Effective November 1, 2010, the U.S. Sentencing Commission has changed how the U.S. Sentencing Guidelines calculate fines for certain defendant companies. Specifically, the amendments significantly expand the availability of a long-standing three-level total offense level reduction. This change shifts the inquiry away from the (mis)conduct of the company’s high-level personnel and toward the effectiveness of the company’s compliance and ethics program.

Amendment Axes 20-Year-Old Categorical Bar on Fine Reduction

Since the adoption of the Sentencing Guidelines some 20 years ago, Section 8C2.5(f) has enabled corporate defendants that are able to demonstrate that they, at the time of the offense, had an effective compliance program in place to significantly reduce their fines by way of a three-level reduction in their total offense level.

For a company that finds itself in the unenviable position of having to calculate its guidelines range, a three-level offense reduction can translate into significant real-world results—effectively reducing the applicable fine by at least 50%.  For example, at the lower end of the range, a three-level decrease drops the fine from $15,000 to $5,000; and toward the higher end of the range, a three-level reduction moves the fine from $72,500,000 (level 38) down to $36,000,000 (level 35).

Of course, implementing and maintaining an effective compliance program is a company’s best chance to avoid ever having to consider the benefits of the three-point reduction; while the drop affords real benefits, this will be cold comfort to company’s shareholders or directors.

For the past two decades, however, companies seeking to benefit from a Section 8C2.5(f) reduction faced a considerable stumbling block—an automatic bar in cases when "high-level personnel" participated in, condoned, or were willfully ignorant of the offense.

As of November 1, 2010, however, the actions of high-level corporate personnel no longer foreclose the possibility of receiving a significant compliance credit.

New Four-Part Eligibility Test Introduced

Under new Section 8C2.5(f)(3)(C), a company with an effective compliance program, as defined in Section 8B2.1, can benefit from the three-level reduction if it meets four distinct criteria:

1. The individual or individuals with operational responsibility for the compliance and ethics program have direct reporting obligations to the company’s governing authority or appropriate subgroup thereof;
2. The compliance and ethics program detected the offense before discovery outside the company or before such discovery was reasonably likely;
3. The company promptly reported the offense to the appropriate governmental authorities; and
4. No individual with operational responsibility for the compliance and ethics program participated in, condoned, or was willfully ignorant of the offense.

The amendments respond to public concerns that (1) the categorical bar to the reduction operated too broadly, and (2) internal and external reporting of criminal conduct is, in appropriate cases, better encouraged by providing an exception to the general prohibition.

Effective Compliance Programs and Appropriate Responses to Criminal Conduct

In order to have an "effective compliance program," Section 8B2.1(b)(7) requires that, after detecting the criminal conduct, the company take "reasonable steps to respond appropriately to the criminal conduct and to prevent further similar criminal conduct, including making any necessary modifications to the company’s compliance and ethics program."

The amendments now add helpful application note 6, explaining what constitutes (1) an appropriate response to criminal conduct, as well as (2) proactive steps designed to avert similar conduct in the future—the application note provides that such steps "may include the use of an outside professional advisor to ensure adequate assessment and implementation of any modifications."  (Emphasis added.)

Lessons from the New Amendments

Broadly speaking, the amendments should be warmly received by companies that are making a significant effort to develop and implement effective internal compliance and ethics programs. Such proactive steps translate into robust compliance programs reducing corporate exposure to risk.

However, the amendments also raise some key questions:

• What role, if any, can and should general counsel now play in internal investigations and in reporting offenses to the government?  Are general counsel still able to instruct outside counsel on how to conduct internal investigations, or must such directions now come from the compliance/ethics officers?
  The amendments require that the company’s compliance and ethics officers be expressly authorized to report their findings concerning actual or potential criminal conduct personally and directly to the company’s executive leadership (the “governing authority”).  This, however, does not require the company’s general counsel to remain uninvolved in ethics and compliance issues. To the contrary, it is highly advisable that general counsel maintain a close, cooperative, and supportive relationship with the compliance and ethics officers. Likewise, the amendments do not preclude general counsel from instructing outside counsel on how to conduct internal investigations. The only caveat is that the general counsel must take care not to function as a “gatekeeper” who filters information between the company’s compliance and ethics officers and its executives.
• Are internal investigations still privileged?
  There is no reason that the amendments’ new reporting requirements should result in, or require, waiver or forfeiture of any attorney-client privilege. The amendments simply require unfiltered, direct reporting between the ethics and compliance officers and the company’s executives, early and voluntary self-disclosure, and that the compliance and ethics officers remain free of culpability. These objectives can be achieved without sacrificing the attorney-client privilege, and nothing in the text of the amendments requires companies to waive the attorney-client privilege or work-product protections in order to qualify for a reduction.
• Does a company’s retention of outside counsel for an investigation impact the analysis of whether the three-level reduction is available?
  The use of outside counsel poses no obstacle, provided that they work through the company’s compliance and ethics officers, and that it is the latter who report their findings to the company’s executives. To the contrary, companies are well-advised to take advantage of outside counsel's independent investigation.

Accordingly, companies must take careful stock of their compliance and ethics programs to ensure that they are appropriately tailored to fit the amended guidelines.

© 2010 Perkins Coie LLP