On May 1, 2013, federal prosecutors in the Southern District of New York brought the first criminal case based on a referral from the Consumer Finance Protection Bureau (CFPB) in United States v. Mission Settlement Agency. In the recently unsealed indictment, federal authorities charge Mission Settlement Agency (Mission) and four of its employees—including Mission’s principal, who is a suspended attorney—with mail and wire fraud in connection with an alleged scheme to defraud customers seeking “debt settlement” services. This case is significant because prior to this action, the CFPB efforts were confined to civil and administrative enforcement remedies.

According to the indictment, Mission held itself out as being able to lower its customer’s consumer debt by 45 percent, for a nominal fee, through negotiation with credit card companies and banks. Mission marketed its services to financially disadvantaged individuals known to be struggling with credit card debt. However, as the indictment alleges, instead of helping its customers, it “systematically exploited and defrauded” customers by failing to reduce their debts and by charging excessive fees. The indictment alleges the company took fees of $2.2 million from 1,200 customers without paying any money to their creditors.

In prepared remarks in conjunction with the announcement of this indictment, CFPB Director Richard Cordray explained that the indictment stemmed from a CFPB investigation: “During our investigation, we found evidence of criminal conduct and, accordingly, we referred this information to the United States Attorney for the Southern District of New York while we continued to pursue the civil law violations. Partnerships like the one between the Consumer Bureau and the Department of Justice are integral to our success and mission.” Cordray also made clear the CFPB would be looking to make similar referrals in the future: “We will be looking for more such occasions to coordinate and collaborate [with the Department of Justice].”

The CFPB was established in 2010 by the Dodd-Frank Wall Street Reform and Consumer Protection Act. It is authorized to regulate and supervise certain consumer financial services companies and large depository institutions. Prior to Mission Settlement Agency, the CFPB’s enforcement actions typically resulted in orders that the company in question cease and desist deceptive and misleading conduct, refund customers for their losses and pay a civil penalty. This case sends a clear message that the CFPB will have an emphasis on enforcement, and not just supervision, and referrals for criminal prosecution, when warranted, should be expected.

Useful Links

• Richard Cordray’s Prepared Remarks from May 7, 2013
• U.S. Dept. of Justice Press Release regarding the Mission Settlement Agency Indictment
• U.S. v. Mission Settlement Agency et al. Indictment
• U.S. v. Felix Lemberskiy Information
• U.S. v. Zakhir Shirinov Information
• U.S. v. Mission Settlement Agency, et al. Forfeiture Complaint

Deferred prosecution agreements (DPAs) have finally arrived in the UK. As our colleagues at the Bribery Library have detailed in depth, the Crime and Courts Act 2013 creates a procedure whereby a prosecutor and an entity facing criminal prosecution may agree to defer prosecution provided the entity complies with specified requirements. For example, the agreement may require the entity to pay financial penalties, compensate victims, cooperate with investigations, or adopt or enhance compliance programs. DPAs will be available only to corporate entities, partnerships or unincorporated associations, and not to individuals.

Notably, the court will play a key role. While the prosecutor and the entity may negotiate terms, the prosecutor must apply to the court in a private hearing for a declaration that the proposal is reasonable and in the interests of justice before a final agreement is reached. Following final agreement, the prosecutor must again seek official court approval, this time in open court. The court also may have continued oversight so that prosecutors may raise instances of noncompliance before it.

This element of judicial oversight partly reflects a different view from the U.S. of what role, if any, prosecutors should have in recommending punishment. As reported last year in the Bribery Library (here), former Serious Fraud Office (SFO) Director Richard Alderman has explained that one challenge to obtaining DPA authority in the UK was that courts had clearly stated the SFO should play no role in setting penalties or sentences.

But as recently detailed by Max Stendahl in Law360, the UK’s articulation of a role for the courts may have the added benefit of helping preempt some of the criticism facing DPAs in the U.S. As Stendahl reports, the Justice Department has increasingly used DPAs and nonprosecution agreements (NPAs) in recent years. Justice Department officials and prosecutors have routinely defended these agreements (e.g., here) as valuable enforcement tools that help them achieve significant financial penalties and that impose stringent compliance measures at a lower cost to the government than if its only option was to prosecute. These agreements also help avoid or ameliorate the significant collateral consequences facing a corporation’s employees and shareholders when the corporation is charged with criminal misconduct.

