Corporate Governance

CONSTRUCTION FIRMS: Targets for Enforcement Initiatives (Part 4)


This article is a continuation of our most recent corporate governance series. If you missed part 3, you can read it online here: Construction Firms Part 3

Protections from compliance and ethics programs

On May 1, 2004, the U.S. Sentencing Commission (the "Commission") delivered to Congress proposed amendments to the United States Sentencing Guidelines for Organizations (the "Amended Guidelines"). The Amended Guidelines have since become law and apply to a wide variety of organizations, including corporations, partnerships, associations, joint-stock companies, unions, trusts, pension funds, unincorporated organizations, governments, and non-profit organizations. The section of the Guidelines on compliance programs, which is found in Chapter 8, provides for a significant reduction in criminal fines if an organization convicted of a crime has in place an "effective" compliance program. While a reduction in a criminal fine can be a useful benefit, the Department of justice has formally required prosecutors to consider an organization's compliance program in deciding whether to bring criminal charges in the first place. For good corporate citizens, this can be a significantly more important benefit.

The Amended Guidelines are intended to provide greater clarity regarding the criteria for an "effective" compliance program. The original Chapter 8 Guidelines required an organization to have an "effective" compliance program in order to receive the reduction in penalty. This meant that an organization had to have "exercised due diligence in seeking to prevent and detect criminal conduct..." This, in turn, meant that an organization had to have taken the following minimum seven steps: (1) established written compliance standards and procedures; (2) assigned "high level" personnel to oversee compliance; (3) taken due care not to delegate substantial authority to persons with a propensity to engage in illegal activities; (4) taken steps to communicate its standards to employees and agents; (5) utilized auditing and monitoring systems designed to test compliance, and establishing an internal reporting system that allowed employees to report compliance violations without fear of retribution; (6) consistently enforced the compliance standards, including appropriate discipline for violations of compliance standards; and (7) taken reasonable steps to respond when violations were detected, including appropriate modifications to the compliance program.

The Amended Guidelines amplify and refine the original seven minimum requirements. The Amended Guidelines require a compliance and ethics program to "exercise due diligence to prevent and detect criminal conduct." (Emphasis added.) Nevertheless, in Introductory Commentary, the Commission noted: "The prevention and detection of criminal conduct, as facilitated by an effective compliance and ethics program, will assist an organization in encouraging ethical conduct and in complying fully with all applicable laws." Thus, although the formal requirement is that an effective program focus on avoiding criminal conduct, an effective program will also "facilitate compliance with all applicable laws."17

In one of its more controversial provisions, the Commission required an "ethical" component to be added to traditional compliance programs. It even changed the name of the program from "Compliance" to "Compliance and Ethics." This new requirement is intended to "reflect the emphasis on ethical conduct and values incorporated into recent legislative and regulatory reforms," like the Sarbanes Oxley Act. Compliance and ethics programs must now encourage and help develop an ethical "organizational culture." This provision has been controversial because the term "ethical organizational culture" is a somewhat vague and amorphous standard, and is difficult to measure objectively. Nevertheless, the Commission felt it was very important to encourage a culture of "do the right thing," even if that is hard to define.

In addition, the Commission places specific responsibilities for the effectiveness of the program on the organization's governing authority, high-level personnel, and the compliance officer. They increase the organization's requirement to train and communicate on matters related to compliance at all levels of the organization. They also require an ongoing risk assessment, review, and where necessary, modification of the compliance program.

The revised seven elements

New language in the Chapter Eight Introductory Commentary addresses factors that both mitigate and ultimately increase punishment for an organization. There are six factors the sentencing court must consider when assessing an organization's culpability. Factors that aggravate the organization's culpability "are: (i) the involvement in or tolerance of criminal activity; (ii) the prior history of the organization; (iii) the violation of an order; and (iv) the obstruction of justice". The two factors that can "mitigate the ultimate punishment of an organization are: (i) the existence of an effective compliance and ethics program; and (ii) self-reporting, cooperation, or acceptance of responsibility."

The Amended Guidelines have an entirely new section that outlines the minimum requirements for an "Effective Compliance and Ethics Program." "Compliance and Ethics Program" is defined in the Commentary as "a program designed to prevent and detect criminal conduct." The revised seven elements are discussed below.

Standards and procedures. An organization must establish standards and procedures to prevent and detect criminal conduct. Standards and procedures include standards of conduct and internal controls reasonably capable of reducing the likelihood of criminal conduct.

Organizational leadership and culture. New language regarding organizational leadership is intended to increase leadership responsibility for compliance and to promote an organizational culture that encourages a commitment to compliance. The changes define roles and reporting relationships for specific high-level personnel with respect to the compliance program. The organization's governing authority (typically, the Board of Directors) is now required to be "knowledgeable about the content and operation of the compliance and ethics program" and exercise reasonable oversight of the program's implementation and effectiveness.

"High-level personnel shall ensure that the organization has an effective compliance and ethics program" and specific individuals among this level of personnel "shall be assigned overall responsibility" for the program. (§ 8B2.1(b)(2)(B).) The Amendment requires that an individual(s) be assigned responsibility for the "day-today" operations of the program. This individual(s) shall report periodically to the governing authority (or a subgroup of the governing authority) and shall have direct access to the governing authority (or a subgroup of the governing authority). For the first time, the Commission also requires that a compliance and ethics program have "adequate resources." (§ 8B2.1(b)(2)(C).) The meaning of "adequate resources" will vary from organization to organization, depending on the size and complexity of the organization and the levels and types of risks to which it is exposed. It is clear, however, that it will not be adequate for an organization that is large, broadly dispersed geographically and is highly regulated to assign a single employee, with additional job responsibilities, to be solely responsible for the compliance and ethics program.

