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November/December 2001 - By Jeffrey M. Kaplan

The Sentencing Guidelines: The First Ten Years

November 1st was the ten-year anniversary of the federal Sentencing Guidelines for Organizations. These “Corporate” Guidelines announced what one prosecutor (then Manhattan U.S. Attorney Otto Obermaier) called a “practical partnership” between government and the business community in preventing white-collar crime.

The essence of that partnership is a carrot-and-stick approach, with the carrot a promise of tangible incentives for companies to develop and implement effective compliance programs and the stick the threat of devastating punishment for corporations, convicted of a federal offense, that had failed to take such proactive measures. As the U.S. Sentencing Commission’s then Deputy General Counsel, Win Swenson, told ethikos: “The Commission wanted to provide organizations with a clear incentive to take actions that should reduce the likelihood of criminal conduct. The Commission’s review of past cases made clear that few organizations that find their way into the federal courts have effective compliance programs. The Commission also learned through public comment that there is a need even among organizations that have never been convicted of crime for increased attention to and strengthening of internal mechanisms to prevent and detect unlawful conduct.” (See ethikos, July/Aug. 1991.) “Now is the time to review corporate compliance programs,” noted the publication at the time.

An experimental approach

Ten years after, it is easy to forget just how experimental this approach was. Early on, William W. Wilkins, Jr., then Chairman of the Commission, wrote, “[T]he ‘carrot and stick’ approach of the guidelines for organizations, with its heavy reliance on . . . compliance programs, must still be viewed as developmental. If organizations ignore this exploratory invitation to shield against potential liability with well designed and rigorously implemented compliance systems, it is doubtful this new approach will endure.” (Foreward, Kaplan, Murphy & Swenson, eds., Compliance Programs and the Corporate Sentencing Guidelines: Preventing Criminal and Civil Liability, p. x [West Pub. 1993].)

The good news is that many corporations have not ignored the Guidelines’ “exploratory invitation.” Perhaps even better (in the sense that it was even less expected), the Commission’s new approach has not only endured; it has been adopted by other governmental bodies, and has thereby prospered.

This time line–which provides only highlights of Corporate Guidelines’ history—is offered to commemorate what is indeed a happy (or at least successful) ten-year anniversary.

* * *

• 1984. Sentencing Reform Act of 1984 is signed into law, limiting judicial discretion in sentencing and creating the Sentencing Commission.

• November 1987. The Sentencing Guidelines for individuals go into effect. Among other things, these guidelines lead to harsher punishment for white-collar crimes.

• 1987-1991. The Commission grapples with different approaches for sentencing corporations convicted of federal offenses. Early drafts carry no incentives for corporations to implement compliance programs. Business organizations (such as the Business Roundtable) lobby for such incentives. To the surprise of many, the final Guidelines embrace the carrot-and-stick idea.

• November 1, 1991 . The Corporate Guidelines go into effect.

• December 1991. In the first indication that the Guidelines approach is being adopted by other government bodies, the Environmental Protection Agency (EPA) announces that it will utilize most of the Guidelines’ articulation of effective compliance program elements in connection with debarment decisions. (See EPA Policy on Corporate Facility Removal from Violating Facilities List, Appendix, Doc. 10.)

• 1991-1995. Because the Guidelines are not applied retroactively (that is, to offenses occurring prior to November 1, 1991 ), for several years many mistakenly believe that the “stick” can be ignored.

• 1992. The Ethics Officer Association (EOA), a trade association of ethics and compliance officers, is formed. Originally, it has only 12 members. Its growth over the coming years is often seen as a measure of the business community’s embrace of the Guidelines’ proactive approach to corporate compliance.

• September 1993. A study shows that many state Attorneys General informally provide incentives in connection with enforcement decisions to companies to implement compliance programs. (See Woo, “Self Policing Can Pay Off For Companies,” Wall Street Journal, September 8, 1993 B5, Col. 1.)

• May 1994. The Guidelines are used as the basis for sweeping compliance program measures required of a corporate defendant in U.S. v. Lucas Aerospace Communications & Electronics, 94 Cr. 3493 EDNY. In many subsequent cases, civil as well as criminal, corporations are required to implement Guidelines-based compliance programs. These settlement agreements themselves help form an important part of emerging compliance law. (See Jordon & Murphy, “Compliance Programs – What The Government Really Wants.” 14 ACCA Docket 10 [1996].)

• June 1994. EOA has 106 members.

• 1994-1995. Various states adopt laws providing that environmental audit information cannot, in some instances, be used against a company. This is a different but also significant type of “carrot” to encourage compliance efforts. In addition, over the years, some courts apply the “self-evaluative privilege” (the origins of which are pre-Guidelines) and related shields for various types of compliance-related information from discovery in litigation, again with an eye to encouraging companies to be proactive in compliance and ethics measures.

• April 1995. Following its conviction of an environmental offense, Con Edison is the subject of probation order (inspired by the Guidelines’ probation provisions) with onerous compliance-related requirements.