Despite these arguments, DPAs in the U.S. have been criticized of late as allowing corporations off too easily and, as Stendahl reports, as lacking meaningful judicial involvement. In contrast with the UK approach, the Justice Department and the corporation negotiate agreements without court involvement, and ultimately there may be little the court can do about the decisions reached. By inserting courts into the DPA process, the UK may well avoid such issues. Only time will tell how the process plays out in the UK. Yet if nothing else, it seems likely the SFO will seize upon this new enforcement tool to investigate greater numbers of possible Bribery Act violations. We and our friends at the Bribery Library will be certain to watch.

Companies and practitioners alike can keep the mining, drilling and extractive industry on the hot list for bribery and corruption enforcement. Earlier this week, Houston-based Parker Drilling Company entered into a deferred prosecution agreement with the U.S. Department of Justice and the U.S. Securities and Exchange Commission to settle allegations that the company violated the antibribery provision of the Foreign Corrupt Practices Act (FCPA). According to the criminal information filed in federal court in the Eastern District of Virginia, Parker Drilling, among other things, hired a Nigerian agent to assist the company with customs matters related to the importation of oil-drilling rigs into Nigeria. The agent, with the knowledge of Parker Drilling executives, used company funds to entertain Nigerian officials to receive influence in resolving customs disputes. The settlement — which remains subject to partial court approval — requires the company to implement an enhanced anticorruption and compliance program and pay nearly $16 million to the DOJ and SEC.

While the FCPA has long been a tool to combat corruption, governments both here and abroad have added another arrow to their quiver to target corruption in the natural resources sector. In August 2012, the SEC released final regulations implementing Section 1504 of the Dodd-Frank Act, which requires “resource extraction issuers” to disclose annual payments made to governments for access to specified natural resources. Companies qualify as “resource extraction issuers” and are subject to the rule if (1) the issuer is required to file an annual report with the SEC and (2) the issuer engages in the commercial development of oil, natural gas or minerals. Section 1504 reporting requirements apply to both domestic and foreign issuers and any payments made by a subsidiary or other entity controlled by the issuer. Subject to disclosure are payments to governments in furtherance of the commercial development of oil, natural gas or minerals that equal or exceed $100,000 per “project” during the fiscal year.

Although Section 1504 has provoked substantial domestic controversy — American Petroleum Institute’s challenge of the law is currently on appeal to the D.C. Circuit Court — it has found favor across the pond. Last week, the European Union reached an agreement to implement analogous reporting standards for payments made by European public and private companies to foreign governments for the right to extract natural resources. This legislation, addressed in more detail in the McGuireWoods Alert, “Recent EU Mining Developments” dated April 18, 2013, has been under intense negotiation since 2011. The EU rule, once enacted, will require companies to disclose payments over €100,000 on a “country-by-country” and “project-by-project” basis. Notably, the EU’s proposed rule is broader than Section 1504. It applies not only to oil, natural gas and minerals, but also to logging. And, unlike its U.S. counterpart, the EU act’s reporting requirements are not limited to public companies.

Supporters of both Section 1504 and the EU’s proposed equivalent claim that disclosure promotes transparency, prevents corruption and protects resource-rich, developing countries from exploitation. Needless to say, resource extraction companies must be mindful of these enhanced reporting requirements to avoid sanction domestically or abroad. How aggressively these standards will be enforced remains to be seen.

As we know, the recently enacted Iran Threat Reduction and Syria Human Rights Act of 2012 (ITRSHRA) expands the reach of the U.S. sanctions program and imposes new SEC disclosure requirements on issuers if they or their affiliates do business with Iran (although, their affiliates may not have violated U.S. law in any way, because U.S. law may not apply to their affiliates). Pursuant to Section 219, these disclosures must be investigated by the president, although the mechanism by which these investigations are to be accomplished remains uncertain.