Reasonable efforts to exclude prohibited persons. The organization must have employment and advancement practices that are consistent with the compliance and ethics program and promote an organizational culture that encourages ethical conduct and compliance with the law. Employee background checks and due diligence and "reasonable efforts" should be conducted, as appropriate, to ensure that the organization does not knowingly place personnel in positions with substantial authority that "the organization knew, or should have known through the exercise of due diligence, has engaged in illegal activities or other conduct inconsistent with an effective compliance and ethics program." (Synopsis of Amendment § 8B2.1(b)(3).) This provision does not automatically disqualify from employment a person with a criminal record or other unethical conduct in his or her past. However, the organization must consider the relationship of the person's past behavior to the job he or she will be performing for the organization, as well as how recent was the misconduct.

Training and communication. The Amended Guidelines require training AND the dissemination of information relevant to the compliance program and its objectives. The Amended Guidelines list the types of individuals within the organization who need to be trained, which include "the governing authority, the organizational leadership, the organization's employees, and, as appropriate, the organization's agents." The Commission was not prescriptive when addressing training; rather, it noted the need for flexibility in this area. It is clear, however, that compliance and ethics training must be delivered to senior management and the board/governing authority, as well as all employees and "agents as appropriate." (§ 8B2.1(b)(4).)

Monitoring, auditing and evaluation of program effectiveness. The Amended Guidelines require that an organization's compliance program include monitoring and auditing systems that are designed to "detect criminal conduct." There is also a requirement to periodically evaluate the compliance program itself for effectiveness. The proposed changes address the need for an organization to scrutinize two areas: (1) the adherence of the organization to legal and regulatory requirements and the compliance and ethics program; and (2) the adequacy of managerial practices and business processes to prevent and detect criminal conduct.

A reporting system is now required that will provide a means for "employees and agents" to report OR seek guidance about potential or actual criminal conduct. The language also requires that the reporting system incorporate a non-retaliation policy and allow for anonymous and/or confidential reporting. (§ 8B2.1(b)(5).)

Performance incentives and disciplinary actions. The organization must consistently enforce the compliance and ethics program throughout the organization using incentives to encourage employees to perform in accordance with the program AND the use of appropriate disciplinary measures for engaging in or "failing to take reasonable steps to prevent and detect criminal conduct." This should include making compliance and ethics part of employee and management evaluations and promotions. (§ 8B2.1(b)(6).)

Remedial action. Once an organization detects criminal conduct, it must take reasonable steps to respond appropriately AND prevent further criminal conduct including modifying the compliance and ethics program. (§ 8B2.1(b)(7).)

IN NEXT WEEK'S ARTICLE, WE'LL CONTINUE THIS TOPIC BY DISCUSSING THE EIGHTH ELEMENT: RISK ASSESSMENT...

Construction Firms - Part 5

Our thanks to this article's authors, Christopher Myers and Allison Feierabend of Holland & Knight.

Holland & Knight is a global law firm with more than 1,150 lawyers in 17 U.S. offices. Other offices around the world are located in Beijing and Mexico City, with representative offices in Caracas and Tel Aviv. Holland & Knight is among the world's 18 largest firms, providing representation in litigation, business, real estate and governmental law. Our interdisciplinary practice groups and industry-based teams ensure clients have access to attorneys throughout the firm, regardless of location. www.hklaw.com

Christopher A. Myers is chair of Holland & Knight's Compliance Services Team and a member of the firm's White Collar Defense Team. He is a former federal prosecutor and has experience in a broad range of complex matters affecting heavily regulated industries, including health care, government contracts, financial institutions, real estate, securities and other companies. He has represented clients with respect to matters involving civil and criminal fraud investigations, corporate governance, anti-money laundering, design and implementation of compliance programs, and administrative litigation. Mr. Myers is certified as an Anti-Money Laundering Specialist and as a Certified Compliance & Ethics Professional. chris.myers@hklaw.com

Allison V. Feierabend practices in the areas of government contracts and business litigation. Her government contracts experience includes bid protests, contract disputes, contractor claims, and counseling clients on diverse government contracts issues. Ms. Feierabend's protest experience includes a wide array of military and civilian agency procurements before the Government Accountability Office and United States Court of Federal Claims. Ms. Feierabend counsels large and small government prime contractors and subcontractors on a wide variety of procurement law issues including intellectual property and technical data rights, organizational conflicts of interest, Freedom of Information Act (FOIA) requests, the Berry Amendment, and flow-down clauses. allison.feierabend@hklaw.com

DISCLAIMER: This Corporate Governance article is provided as an informational resource and does not constitute legal advice. The information provided in this article is based on the laws in effect at the time the article was published. Laws related to this article's topics may change over the course of time. Visitors to this website should not rely upon or act upon this information without seeking professional legal counsel.

9 April 2007 Quarterly Report, Stuart W. Bowen, Jr., Inspector General (April 30, 2007), available at http://www.sigir.mil/reports/quarterlyreports/Apr07/Default.aspx
10 See id.
11 Id.
12 Hurricane Katrina Fraud Task Force, First Year Report to the Attorney General, September 2006, page 4.
13 See DOJ Press Releases available at http://trina/Katrina_Fraud/pr/press_releases/http://trina/Katrina_Fraud/pr/press_releases/; Thousands Suspected of Katrina Fraud, CBS News (April 2, 2007).
14 Thousands Suspected of Katrina Fraud, CBS News (April 2, 2007).
15 Hurricane Katrina Fraud Task Force, First Year Report to the Attorney General, September 2006, pages 5, 14.
16 Id.

 

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