Corporate Compliance Programs: The Benefits Extend Far Beyond the Criminal Prosecution Context
Since the implementation in 1991 of Federal Sentencing Guidelines for organizations, there has been much discussion concerning the impact of a voluntary corporate compliance program on sentencing, especially in the setting of fine amounts. While the existence of an "effective" corporate compliance program provides an express mitigating factor under the Guidelines, the usefulness of a compliance program goes far beyond the fine reduction mechanism under the Guidelines.
A compliance program can be the catalyst for: avoiding criminal conduct by the corporation; dissuading prosecutorial authorities from pursuing criminal charges; limiting or preventing findings of liability at trial; as well as establishing a less onerous sentence should there be a finding of guilt. A voluntarily established program can also be an effective tool in preventing and defending potential civil liability after the threat of criminal liability has been eliminated. The following discussion illustrates a few of the benefits potentially flowing from establishing and maintaining an effective compliance program.
Benefits under the Sentencing Guidelines
The most obvious benefit to establishing a voluntary compliance program under the Federal Sentencing Guidelines is that the existence of an "effective" program permits a three level reduction in the corporation's "culpability" score. The "culpability score" is correlated to a set of minimum and maximum dollar amount multipliers that establish the range of potential fines. The three level reduction accorded for a compliance program reduces the fine amount attributable to the corporations "culpability" by up to 60% for the minimum multiplier and 120% for the maximum multiplier.
There are several additional benefits to consider under the Guidelines, however. An effective compliance program may form the basis for further reductions in penalties under various subparts of the Guidelines. For example, an established program may permit the corporation to avoid a period of probation altogether. If certain other factors are met, such as the payment before sentencing of restitution and fines, the court need not impose a period of probation under Guidelines section 8D1.1, if the corporation has a compliance program.
In addition, an effective program may help the corporation to discover the problem, self-report violations, cooperate with the government in its investigation, and accept responsibility for the misconduct, thereby making the corporation eligible for a further reduction of five levels from the culpability score under Guidelines section 8C2.5(g). This reduction, coupled with the three level reduction for the program, effectively reduces the fine amount attributable to the corporation's "culpability" by up to 160% for the minimum multiplier and 320% for the maximum multiplier. Further, if no high level employee was involved in the misconduct, the existence of the compliance program makes the corporation eligible for a downward departure to further reduce the fine, under Guidelines section 8C4.11.
Finally, in some instances, information gained through the corporation's compliance program that is entirely unrelated to the charges facing the corporation may be useful in obtaining a more favorable sentence. A mature compliance program may well yield information to the corporation about wrongdoing by its competitors or other entities. If the corporation shares that information with the government, the corporation may be eligible for an additional downward departure under Guidelines section 8C4.1.
Dissuading Prosecutorial Authorities from Bringing Criminal Charges
Many criminal charges applicable to corporations parallel civil and administrative schemes, violations of which also result in severe penalties to the corporation. The difference between the civil and criminal statutes, however, especially concerning the element of intent, provides an opportunity for the corporation to avoid criminal charges and liability altogether by demonstrating that it had an effective compliance program in place when the misconduct occurred.
Some government agencies have created so called "amnesty" or "voluntary disclosure" programs to encourage self-policing and self-reporting of discovered violations. Although they do not always offer blanket immunity from prosecution, these programs permit corporations to voluntarily disclose the misconduct and thereby greatly reduce the likelihood of criminal prosecution. Even without a formalized "amnesty" program, however, a corporation with a working compliance program may use the program to persuade prosecutorial authorities to exercise their discretionary authority to forgo pursuing criminal charges. The existence of a compliance program can be used to establish that the corporation's board and management are affirmatively working to comply with regulatory requirements and that, therefore, they lack the intent to violate the law. On numerous occasions, we have made such presentations to enforcement authorities and convinced them to forgo the criminal aspect of the investigation. In order to make such arguments successfully, however, it is imperative that the corporation's commitment to compliance be genuine. Law enforcement authorities generally will look behind counsel's representations to test the actual operation of the compliance program.