ITRSHRA amended Section 13 of the Securities Exchange Act of 1934 to eliminate any materiality threshold for disclosures about Iran-related activities. Essentially, an issuer with stock traded on a U.S. exchange must now disclose in its periodic reports whether it or any of its affiliates knowingly engaged in specified activities involving Iran, including substantial investment in the Iranian petroleum industry, transactions involving blocked persons, the proliferation of weapons of mass destruction, or the transfer of goods or services that are likely to be used to further human rights violations, among other things. In fact, the ITRSHRA disclosures are beginning to make appearances in 10-Ks.

There has already been a good deal of discussion among practitioners about what constitutes an affiliate, but there are other aspects of Section 219 that have not received appropriate attention. Specifically, Section 219 imposes a requirement on the president to initiate an investigation of all disclosures to determine whether sanctions are warranted against the U.S. issuer or its affiliate. The statute also puts the executive branch on the clock by requiring the president to make his determination as to the imposition of sanctions within 180 days of initiating the investigation.

The scope of these presidential investigations is entirely unclear and many questions remain unanswered:

• Will a U.S. issuer’s conduct be directly investigated even if the only activity reported relates to a foreign affiliate?
• Because the statute requires the issuer to state whether it intends to continue with the activity, will the United States investigate to determine if future conduct comports with the stated intention?
• Could a discrepancy between the stated intention and actual conduct support a prosecution for false statements?

Indeed, at this point, U.S. issuers are left guessing which elements of the executive branch will be employed to conduct the investigations required of the president.

The Treasury’s Office of Foreign Assets Control (OFAC) seems to be the most likely candidate to investigate these ITRSHRA disclosures. OFAC already administers sanctions against Iran under the Iranian Transactions Regulations and the Iranian Assets Control Regulations (not to mention all the other economic and trade sanctions against other specific countries, terrorist organizations and certain drug traffickers). It also has broad administrative subpoena power under 31 CFR 501 to further investigate these transactions. But, an administrative subpoena issued to a U.S. issuer may not produce much in the way of documents or information because the U.S. business has, in all likelihood, either terminated its business relationship with the foreign affiliate or never had access to the affiliate’s records or information overseas. OFAC may have great difficulty using its ordinary investigative tools under these circumstances.

In the alternative, the president may turn to the Department of State as another possible investigative body for ITRSHRA. The State Department currently enforces sanctions in the energy-related sector under the Iran Sanctions Act of 1996, and it relies on a much different form of information gathering than OFAC. According to the State Department, it uses intelligence organizations, such as its own Bureau of Intelligence and Research and the Central Intelligence Agency, to gather information about foreign companies and possible sanctions violations. It then asks foreign embassy and government officials to engage with stakeholders to corroborate the information gathered. When possible, the State Department will hold a U.S. parent company accountable for sanctions violations.

Particularly in light of the obstacles that the United States encounters in gathering evidentiary information abroad, 180 days is not much time to complete an investigation. The deadline appears even more challenging when one considers the other, related matters that these agencies are working upon. Moreover, given the congressional interest in this issue, Congress will likely be watching these investigations closely. They are not the only ones.

Following a slew of significant corporate settlements over the last several months — none involving criminal charges being brought against corporations or individuals — federal regulators and law enforcement have heard an increasing outcry over the lack of criminal prosecutions of financial institutions and their executive leadership. Congress, irked by the perceived “Too Big to Jail” policy, recently summoned Attorney General Eric Holder to a hearing, where he defended the Department of Justice (DOJ) as being “appropriately aggressive” in its investigations, yet also voicing his concern that a prosecution of a large financial institution could have a “negative impact on the national economy.” (Click here to view the full transcript of Attorney General Holder's remarks.).

The media has feasted on the notion of a financial industry above oversight or investigation — the phrase “Too Big to Jail” returns more than 4,000 hits in a Google News search. News outlets have run programs furthering this perception. Recently “Frontline,” the investigative reporting program on PBS, ran a piece titled “The Untouchables,” which examined why Wall Street executives have avoided prosecution during the fallout from the financial crisis.

