“Credit” For An Effective Ethics And Compliance Program

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Explore:  Compliance Ethics SEC

corporateSometimes we gloss over complex issues using shorthand phrases.  Part of that reflects our continuing ADHD society where 140 characters is the most any person can read and understand at one time.

The US Sentencing Guidelines are always cited for its definition of an “effective” ethics and compliance program (Section 8B2.1).  Under Section 8C2.5(f)(1), a company can earn a three-point reduction in the base offense level (assuming certain countervailing considerations in (f)(2) and (f)(3) are not present).

I hate to burst everyone’s bubble but the reality is that this credit has only been awarded in a few instances – last count I only found two situations where a company earned a three-point reduction.

So then, how can a company earn “credit” for its ethics and compliance program?  If it cannot earn a reduction in the base offense level, which translates into a reduction in the applicable fine range, then how does a company earn a “credit” for its ethics and compliance program?

The answer to the question is undefined.  Prosecutors hold the cards on this issue – and they play the cards according to their rules.corporate3

Assuming that there is not a DPA or NPA involved in the resolution of the case, prosecutors and a company reach an agreement as to the fine (and civil penalty to the SEC) that the company has to pay.  The plea agreement is submitted to the Court under Federal Rule Criminal Procedure 11(c)(1)(C) – the judge cannot change the deal but can only approve the deal or reject the deal.  Judges rarely, if ever, reject an 11(c)(1)(C) plea.  In the calculation of the appropriate fine, the government cites credit for the company’s compliance program.  In practice this turns out to be meaningless since the government provides credit for the company’s remediation efforts.

Most prosecutors will admit they subscribe to the tautology – if the compliance program was effective, then the company would not have violated the law.

That attitude reflects limited thinking and analysis.  There are many reasons for a company to violate the law – sometimes it can involve a rogue region or division that violated the law despite the compliance program.

Prosecutors need to provide a little more guidance and reflection on  the issue.  More importantly, they have to articulate the precise benefit given a company for its compliance program, especially if it was “effective” despite the company’s violation.

corporate2Unfortunately, prosecutors are not willing to define much in this calculation because they feel it will tie their hands when they want to award a company more credit or less credit in unique situations.  That is letting the tail wag the dog since the government can always leave itself room to maneuver with a unique circumstances exception.

Prosecutors have an obligation to define standards for recommending certain sentences, especially in the context of Rule 11(c)(1(C) pleas.  Relying on amorphous concepts and muddling definitions is not the way to do it.  The business community deserves more guidance and definition on this issue.

Topics:  Compliance, Ethics, SEC

Published In: General Business Updates, Criminal Law Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Michael Volkov, The Volkov Law Group | Attorney Advertising

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