Compliance Programs Should Upgrade To New Standard

As most public company executives already know, The United States Sentencing Commission's revised federal sentencing guidelines, which have been effective since Nov. 1, require businesses to maintain "effective" compliance programs that prevent and detect violations of law.

And just as many companies were diligently altering their compliance programs to meet the amendment's new requirements, the USSC guidelines were placed in a state of limbo. On June 24, in a case widely known as "The Blakely Case," the United States Supreme Court held that Washington state's sentencing guidelines violated a defendant's Sixth Amendment right to a jury trial because the judge increased his sentence with evidence not presented to the jury.

And because the federal sentencing guidelines are similar to those reviewed in Blakely, the federal scheme became constitutionally suspect. On Oct. 4, the Supreme Court heard argument in two cases to decide whether the federal guidelines are unconstitutional, and a ruling is expected at any time (see related cases, transcript in box at right).

All this leaves corporate compliance officials understandably perplexed. Should their corporate compliance programs continue to follow the federal guidelines? Do their corporate compliance programs need to satisfy the Nov. 1 standards? If the Supreme Court declares the federal guidelines unconstitutional, does that mean corporations don't need compliance programs?

Although the source of confusion is understandable, it is more surface than real. Companies should continue implementing necessary changes to their compliance programs to satisfy the Nov. 1 amendment's requirements without worrying about how the Supreme Court will resolve problems associated with the Blakely case.

The Road To Blakely

This all started with the Sentencing Reform Act of 1984, when Congress created the United States Sentencing Commission to establish "guidelines" defining offense behaviors and characteristics for federal judges to follow during sentencing. The term "guidelines" is a euphemism, though, because any judge who refuses to follow the guidelines will be quickly reversed by the appellate court. State legislatures, concerned that sentencing in state courts was arbitrary—a potential violation of 'equal protection' guarantees in the federal and state constitutions—soon passed similar guidelines.

The Sixth Amendment problem condemned in Blakely occurred because, under the guidelines, certain offense characteristics can result in additional sentencing "points," which increase the sentencing range. These characteristics need not have been elements of the crime charged or proven to the jury at trial.

For example, routinely in federal drug cases the defendant receives an enhancement for "using" a firearm, even though the indictment and trial required evidence only of drug possession. Only at post-conviction sentencing does the judge review evidence that the defendant had a firearm.

The Blakely majority held that this scheme violated the principle of another case (Apprendi v. New Jersey in 2000; see box at right), in which the Court said, "Other than the fact of a prior conviction, any fact that increases the penalty for a crime beyond the prescribed statutory maximum must be submitted to a jury, and proved beyond a reasonable doubt."

By late August 2004, three federal circuit courts applying Blakely had declared the federal guidelines unconstitutional. At the urging of members of Congress, the Solicitor General, and the Department of Justice, the U.S. Supreme Court agreed to consider immediately whether the federal sentencing guidelines were unconstitutional.

On Oct. 4, the Court heard the Booker and Fanfan arguments mentioned above. Booker had been convicted of carrying 92.5 grams of crack cocaine. But at sentencing, the judge learned that Booker told police he was carrying more than 500 grams, which increased his sentence by 30 years. Fanfan's drug possession sentence was also subject to increase of five to 15 years due to evidence not presented to the jury.

At the Oct. 4 argument, the Justices' questioning made clear that the federal sentencing guidelines' enhancement procedures could not be distinguished from the Washington sentencing guidelines, so that the guidelines cannot survive in their current form. That still, however, leaves open the question of what remedy the Court will impose. Four Justices appeared in favor of declaring the guidelines advisory only, leaving judges free to sentence anywhere within the statutory range. Five Justices, however, leaned toward holding that the guidelines remained mandatory, but that any facts necessary for sentencing must be charged and presented to a jury. There remains the somewhat remote possibility that the Court might strike down the federal guidelines in their entirety by holding that as a matter of separation of powers, only Congress can revise a complex legislative scheme like the guidelines.

From Drugs To Compliance?

How drug defendants are sentenced under the federal guidelines would be a little note in the boardrooms of America if not for one part of the guidelines.

