On April 30, 2004, the U.S. Sentencing Commission approved amendments to the U.S. Sentencing Guidelines with potentially significant implications for business organizations that administer compliance and ethics programs. In announcing that the amendments had been sent to Congress for approval, the Commission predicted that the new, tougher Guidelines "should lead to a new era of corporate compliance." 1 The Guidelines will go into effect on November 1, 2004, unless Congress votes to reject them. If implemented, the proposed Guidelines will result in more rigorous standards in evaluating an effective compliance program. They will also require senior management and boards of directors to be more actively involved in designing and monitoring the effectiveness of corporate ethics and compliance programs.
The stakes are high. As the Commission observed, "establishing an effective compliance and ethics program is essential for an organization seeking to mitigate its punishment (including fines and terms of probation) for a criminal offense." A key factor in determining whether an organization qualifies for a sentence reduction under the Guidelines is a finding that the organization had, at the time of the offense, an effective program to prevent and detect violations of law. Merely establishing a compliance program, however, is not sufficient to gain this reduction. Program effectiveness is based on a comparison of that program with seven minimum requirements that the Commission first articulated in 1991. The proposed Guidelines strengthen and clarify these seven key criteria, shifting the compliance terrain significantly for companies designing, evaluating or updating existing compliance and ethics programs.2
Overview of Significant Changes
Proactive Approach Now Required
One fundamental change to the Guidelines is one of scope: they require a more forward- looking and active involvement by management in the organization's compliance program as well as a more dynamic process to evaluate its effectiveness. The new standards require that an effective compliance program be proactive, that is, the program must take "reasonable steps to prevent illegal conduct in organizational activities."3
Effective compliance programs will now require the following additional or enhanced elements: First, the "governing authority" must be "knowledgeable about the content and operation" of the compliance program, thus mandating more involvement by high corporate officials.
Second, "effective" training, designed to disseminate the culture of good ethics and to educate employees at all levels of the organization, including senior management and the board, regarding the company's compliance program, is now required, as is disseminating information that is tailored to an "individual's respective roles and responsibilities." (See §§8B2.1(b)(2) & (b)(4)(A).) Previous guidelines suggested that such training was optional.
Third, and significantly, the corporation must periodically evaluate the effectiveness of its compliance program. A new provision requires companies periodically perform "risk assessment" in order to inform the compliance officials of risk areas so as "to reduce the risk of criminal conduct identified through this process." (See §§8B2.1(b)(5) & (c).) This means that a compliance program must be considered a work in progress. The prior guidelines required an organization to re-evaluate its compliance program after an offense had been detected;4 the new guidelines require an organization periodically assess whether criminal conduct will occur. (See § 8B2.1(c).) Independent, outside counsel frequently assist in performing the "risk assessment" and reevaluating a compliance program.
Fourth, an effective compliance program must be "promoted and enforced consistently through appropriate incentives," which presumably means that individual failures to observe corporate norms or "to prevent or detect criminal conduct" must be sanctioned by the organization. A mechanism has been included in the proposed amendments to permit "anonymous or confidential reporting," as opposed to current language which allows for reporting systems that permit employees or other agents to report criminal conduct by others "without fear of retribution." (See §§8B2.1(b)(5) & (b)(6).) The new anonymous reporting element could encourage more employees and company officials to communicate violations or suspected violations of the law if they can be sure their identity will not be disclosed.
Waiver of Attorney-Client Privilege and Work Product Protections
A potentially significant addition impacts on the developing trend, fashionable amongst Department of Justice prosecutors, to pressure a corporate target to waive its applicable attorney-client and work product privileges in order to receive a two-point culpability reduction for "active cooperation." Enforcement staff at regulatory agencies, such as the SEC, CFTC and FERC, have also taken the position that "active cooperation" requires a waiver of these privileges. The former Guidelines were silent as to whether "cooperation" necessarily entailed a complete surrender of all applicable privileges in order to qualify for this important reduction. The commentary to section 8C2.5(g) specifically provides that waiver of the attorney-client privilege and of work product protections "is not a prerequisite to a reduction in culpability score under subsection (g)" provided "the defendant has satisfied the requirements for cooperation set forth in this Note."5 That is welcome news to corporate counsel.
