Sentencing Guidelines: Compliance Programmes Should be Updated

On April 8 2004 the US Sentencing Commission voted to adopt significant amendments to the Organizational Sentencing Guidelines which direct judges in determining penalties for corporate criminal law violations, including cartel enforcement penalties. The amendments are principally intended to provide more precise standards for corporate compliance programmes designed to prevent and detect violations of the antitrust laws. They also address various other important issues such as waiver of the corporate attorney-client privilege, and require a periodic assessment of the "risk of criminal conduct", including antitrust violations, by the organization. The commission presented the amendments to Congress on April 30 2004 and the amendments will take effect 180 days later, unless Congress acts to modify or disapprove them. In light of these amendments, corporate counsel should carefully review and update their antitrust compliance programmes and other corporate compliance policies to ensure compliance with the guidelines.

Corporate Compliance Programmes

Under the Organizational Sentencing Guidelines, penalties imposed on a firm for criminal conduct by employees attributable to the firm are based on the firm's 'culpability score', which is calculated by adding or subtracting points for factors the commission has determined aggravate or mitigate the firm's culpability. The previous guidelines provided for mitigation if the organization had an "effective programme to prevent and detect violations of law", with the notes list included in the guidelines listing some suggested features of such a programme.

The commission's recent amendments replace this relatively vague 'effective programme' requirement with a list of seven specific elements that a compliance programme "minimally require[s]". For example:

• the board of directors must oversee the compliance programme;
  
  
• the compliance programme must be promoted and enforced consistently through both "appropriate incentives to perform in accordance" with the programme and "appropriate disciplinary measures" for engaging in criminal conduct or failing to take "reasonable steps to prevent or detect criminal conduct";
  
  
• firms must implement a reporting system that allows employees to "report or seek guidance regarding potential or actual criminal conduct without fear of retaliation"; and
  
  
• firms are required to implement periodic programmes to train corporate employees regarding the standards and procedures of the firm's compliance programme. This training requirement extends to the upper levels of an organization's management.

Under the amendments, most firms will no longer receive any sentencing reduction for having a corporate compliance programme unless the programme meets all seven enumerated criteria.

In addition, the amendments include an open-ended new requirement that the corporate compliance programme must also "otherwise promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law". This provision is intended to "reflect the emphasis on ethics and values incorporated into recent legislative and regulatory reforms". The amendments do not define the phrase 'organizational culture' or explain how an organization should be expected to encourage such a culture apart from meeting the enumerated criteria.

Waiver of Attorney-Client Privilege and Work Product Protection

The commission's amendments also require a corporation seeking sentencing mitigation to waive its attorney-client and work product protections in certain instances to cooperate with a government investigation. The previous guidelines allowed for a reduction in culpability score if the organization "fully cooperated" in the investigation of its alleged wrongdoing, but did not address whether full cooperation required sharing privileged documents with the government. Under the amendments, organizations are required to waive the attorney-client privilege and work product protection as a prerequisite to a reduction in culpability score whenever "such waiver is necessary in order to provide timely and thorough disclosure of all pertinent information known to the organization". The amendments do not specify who decides whether a waiver is necessary in a given situation, but a federal judge would likely make the ultimate decision.

Risk Assessment

As part of the 'effective compliance and ethics programme' requirements, the amendments also create a new obligation to perform periodic assessments of the risk that criminal conduct will occur within the organization. The organization must consider:

• the nature and seriousness of potential criminal conduct;
  
  
• the likelihood that the conduct will occur based on the nature of the organization's business; and
  
  
• the prior history of the organization.

The risks identified in the assessment would prioritize the actions the organization should take to implement effective compliance and ethics programmes. Audits focused on potential antitrust issues may be advisable.

These are just some of the key amendments to the Sentencing Guidelines. As eligibility for mitigation can have a significant impact on the criminal penalties imposed on a firm for violations of the antitrust laws, corporate counsel should carefully review and update their antitrust compliance programmes and related policies to ensure that they fully satisfy the commission's new requirements.

For further information on this topic please contact Janet L McDavid or Mary Anne Mason or David J Michnal at Hogan & Hartson LLP by telephone (+1 202 637 5600) or by fax (+1 202 637 5910) or by email (jlmcdavid@hhlaw.com or mamason@hhlaw.com or djmichnal@hhlaw.com).