However, some commentators have recognized that criminal prosecutions may not be the best — or appropriate — outcome. Following Attorney General Holder’s appearance on Capitol Hill, Professor Peter Henning ran a post with the title “After Financial Crisis, Prosecutors Navigate Tricky Waters” on his informative White Collar Watch blog in The New York Times. Professor Henning, himself once with the DOJ and Securities and Exchange Commission (SEC), acknowledged a critical factor DOJ must consider before charging a corporation — whether the severe and swift collateral consequences would cause disproportionate harm to the public and shareholders (in the words of the DOJ manual, “others not proven personally culpable”) and outweigh the goals of a prosecution. Attorney General Holder and DOJ prosecutors are right to use the utmost caution in charging not only a financial institution but also any publicly traded institution, especially in cases where, as Attorney General Holder noted before Congress, DOJ identifies conduct that is “wrong” but does not rise to criminality.

Amid the public outcry over the lack of criminal prosecutions, one would hardly expect to hear general counsel at a financial institution describe the last several years as operating in an industry without regulation or investigation. In late 2009, President Obama announced the establishment of an interagency financial fraud enforcement task force, an effort DOJ trumpets as resulting in the filing of more than 10,000 financial fraud cases. Other regulators, such as the Office of the Comptroller of the Currency and the Federal Reserve Board, and the SEC, have also been active in their oversight, announcing large settlements with financial institutions. And in light of the ongoing congressional hearings and investigations, general counsel at financial institutions are right to expect continued and growing oversight and regulation.

While the media point out that financial institutions may be “too big to jail,” they certainly have not been “too big to investigate” or “too big to regulate.” But those aren’t catchy headlines. Nor are they true.

A recent 76-count indictment announced by the United States Department of Justice demonstrates that executives who willfully ignore food safety standards risk criminal prosecution in addition to the potential criminal and civil penalties facing their companies. The indictment, against former officials and employees of Peanut Corporation of America (PCA), stemmed from a 2009 salmonella outbreak traced to a PCA roasting plant.  At least nine people are alleged to have died due to consumption of the tainted peanut butter, which was later recalled.

The indictment alleges that the officials, as well as another employee who previously pleaded guilty to similar charges, conspired for six years to deliver adulterated and misbranded food. In particular, the indicted individuals allegedly failed to inform PCA customers after laboratory tests revealed the presence of salmonella and fabricated certificates of analysis (COAs)—documents that summarize lab results including whether tested food is contaminated.

Although both civil and criminal statutes and penalties against the company and individuals are available, the government has rarely charged individuals criminally in cases involving food safety violations. The fact that, according to the indictment, company officials knowingly focused on profit over safety likely contributed to the government’s aggressive move in this case.  For example, in one email detailed in the indictment, PCA’s president ordered that products for which the salmonella testing results were not yet available be shipped to the customer, writing “s**t, just ship it.  I cannot afford to loose (sic) another customer.”  Additional factors that likely led to criminal prosecution of PCA officials include the length of time over which the officials’ conduct occurred and the fact that it included allegations of lying to and obstructing the investigation of FDA investigators.

The government continues to investigate other large scale outbreaks, including a 2010 salmonella outbreak in eggs and a 2011 listeria outbreak in cantaloupe that was linked to more than 30 deaths. Food safety issues have also led to increased authority for the FDA in the Food Safety Modernization Act passed in 2011, including the ability to issue mandatory recalls and revoke the registration of food facilities.

To read a fuller McGuireWoods discussion of the PCA prosecution, please click here.

On Feb. 27, 2013, the U.S. Supreme Court issued an opinion that narrows the SEC’s ability to seek civil penalties in its enforcement actions. In Gabelli v. SEC, the Supreme Court held that the SEC cannot use the “discovery rule” to extend the five-year statute of limitations on the government’s claims for civil penalties. Given that SEC investigations often take years, the Supreme Court’s adoption of this bright-line rule will likely reduce the number of civil penalty claims that the SEC brings.