The application of this new standard remains cloudy, as the commentary inconsistently provides: "However, in some circumstances waiver of the attorney-client privilege and of the work product protections may be required in order to satisfy the requirements of cooperation." The proposed amendments fail to offer any specific guidance regarding the types of situations in which the government might determine a waiver is necessary. Companies will thus continue to find themselves in a precarious position. Pressured by aggressive prosecutors involved in complex investigations, they will have to decide whether to waive the traditional privileges or decline such waivers, thereby risking both criminal indictment and enhanced punitive sanctions for failing to cooperate.
The new Guidelines thus do not resolve this dilemma. A recent decision of the California Court of Appeals in McKesson HBOC v. Superior Court illustrates the dilemma companies face in deciding whether to waive the attorney-client privilege and attorney work product protections in an effort to provide complete cooperation with the government in an investigation.6 While some contend that the doctrine of selective waivers Â– under which a party conceivably may disclose privileged material to the government while continuing to assert the privilege against third parties Â– is a viable solution, federal courts have split on the issue. Although the McKesson court rejected the selective waiver theory, the identical issue is on appeal before the Ninth Circuit in U.S. v. Bergonzi.7
Intersection of Proposed Amendments with Prosecution Guidelines for Corporations
Recent DOJ publications provide further guidance to companies seeking to either forestall criminal liability or to mitigate potential punitive assessments following conviction. Deputy Attorney General Larry Thompson's January 2003 memorandum sets forth specific criteria to inform and guide prosecutorial discretion in corporate criminal investigations.8 The DOJ edict directs, but does not require, federal prosecutors to consider a business' willingness to waive the attorney-client privilege work product protection in assessing the extent of cooperation.9 The Thompson memo thus underscores that companies seeking to avoid prosecution are encouraged to waive the attorney-client privilege, particularly if requested by the investigating prosecutor. 10
A comparison of the Thompson memo and the proposed amendments highlights the importance of maintaining effective corporate compliance programs. In many respects, the two guidelines parallel one another and provide insight as to what the government expects in terms of mitigation of penalties, should a prosecution occur.
As discussed above, the proposed amendments to the U.S. Sentencing Guidelines entail significant implications for corporations that maintain and operate compliance and ethics programs. A company which fails to implement and follow a compliance program risks a greater chance of indictment as well as increased exposure to large criminal fines.
1. News Release, "Commission Tightens Requirements For Corporate Compliance And Ethics Programs," May 3, 2004, http://www.ussc.gov.
2. The proposed Guideline amendments were submitted to Congress on April 30, 2004, and were published in the Federal Register on May 19, 2004. 69 Fed. Reg. 28994.
3. See United States Sentencing Commission, Guidelines Manual, §8B2.1(a), Nov. 2002.
4. Guidelines Manual §8A1.2, (Commentary 3(k)(7)).
5. Note 12 to §8C2.5.
6. See McKesson HBOC, Inc. v. Superior Court, 115 Cal.App.4th 1229 (2004)
7. The district court opinion is reported at 216 F.R.D. 487 (N.D. Cal. 2003).
8. "Principles of Federal Prosecution of Business Organizations," January 20, 2003, by Larry D. Thompson, Deputy Attorney General, http://www.usdoj.gov/dag/cftf/corporate_guidelines.htm (last accessed April 25, 2004).
9. "Federal Prosecution of Corporations," June 1999, by Eric Holder, Jr., Deputy Attorney General, http://www.usdoj.gov/
10. "In gauging the corporation's cooperation, the prosecutor may consider the corporation's willingness...to waive attorney-client and work product protection." See "Principles of Federal Corporations of Business Organizations," January 20, 2003, by Larry D. Thompson, http://www.usdoj.gov/dag/cftf/corporate_guidelines.htm