• September 1995. More than 400 attend a Sentencing Commission Conference—“Corporate Crime in America : Strengthening the ‘Good Citizen’ Corporation”—in Washington , D.C. In a reflection of the spread of the Guidelines approach, prosecutors from various divisions of the Department of Justice state that their offices take into account whether a company had a compliance program at the time of the offense in determining whether to prosecute the company. In other words, the Justice Department is now providing stronger incentives for compliance efforts than do the Guidelines themselves.

• December 1995. The Environmental Protection Agency issues a policy, “Incentives for Self Policing: Discovery, Disclosure, Correction and Prevention of Violations,” which provides, in some circumstances, for reduced civil penalties and no criminal sanctions for corporations with effective environmental compliance programs. A final version of the policy was issued in April 2000 and can be found at 65 Fed. Reg. 19618.

• February 1996. A $340 million fine is imposed under the Guidelines in United States v. The Daiwa Bank. Ltd., S.D.N.Y. 95 Cr. 947 (KMW). At the time, this was the largest criminal fine in federal law, and dispelled any doubts about the Guidelines’ potential force.

• June 1996. EOA has 244 members.

• September 1996. The Court of Chancery of Delaware issues an opinion stating that directors who fail to take adequate compliance measures can face personal liability to shareholders for breach of the fiduciary duty of care. (In re Caremark International Inc. Derivative Litigation. 1996 WL 549894 [Del. Ch.].) The Court noted that, “any rational person attempting in good faith to meet an organizational governance responsibility would be bound to take into account [the Guidelines] and the enhanced penalties and the opportunities for reduced sanctions that [they] offer.”

• 1997-2000. U.S. Department of Health and Human Services adopts numerous “model compliance plans,” setting forth in great specificity elements of compliance programs for health care providers and providing incentives for the development of such programs. (The plans can be found at www.hhs.gov/oig/modcomp.)

• June 1998. In the companion cases of Burlington Industries, Inc. v. Ellerth (66 USLW 4634 [1998]) and Faragher v. City of Boca Raton (66 USLW 4643 [1998]), the Supreme Court holds that in certain circumstances a company’s compliance program can shield the company from liability for an employee’s acts on sexual harassment.

• June 1998. EOA has 510 members.

• May 1999. Pharmaceutical giant Hoffman-LaRoche, Ltd. is convicted of an antitrust conspiracy and fined $500 million under the Guidelines, which remains the largest criminal fine in the history of American law. At the same time, another convicted company, BASF AG, pays a fine of $225 million relating to the same conspiracy. A third company, Rhone Poulenc, is awarded “amnesty” because it is the first to report the offense. The Antitrust Division’s Amnesty Program—significantly expanded in 1993—is yet another example of a compliance incentive which has impacted corporate conduct significantly.

• June 1999. In Kolstad v. American Dental Association, 119 S. Ct. 2118 (1999), the Supreme Court holds that in some instances an employer may not be found liable for punitive damages arising from a manager’s discriminatory actions if those actions were contrary to the company’s compliance program. Although, strictly speaking, limited to anti-discrimination law, the logic of Kolstad is potentially applicable to other types of punitive damage claims.

• June 1999. The Department of Justice issues Federal Prosecution of Corporations, (www.usdoj.gov./criminal/fraud/policy/chargingcorps.html), a guidance to help determine when to charge corporations criminally for employees’ and other agents’ offenses. Two factors listed in the guidance are “[t]he existence and adequacy of the corporation’s compliance program” at the time of the offense; and “the corporation’s remedial actions” after the offense, “including any efforts to implement an effective corporate compliance program or to improve an existing one.…”

• June 2000. EOA has 632 members.

• September 2001. Returning to the compliance area, the Sentencing Commission announces that it is considering refinements in the Corporate Sentencing Guidelines’ compliance provisions. Looking back, the Commission notes that the “guidelines have had a tremendous impact on the implementation of compliance and business ethics programs over the past ten years. [They] prompted a serious reconsideration within the American business community of methods and rationale for improved corporate governance.”

• October 2001. EOA has 760 members. In addition, spawned in part by the Guidelines, specialized compliance positions have grown dramatically in number over recent years. For example, by 2001 the Health Care Compliance Association had more than 2,700 members. And compliance jobs in the financial services industry are numerous enough to be the subject of their own website – www.compliancejobs.com.

• October 2001. A $290 million criminal fine—the largest in any health care case and the third largest fine ever under the Guidelines—is announced in a prosecution against TAP Pharmaceuticals. Thus, on the eve of their 10th anniversary, an enormous fine under the Guidelines serves as a reminder of the force of the “stick” for those who ignore the “carrot.”

Jeffrey M. Kaplan is executive editor of ethikos and Counsel to the Ethics Officer Association.
Reprinted from the November/December 2001 issue of ethikos
© 2004 Ethikos, Inc. All rights reserved.

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