When the SEC files a civil action in federal court, it usually seeks three types of relief: 1) a permanent injunction from future violations of the securities laws; 2) disgorgement; and 3) civil penalties. Congress long ago imposed a five-year statute of limitations on actions seeking civil penalties. See 28 U.S.C. § 2462. Relying on the “discovery rule,” the SEC has often argued that the five-year statute of limitations should not begin to run until the SEC discovered the fraud, and courts have reached different results on the issue. The Supreme Court has now put the issue to rest.

In Gabelli v. SEC, the Supreme Court held that the government cannot use the “discovery rule” to extend the statute of limitations, but must be held to the strict five-year limitation. In reaching this decision, the Court drew a contrast between cases brought by victims of fraud and the agencies charged with responsibility for policing fraud. The Court explained that the “discovery rule” is intended to protect victims of fraud, where a defendant’s deceptive conduct prevents a victim from knowing that he or she had been defrauded. In that situation, the fraud is “ ‘deemed to be discovered when, in the exercise of reasonable diligence, it should have been discovered.’ ” Gabelli, Slip Op. at 6 (quoting Merck & Co. v. Reynolds, 130 S.Ct. 1784, 1794(2010)). The Court said it has never applied the “discovery rule” to government enforcement actions because unlike a victim who may have no reason to suspect fraud, it is the SEC’s mission to investigate and root out fraud. And the SEC is imbued with considerable resources to carry out that mission, including the ability to subpoena documents and testimony before filing an action. The Court held that “[c]harged with this mission and armed with these weapons, the SEC as enforcer is a far cry from the defrauded victim the discovery rule evolved to protect.” Gabelli, Slip Op. at 8. The Court also recognized the practical difficulty of applying the discovery rule to a government agency, given the challenge of determining when a government agency should have discovered the fraud “in the reasonable exercise of diligence.”

Although Gabelli arose in the context of the Investment Advisers Act of 1940, it is certain that courts will apply the ruling with equal force in actions brought under the Securities Act of 1933 and the Securities Exchange Act of 1934. The civil penalty provisions of the three acts are very similar. Compare 15 U.S.C. § 77t(d) with 15 U.S.C. § 78u(d)(3) and 15 U.S.C. § 80b-9(e). Moreover, the Supreme Court left room for courts to apply Gabelli to any case involving a government claim for civil penalties, noting that Section 2462 governs “many penalty provisions throughout the U.S. Code.” Gabelli, Slip Op. at 2.

Finally, the Court’s ruling does not address whether Section 2462 applies to claims for disgorgement or injunctive relief, and the SEC will undoubtedly argue that Section 2462 does not apply to such claims because they are not penalties. Thus, while Gabelli may not deter the SEC from bringing enforcement actions where there is a considerable amount of disgorgement to be recovered, the ruling may cause the SEC to think twice about bringing cases involving old conduct, where a defendant has obtained little or no ill-gotten gains.

The full Supreme Court opinion can be found here: http://www.supremecourt.gov/opinions/12pdf/11-1274_aplc.pdf. 

To learn more about the Gabelli case, the SEC litigation release can be found here:  http://www.sec.gov/litigation/litreleases/2008/lr20539.htm

SEC v. Welliver, Civil No. 11-CV-3076 (D. Minn. October 26, 2012) serves as a useful reminder to take precautions when responding to government subpoenas and discovery requests to avoid waiving the attorney-client privilege. 

The Welliver court held that defendants intentionally disclosed and, therefore, waived their attorney-client privilege over communications they introduced as exhibits during a deposition of their compliance officer.  The court declined to require a broader subject matter waiver, however, finding that the disclosure was not made to gain a tactical advantage or in a “selective, misleading and unfair manner.” 

