Corporate Governance

CONSTRUCTION FIRMS: Targets for Enforcement Initiatives (Part 5)


This article is the final part in our most recent corporate governance series. If you missed part 4, you can read it online here: Construction Firms Part 4

The eighth element: Risk assessment?

Although the Commission did not formally designate an eighth element, preferring to continue with the well-established concept of seven elements, it did state, "as an essential component of the design, implementation and modification of an effective program, an organization must periodically assess the risk of the occurrence of criminal conduct." (§ 8B2.1(c).) Organizations must periodically assess the risk of criminal conduct and take appropriate steps to design, implement or modify compliance procedures to reduce the risk of misconduct identified through this process. Critical to the risk assessment are the following elements:

• Assess the nature and seriousness of potential improper conduct.
• Evaluate what reasonable steps can be taken to prevent and detect the specific kinds of improper conduct to which the organization is exposed.
• Consider the prior history of the organization and others similarly situated: appropriate consideration should be given to prior criminal, civil and regulatory enforcement actions.
• Periodically prioritize the program elements in order to focus on preventing and detecting the improper conduct most likely to occur.
• Modify, as appropriate, the procedures to be taken under any of the program elements to reduce the kinds of improper activity most likely to occur.
• Train management and employees to be aware of and report the kinds of violations most likely to occur.
• Develop auditing and monitoring programs focused on the violations most likely to occur.

Relevant changes to the guidelines: Potential pitfalls

In addition to the revised seven elements, several other new provisions should be noted.

Adoption of industry standards/government regulation. The Commentary of §8B2.1 states "an organization's failure to incorporate and follow applicable industry practice or the standards called for by any applicable governmental regulation weighs against a finding of an effective compliance and ethics program." (Application Note 2(B).)

Mitigation of criminal fines. Under § 8C2.5(f), an organization will not get credit for the existence of an effective compliance and ethics program if:

• after becoming aware of an offense, it unreasonably delayed reporting the offense to government authorities;
• an individual within "high-level personnel" of the organization or a unit of the organization where the offense was committed participated in, condoned or was willfully ignorant of the offense.

Cooperation and acceptance of responsibility. The Amended Guidelines also provide for a reduction in an organization's "culpability score" for self-reporting, cooperation and acceptance of responsibility. (See § 8C2.5(g).) To receive this credit, the organization's cooperation must be "timely and thorough." This, in turn, requires the "disclosure of all pertinent information known by the organization." (See Application Note 12.)

Upward departures. There is new language that states an "upward departure" (a more severe sentence) may be warranted if an organization was required by law to have an effective compliance and ethics program but did not. This provision is relevant to government contractors because of proposed amendments to the Federal Acquisition Regulation that would require many contractors to have compliance programs.

Corporate probation. The Amended Guidelines require the court to order a term of probation if the organization had 50 or more employees at the time of sentencing, or was required under law to have an effective compliance and ethics program and didn't have such a program. Under this provision, companies will have compliance programs imposed on them by the government or the courts. These programs are typically much more extensive and expensive to operate than programs voluntarily established by organizations themselves.

Violations of probation. A policy statement has been added that states if an organization is found to be in violation of a condition of probation the court may: 1) extend the term of probation; 2) impose more restrictive conditions of probation; or 3) revoke probation and re-sentence the organization. The Commentary to the section further states that: "in the event of repeated violations of conditions of probations, the appointment of a master or trustee may be appropriate to ensure compliance with court orders." Appointment of such masters is becoming more and more prevalent.

Department of Justice policy

As noted above, the Department of justice has established a policy on prosecuting corporations that requires federal prosecutors to consider whether a company has an effective compliance and ethics program in making the decision whether or not to criminally prosecute the company. It is clear from the Department of justice's perspective, for a compliance program to achieve the highest benefit for a corporation it must be designed to ensure compliance with "all applicable criminal and civil laws, regulations and rules." Thus, a program that focuses only on criminal conduct may not be sufficient. In addition, prosecutors are directed to look beyond the paper documents that form the underpinning of a compliance program. Like the Amended Guidelines, prosecutors will want to see adequate staffing and resources, well-designed training, auditing and monitoring programs, true corporate commitment to compliance, an informed and involved senior management and board, and other elements which make the program effective and more than a mere piece of paper. The Department also directs prosecutors to consider whether or not the program has been "designed to detect the particular types of misconduct most likely to occur in a particular corporation's line of business." In other words, they will want to see a risk assessment and a program designed to protect against the risks identified.

Over the past decade and more, prosecutors and a broad range of regulatory enforcement agencies have developed experience in evaluating compliance programs. Their reviews of compliance programs are becoming more and more sophisticated. It is also clear that the standards by which prosecutors will evaluate compliance programs are, and will continue to be, the standards set forth in the Sentencing Guidelines. As a result, organizations with either existing compliance programs, or programs that are being developed for the first time, will obtain the most benefit from their compliance efforts if they utilize the Amended Guidelines in both the design and implementation of their programs.

Conclusion

The combination of new statutes and regulations directed at combating corporate fraud and the government's particular efforts in response to perceived substantial amounts of procurement fraud in response to the Iraq war and the Hurricane Katrina disaster, have resulted in tremendous investigative attention on government contractors, particularly those in the construction and professional services industries. In our experience, the most effective way for companies to protect themselves when this kind of scrutiny comes is to have an effective compliance and ethics program. The time to develop and implement a program is before the investigation begins. The government looks with some skepticism at the motivation of companies that begin the implementation of compliance and ethics programs after they learn of an investigation or allegation of fraud. Construction firms involved in government contracting, whether focused on the war or Katrina response or not, are on notice of the kind of programs the government expects to see, and they should safeguard their investors, management and employees accordingly.

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.

 

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