The concept of corporate compliance programs was first formalized when, in November 1991, the guidelines for organizational sentencing were revised to permit more lenient sentencing for organizations with an "effective program to prevent and detect violations of law."

For the last three years, the U.S. Sentencing Commission has been in the process of revising the standards for compliance programs, and the revisions went into effect on Nov. 1, 2004. Although the amendment makes numerous changes, most merely aligned the guidelines' definition of an effective compliance program with best practices already in place, such as mechanisms for anonymous reporting, training and the dissemination of compliance training materials, and risk assessments.

One aspect of the amendment, however, is substantially new, pushing compliance procedures in the direction desired by Congress when it passed the Sarbanes-Oxley Act.

As with other aspects of Sarbanes-Oxley, the amended guideline requires senior management and the highest governing authority to be actively involved with the company's compliance efforts. The amended guideline requires directors to "be knowledgeable about the content and operation of the compliance and ethics program" and to "exercise reasonable oversight" with respect to its implementation and effectiveness. Persons with "day-to-day" responsibility for the compliance function must have "direct access to the governing authority" or its designated subgroup, who must be briefed about compliance activities at least annually. And for the first time, all employees—including officers and directors—must be trained in the company's compliance standards and procedures.

The Gold Standard

Corporate compliance officials wondering whether the federal sentencing guidelines will survive the fallout from Blakely should still upgrade their programs to comply with the amendment without waiting to see what the Supreme Court does.

Under the sentencing guidelines, corporations receive a "reduction"—not an "enhancement"—to their sentence based on the presence of an effective compliance program; the Sixth Amendment problem in the Blakely, Booker, and Fanfan cases is not at issue under the organizational sentencing guidelines. If, as expected, the Supreme Court takes a narrow approach to remedying the constitutional problem of sentencing enhancements, the organizational sentencing guideline for compliance programs should remain unaffected.

Even if the Supreme Court surprises observers and strikes down the federal sentencing guidelines in their entirety, there are still good reasons why compliance officers should continue to implement the Nov. 1 amendment standards.

Anyone involved in corporate compliance for the last decade would agree that the definition of an effective corporate compliance program in the federal sentencing guidelines has become the gold standard for many other purposes beyond sentencing.

First, under the Department of Justice's Principles of Federal Prosecution of Business Organizations (see box at right), federal prosecutors examine whether the corporation has a compliance program effectively designed to prevent wrongdoing when deciding whether to bring criminal charges.

Second, the need to maintain an effective compliance program is not restricted to the criminal realm. Case law defining the fiduciary duties of directors and officers, most preeminently the "Caremark" decision and McCall vs. Scott (both in box at right), hold that officers and directors must ensure that a corporation has an effective compliance program.

Third, Sarbanes-Oxley's sections 302 and 404 require periodic assessments of the effectiveness of a company's internal control structure and procedures for financial reporting, which—as a practical matter—is merely a subset of most if not all compliance programs that follow best practices.

Full Speed Ahead

In this post-Enron environment, the concept that business organizations must have formal procedures and standards in order to reasonably ensure compliance with the law is here to stay. Failing to make sure that a compliance program meets the enhanced standard prescribed by the Nov. 1 amendment invites any number of parties—whether the Department of Justice, a shareholder in a derivative suit, or the Securities and Exchange Commission—to find that a corporation's compliance program no longer satisfies best practices.

If the formal governing standard for an effective compliance program temporarily disappears because of the cases mentioned above, rest assured that the concept will quickly reappear either in revised sentencing guidelines, or in some other federal statutory or regulatory scheme. Because the standard defined in the Nov. 1 amendment embodies "best practices" in corporate compliance theory, the formal "reappearance" of the standard is sure to look remarkably like the one prescribed in the Nov. 1 amendment.

Whatever procedural imprecision has been created by the Blakely mess, it should not be confused with substance. The need for business organizations to have an effective compliance program is here to stay, and the Nov. 1 amendment stands as the best definition of what an effective compliance program looks like.

Business organizations should ignore the drama created by Blakely, and continue updating their compliance programs in accordance with the Nov. 1 amendment as though Blakely never happened.

The column solely reflects the views of its author, and should not be regarded as legal advice. It is for general information and discussion only, and is not a full analysis of the matters presented.

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