The court also held that defendants waived their attorney-client privilege for approximately 200 emails inadvertently produced during the SEC’s pre-suit investigation and in later discovery because defendants failed to identify a single step taken to prevent inadvertent error.  The court rejected defendants’ position that the SEC’s aggressive six-day timeframe for responding to the subpoenas should excuse the disclosure because defendants never asked to extend the production deadline or sought other arrangements to maintain the privilege. The court considered the following factors in reaching its conclusion:  (1) the reasonableness of the precautions taken to prevent inadvertent disclosure in light of the extent of the document production; (2) the number of inadvertent disclosures; (3) the extent of the disclosures; (4) the promptness of measures taken to remedy the problem; and (5) whether justice is served by relieving the party of its error.  The court stressed that “[p]arties must recognize there are potentially harmful consequences if they do not take even minimal precautions to prevent against the disclosure of privileged documents . . . .”

Finally, the court held that there was an implied waiver of the attorney-client privilege because defendants’ defenses put certain privileged communications at issue, and fairness required a broader subject-matter waiver to allow the SEC to investigate the underlying facts.

As a takeaway, implement reasonable procedures for identifying and redacting or withholding privileged materials when producing documents.  Check whether the particular agency has established protocols regarding inadvertent and purposeful productions of privileged documents and agreements related thereto, such as those set forth in the SEC Enforcement Manual.  During the review, running keyword searches for the names of attorneys and their law firms and pulling those documents for further review are useful precautionary measures.  In addition, consider seeking a reasonable extension of the production deadline if necessary to help avoid inadvertent disclosures.  Carefully document communications with the government regarding any changes or attempted changes to the production requirements.  Finally, seeking protections under an agreement or court order in the event of a disclosure are useful protective measures that demonstrate efforts to take reasonable precautions.

The U.S. Securities and Exchange Commission announced recently that it had settled insider trading charges with Diamondback Capital Management LLC. As required by a recent SEC policy change, the proposed settlement appears to be the first not to include a representation that the defendant “neither admits nor denies” the SEC’s charges.

Under the proposed settlement, Diamondback agreed to pay more than $9 million and consented to a judgment that permanently enjoins it from future violations of federal anti-fraud laws. In itself, the settlement is not unusual. As the New York Times reports, however, this settlement marks “a departure from the SEC’s historical practices” because it “does not include language that the fund ‘neither admits nor denies’ any wrongdoing in the case.”

The Diamondback settlement appears to have roots in a new SEC policy prohibiting companies that admit to fraudulent conduct in parallel criminal proceedings from settling SEC charges without admitting guilt of the same conduct.

In the Diamondback case, the company entered into a nonprosecution agreement with the U.S. Department of Justice which contains an agreed statement of facts acknowledging that certain Diamondback employees traded securities based on material nonpublic information. As a result of this admission, Diamondback was not permitted by the SEC to settle charges on a “neither admit nor deny” basis.

There has been widespread speculation — by Reuters and the Washington Post, et al. — that the SEC’s policy change and the Diamondback settlement are, in fact, reactions to criticism from federal district court judges who have questioned the adequacy of the facts typically admitted in consent judgments.

The SEC vigorously denies that there is a tie between the new policy and this heightened judicial scrutiny of SEC settlements. Nevertheless, in the Diamondback case, the SEC took the unusual step of obtaining from the company an agreed statement of facts, which it reportedly submitted to the court for consideration in weighing up the proposed settlement agreements.

Those looking for a template for the factual allegations the SEC might include in future settlement will be sorely disappointed: the proposed agreement is not yet publicly available and, we have been informed by the SEC that it will not become available unless and until the presiding judge approves the settlement.This lack of transparency is uncharacteristic in SEC matters, and it comes as a surprise in a case pending in the same district where Judge Jed Rakoff in November derided the SEC for failing to make clear that the public interest was served by a proposed settlement.From what we know about the proposed Diamondback settlement, it appears the case may be a harbinger of a new era in SEC settlements. The takeaways are simple: (1) where a company admits to criminal conduct, the SEC is prepared to stick to its new policy of prohibiting regulated entities from settling charges on a “neither admit nor deny” basis; and (2) regulated entities should be prepared to negotiate and submit to the court more fulsome factual allegations in support of a proposed settlement agreement.

