The Enforcement of Ethics: An Update on the Federal Sentencing Guidelines and Ethics Office Requirements Charles R. McGuire, J.D. Illinois State University
Legal Requirements for Ethics Programs: • Federal Sentencing Guidelines (1991) • First to require formal company-wide Ethics Programs • Results in reduction of fines and penalties • Resulted in creation of Ethics Offices in companies • Resulted in explosion of Ethics Training • Resulted in explosion of Ethics Consultants • Applies to FEDERAL law only
Legal Requirements for Ethics Programs • Sarbanes-Oxley Act of 2002 • Requires certification of financial reports by top executives • Increases penalties and prison terms for fraud • Establishes new regulations • Requires new reports to the SEC • Requires disclosure of Ethics Codes
Federal Sentencing Guidelines • United States Sentencing Commission • An ongoing independent agency created in 1984 • Establishes sentencing policies and practices for the federal courts • 7 members, appointed by the President • Purpose in part was to “structure the previously unfettered discretion of federal trial judges” and to “target white collar and violent, repeat offenders” for more serious penalties.
U.S. v. Missouri Valley Constr. Co., (8th Cir., 1984) (Healey, J.) “The present practice of punishing corporate crime with fines paid to the U.S. Treasury has done little to deter corporate crime. Once the payment is made, the public promptly forgets the transgression, and the corporation continues on its way, with its reputation only slightly tarnished by what it usually describes as a “highly technical violation”
Organizational Sentencing Guidelines • Most commonly apply to fraud, environmental waste discharge, tax offenses, and food and drug violations • Criminal liability can attach whenever an employee commits an act within the apparent scope of employment, even if directly contrary to company policy and instructions. • Sentencing Guidelines incorporate preventative and deterrent aspects of “systematic compliance programs” • Sentencing Guidelines mitigate the potential fine range – up to 95% in some cases – if there is “an effective compliance program.”
“Aggravators and Mitigators” • Mitigators • Effective program to prevent and deter violations of Law • Self-reporting • Cooperation with authorities • Acceptance of responsibility • Aggravators • Involvement or tolerance of activity • Prior history • Violation of an order • Obstruction of Justice
Seven Criteria for An “Effective Compliance Program” • Compliance Standards and Procedures • Oversight by high-level personnel • Due Care in delegating substantial discretionary authority • Effective communication to all levels • Reasonable steps to achieve compliance, including systems for monitoring, auditing, and reporting suspected wrongdoing without fear of reprisal • Consistent enforcement of compliance standards including disciplinary mechanisms • Reasonable steps to respond to and prevent further similar offenses
Usual Components of an “Effective Compliance Program” • An Ethics Code • An Ethics Office, including high-level oversight • An Ethics Training Program • A “hot line” or “tip line” • Audit and compliance reporting
Ethics Codes: Best Practices • Best when broad based; • No “one size fits all” • Should be continually reevaluated and rewritten (the “dusty and musty” problem) • Should evidence high-level commitment; • Should not be done entirely by either the lawyers (compliance) the accountants (audit) or the security group (internal security) but by all
Ethics Offices: Best Practices • Need to be high-level (V.P.) with access to top management • Must be beyond reproach • Must be totally confidential • Must have internal investigatory powers at all levels • Should have an advocacy function within the company • Should be responsible for reporting
Ethics Training Programs Best Practices • Involve all levels and employees of corporation • Based on Ethics Code • Involve a variety of internal programs and multiple delivery mechanisms • Should be strategic, rather than “canned” • Should aim at awareness, knowledge and skill-building, and reinforcement
Hot Line/Tip Line Best Practices • “Customers or Employees or both?” • Confidentiality, confidentiality, confidentiality…. And security. • The problem of the anonymous informant • No retribution against whistleblowers
Audit and Compliance Reporting Best Practices • Done by (or under the authority of) the Ethics Office • Include positives: Employee/customer surveys, customer satisfaction indices, trend lines, etc. • Make public
Impact of the Sentencing Guidelines: • 500 Law Review Articles and 300 newspaper articles; • 300 websites dealing with guidelines • 18,381 articles on compliance programs; • Created new job description: The Ethics Officer • EOA: 750 Members. www.eoa.org • 53% of those surveyed by EOA reported that the Guidelines had “a lot of influence” on their decision to adopt a compliance program.
The CareMark Decision • Delaware Decision, 1996, a civil action for breach of fiduciary duties resulting from kickbacks and false claims • The Caremark decision expanded liability for board members and said that a corporate director has “a good faith duty” to see that ethics information and reporting systems are established in the organization. • Failure to assure that a corporate reporting and information system exists may render a director liable for losses causes by non-compliance • Court examined the compliance program and found that the directors would not be held liable SINCE AN EFFECTIVE COMPLIANCE PROGRAM WAS IN PLACE. • The decision has been cited numerous times in other cases.
Sarbanes-Oxley Act of 2002 • Amendment to 1934 Securities Exchange Act • Passed to help bolster investor confidence following several corporate collapses • Provided for additional SEC rules to interpret and enforce the Act
Key Provisions of Sarbanes-Oxley • Established Public Company Accounting Oversight Board • Prohibited registered firms doing an audit from non-audit services, including consulting • Required sign-off by CEO and CFO to certify appropriateness of financial statements • Required each annual report to contain an “internal control report”, which requires an “internal control structure.” • Requires disclosure of whether the firm has adopted a Code of Ethics, and rules require that the Code be filed with the annual report
SEC Definition of a “Code of Ethics” • Written standards that are reasonably designed to deter wrongdoing and promote: • Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest… • Full, fair, accurate, timely and understandable disclosure in reports…. • Compliance with applicable governmental laws… • The prompt internal reporting …of violations of the code… • Accountability for adherence to the code.
EOA Survey -- 2000 • Average number of contacts/year = 371 • Full-Time Ethics Officer: 525 • Average number of investigations/year = 59 • Most Frequent contact categories (in rank order): • Conflict of interest • Misuse of resources • Discrimination • Outside business activities • Gifts and gratuities • Sexual harassment
Summary and Questions • The Sentencing Guidelines and Sarbanes-Oxley should be read together • Ethics development must be an ongoing commitment • Ethics needs to be infused throughout the organization • The climate for ethics is strong… but cyclical.