The existence or lack of a compliance program may also effect the liability of corporate officers and directors in shareholder derivative suits. The Delaware chancery courts have held that the Sentencing Guidelines' commentary concerning compliance programs is a relevant factor in determining the duty of care of corporate officers and directors. Chancellor Allen in In re Caremark Int'l, Inc., Derivative Litig., 698 A.2d 959, 970 (Del. Ch. 1996), said "Any rational person attempting in good faith to meet an organizational governance responsibility would be bound to take into account this development [of the Federal Sentencing Guidelines] and the enhanced penalties and the opportunities for reduced sanctions that it offers." Subsequent commentary on the Caremark case suggests that it may be a per se breach of fiduciary duty for the board and management of a corporation in a highly regulated industry, such as health care, to fail to implement an effective compliance program.
It would seem a virtual certainty that the plaintiff's bar will eventually attempt to use the Guidelines and industry materials advocating compliance programs as a measure of the standard of care for imposing civil liability upon corporations and their officers and directors. The Supreme Court's recent decisions in Burlington Industries v. Ellerth, 524 U.S. 724 (1998) and Faragher v. Boca Raton, 524 U.S. 775 (1998), in the context of sexual harassment suits indicate the willingness with which the courts may be inclined to permit internal policing mechanisms to form the basis of a valid defense. The corollary to the benefit created by the defense, however, is that the absence of a compliance program, or the existence of a program that plaintiff's counsel could portray as a "sham" may increase the likelihood of a finding of liability against the corporation.
The existence and elements of the corporation's compliance program may also be useful tools on the issues of whether corporate employees were acting outside the scope of their authority and to show that the corporation has consistently met a high standard of care. In addition, the compliance program may be critical in showing that the government or plaintiff cannot establish the requisite proof of intent needed to prevail in the litigation. At least two of the federal circuits permit proof concerning the compliance program and efforts to enforce the program, as bearing on the factual determination of whether the corporation is liable for the acts of its employees, although several other circuits do not.
Finally, the existence, sophistication and efficacy of a corporation's compliance program may be useful is dissuading a jury from imposing punitive damages, even if there is a finding of liability against the corporation.
The incidental business benefits created by compliance programs should not be overlooked. Such programs are excellent vehicles for preventing and discovering internal employee misconduct, such as theft. The program also creates an excellent opportunity for marketing the corporation as a good community citizen, and serves as a morale boosting mechanism for corporate employees, both of which result in higher job satisfaction and productivity and concomitant benefits for the corporation.
Issues to Consider in Managing a Compliance Program
In evaluating the benefits of a compliance program under both the Guidelines and for other purposes, management and counsel should consider the following issues carefully.
- The compliance program should be voluntary from its formation. If the compliance program was established as the result of a prior judicial or administrative order, the corporation may receive the three level deduction in its culpability score under the Guidelines, but the government may also ask for an upward departure of the sentencing fine range under Guidelines section 8C4.10. A completely voluntary program will also be more persuasive in convincing skeptical jurors not to impose liability or punitive damages.
- The compliance program must be "effective." To date, there is apparently no caselaw interpreting the Guidelines mandate that the compliance program must be "effective." To ensure that the corporation's program is deemed effective, both for sentencing purposes and for other uses, the corporation should closely analyze the seven elements of a compliance program enumerated in Guidelines section 8A1.2. Care must be taken to tailor these elements to the industry in which the corporation operates, the size of the organization and its prior history with the applicable regulatory scheme.
- For maximum effectiveness, the program should be carefully tailored to the educational and language abilities of the corporation's workforce. Many of the internal benefits of the program as well as its ultimate effectiveness depend upon the appropriate dissemination and comprehension of the program by the entire corporate family.
In addition to the obvious benefits under the Federal Sentencing Guidelines, a corporate compliance program serves many other useful purposes in the context of criminal and civil litigation, and business operations. An analysis of even a few of the benefits potentially inuring to the corporation and its officer and directors with an effective program demonstrates the wisdom of establishing and maintaining such as plan.