Undercover investigative techniques, such as wiretaps, which have long been a staple in racketeering and narcotics investigations, are now being used by DOJ in white collar investigations.  In a speech on November 4, 2010, Lanny Breuer, Assistant Attorney General of the DOJ’s Criminal Division, said that DOJ has “begun increasingly to rely, in white collar cases, on undercover investigative techniques that have perhaps have been more commonly associated with the investigation of organized and violent crime.”  Brueur also noted that DOJ has strengthened the Office of Enforcement Operations, which reviews and approves all wiretaps, and as a result the number of wiretaps authorized – in all cases – “has gone up.”

DOJ has already used wiretaps and other undercover investigative techniques in several recent white collar investigations.  In January 2010, for example, 22 individuals were indicted for FCPA violations.  The indictments followed what Brueur described as the DOJ’s “most extensive use of undercover law enforcement techniques in an FCPA investigation.”  Wiretaps were also used in the insider trading cases against Raj Rajaratnam. 

These “new” techniques in white collar investigations mean that DOJ is relying tools other than those traditionally associated with white collar cases, such as voluntary disclosures or whistle blowers.  Companies should take notice that DOJ has “stepped up [its] white collar investigations and prosecutions.”  Indeed, according to a recent OECD report (link to from prior post), DOJ stated voluntary disclosures of FCPA violations are a “source of a significant proportion of investigations, but not the majority.” 

With DOJ’s intention to be more proactive in white collar investigations, and the tools available to it, companies should be one step ahead of potential investigations by having a robust and effective compliance program.  Not only will an effective compliance program both deter and detect illegal conduct, prosecutors consider the effectiveness of  compliance programs in making charging decisions and a court’s determination of an appropriate sentence.   

The proposed changes to the U.S. Sentencing Guidelines (USSG) that went into effect on November 1, 2010 further explain how business organizations can protect against illegal conduct by its employees and mitigate the effect of such conduct.  While the USSG have not been mandatory since the Supreme Court’s 2005 decision in U.S. v. Booker, the same factors a court considers in sentencing a company are considered by federal prosecutors when deciding whether to charge a company. 

The changes to Chapter 8 of the USSG (dealing with Business Organizations) offer another incentive for companies to revisit and revise their compliance programs.  The major changes affecting compliance programs are discussed below:

Effective Compliance and Ethics Program.  After a company detects criminal conduct, it “shall take reasonable steps to respond appropriately to the criminal conduct and to prevent similar criminal conduct, including making any necessary modifications to the organization’s compliance and ethics program.”  Reasonable steps to respond to the conduct can include “providing restitution to the identifiable victims, as well as other forms of remediation” and “self-reporting and cooperation with authorities.”  A company may also decide to retain “an outside professional advisor to ensure adequate assessment and implementation of any modifications” to the compliance program.

Direct Reporting Obligations.  To take advantage of a 3 point reduction in culpability score, there must be a “high-level” person who has responsibility for the compliance program with direct reporting obligations to the company’s governing authority (e.g. an audit committee).   

Early Detection of the Offense.  Also to take advantage of a 3 point reduction in culpability score, the compliance program must detect “the offense before discovery outside the organization or before such discovery was reasonably likely.”  Simply having a compliance program is not sufficient.  Companies should train employees on the compliance program, maintain an internal hotline to report violations, and periodically assess the effectiveness of the program.   

Prompt Reporting. Also to take advantage of a 3 point reduction in culpability score, the organization must promptly report the offense to appropriate government authorities.  Unfortunately a “prompt” report is not defined, but the revisions to the Application Notes provide that a company “will be allowed a reasonable period of time to conduct an internal investigation” and that reporting is not necessary if the company “reasonably concluded, based on the information then available, that no offense had been conducted.” 

No Involvement in the Compliance Program by Individuals Who Condoned or Were Willfully Ignorant of the Offense.  Also to take advantage of a 3 point reduction in culpability score, individuals who are responsible for the compliance program must not have “participated in, condoned, or [been] willfully ignorant of the offense.”  The Application Notes to the General Application Principals, which were unchanged by the recent amendments, define an individual as “willfully ignorant” if he or she “did not investigate the possible occurrence of unlawful conduct despite knowledge of circumstances that would lead a reasonable person to investigate whether unlawful conduct had occurred.”