and shareholders of its criminal behavior, requiring the company to submit probation reports on the progress of the changes to its compliance and ethics program, and disclosing any new civil or criminal proceedings or formal inquiries that have been brought since the last report.

Responding to the Changes

In light of these changes to the Federal Sentencing Guidelines, companies should assess their current compliance and ethics program to determine whether their program meets these new criteria. In particular, they should conduct a study of the mechanisms in place to detect and prevent criminal activity, ensuring that they have robust monitoring and realistic whistleblower protections. They should also examine the structure and leadership of the compliance and ethics program. No one wants to find evidence of criminal activity in-house, but it is far better to find it before it finds you.

For more information, please contact John J. Carney ( or 212.589.4255), George A. Stamboulidis ( or 212.589.4211) or Dennis O. Cohen ( or 212.589.4288). We hope you find this information helpful.

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