Guest Bloggers – Raymond Banoun, Margaret Ryznar*

Earlier this month, the United States Sentencing Commission voted to change the Sentencing Guidelines pertaining to organizations, which included modifications to Chapter 8 of the Federal Sentencing Guidelines Manual—the provisions governing the sentencing of organizations in federal court. These changes will take effect November 1, 2010, barring any Congressional action against them.

Most of these modifications aim to eliminate the automatic bar to the compliance credit based on the actions of high-level personnel. Before these changes, and since 1991, Chapter 8 of the Guidelines has permitted a reduction of the culpability score—and therefore the sentence—for convicted organizations if they had an effective compliance and ethics program in place at the time of the offense. However, this reduction automatically became inapplicable if high-level personnel of the organization participated in, condoned, or were willfully ignorant of the offense. With the Sentencing Commission’s recent amendments, the actions of high-level corporate personnel with respect to the offense no longer serve as an automatic bar to the compliance credit.

Nonetheless, the Sentencing Commission has introduced four new requirements for the receipt of the compliance and ethics program credit: (1) those with operational responsibility of the compliance and ethics program must report directly to the governing authority or its subgroup, such as an audit committee of the board of directors; (2) the compliance and ethics program must detect the offense before its discovery outside the organization or before such discovery was reasonably likely; (3) the organization must promptly report the offense to the proper governmental authorities; and (4) no person with operational responsibility in the compliance program participated in, condoned, or was willfully ignorant of the offense. If these requirements are met, corporations may receive credit for their compliance and ethics program.

Furthermore, the Sentencing Commission has clarified the definition of an effective compliance and ethics program for the purposes of the culpability score reduction. The Commission elaborates upon the previous requirement of the Guidelines that, after criminal conduct has been detected, the organization must take reasonable steps to respond appropriately and to prevent similar criminal conduct in the future. Specifically, newly added language to the Guidelines clarifies that an appropriate response to criminal conduct is to remedy the conduct’s harm through, for example, restitution to victims, and that the organization must assess its compliance program, potentially with the assistance of an outside professional advisor.

These recent changes appear to shift the inquiry from an organization’s high-level personnel to the effectiveness of its compliance and ethics program. The changes also clarify the reasonable steps that an organization must take to respond appropriately to criminal conduct and to prevent similar criminal conduct in the future. Organizations may, therefore, choose to tailor their approach to their compliance and ethics programs based on these modifications, unless Congress prevents the changes from taking effect on November 1, 2010.

*Raymond Banoun is the Managing Partner of the Washington, D.C. office of Cadwalader, Wickersham & Taft LLP, and head of the firm’s Business Fraud and Complex Litigation Practice; he represents corporations and their audit committees on all aspects of business fraud issues and advises them on corporate compliance and governance matters. Margaret Ryznar is a member of the Group.