A new study of regulatory enforcement actions shows that there is little evidence to support the conventional wisdom that strong, effective corporate compliance programs help companies secure better treatment when under investigation.
Published by the Conference Board, the report says the government has no clear, easily understood framework to explain how it awards credit for companies with strong compliance programs. Absent that proof, “companies might come to believe that the government values such programs only as a post-violation remedy,” the report states. And if companies see no incentive to prevent ethics or compliance failures in the first place, “that would undercut the key … deterrence goals of federal prosecution and sentencing policy.”
Kaplan
The authors, Ronald Berenbeim of the Conference Board and Jeffrey Kaplan of the law firm Kaplan & Walker, studied more than 2,800 enforcement actions tracked by the U.S. Sentencing Commission since 1993—and found exactly three instances of a company receiving mitigation credit for an effective compliance program. While the Justice Department and the Securities and Exchange Commission have both said for years that they give mitigation credit, those agencies have not done much to disclose whether, when, or how that credit has ever been dispensed, Berenbeim and Kaplan said. (The Justice Department, which cooperated with the authors, supplied all data for the report.)
The authors do note that examples of compliance programs implemented after a company learned of an investigation, or as part of a settlement agreement, can be found in abundance. But, they stress, that is very different than receiving credit for programs that existed at the time of the offense, and sends the message that companies shouldn’t be concerned with compliance programs until after a violation happens.
“It’s incenting people to wait and see if they get into trouble,” Kaplan tells Compliance Week.
“Until we get pointed guidance from enforcement officials, that makes it clear by their actions that compliance programs matter, we won’t have really effective compliance and ethics programs.”
—Joseph Murphy,
Director of Public Policy,
Society of Corporate Compliance and Ethics
The report’s findings give new ammunition to a complaint many compliance executives have long had: that the government is more interested in wringing concessions out of companies under investigation than it is in effective corporate compliance.
Murphy
Joseph Murphy, director of public policy for the Society of Corporate Compliance and Ethics, calls the report “spot on” and says the government hasn’t done its part to promote effective corporate compliance and ethics programs.
“Until we get pointed guidance from enforcement officials, that makes it clear by their actions that compliance programs matter, we won’t have really effective compliance and ethics programs,” Murphy says.
Darcy
Keith Darcy, executive director of the Ethics and Compliance Officer Association, says compliance officers crave more information from prosecutors and regulators about what they consider when evaluating a compliance program, since that will help the compliance officers know where to focus their resources. It would also give compliance officers “a strong case to take to boards to ensure they’re doing everything possible to meet those standards,” he says.
Indeed, in a 2007 poll of SCCE and ECOA members conducted by the Conference Board, 95 percent of respondents said more information from enforcement agencies about compliance credit would help them promote and implement their ethics programs more effectively.
Problems, Solutions
The report also includes comment from former and current government officials about why they don’t rush to disclose their thinking about giving credit. Some prosecutors worry that by providing specifics on their charging decisions, they might create a precedent that could be used “against” the government in future enforcement actions. Another concern is the practical difficulty in determining how effective an ethics or compliance program is at the time of an offense, when an investigation typically occurs years later.
INFORMATION NEEDS
Below is an excerpt from the Conference Board report looking at compliance programs' value in enforcement actions.
In September of 2007, The Conference Board surveyed the members of two major ethics and compliance professional associations—the Ethics and Compliance Officers Association (ECOA) and the Society of Corporate Compliance and Ethics (SCCE). Nearly half of the respondents stated that they were eager to know whether
companies had “received credit” in enforcement proceedings (such as avoiding prosecution or reduced sentences) for having an effective ethics and compliance program.
Yet information about specific cases of this kind is in short supply. At least with respect to sentencing cases, this is evidently due to the fact that very few corporate defendants have received E&C program credit. That is, according to government records, since the Sentencing Commission began reporting statistics on organizational defendants in 1993, only three out of the 2,811 organizations that were sentenced received mitigation credit for an effective E&C program as outlined in the Corporate Sentencing Guidelines. This low number may be explained in part by the fact that many organizational defendants are small companies which are less likely to receive credit because: (1) smaller companies tend to have less formal E&C programs than do larger companies; and (2) prosecutions of smaller companies tend to involve, more than prosecutions of large companies, the culpable involvement of high-level personnel which disqualifies a company from receiving program credit under the Guidelines.
Additionally, there have been very few publicized cases of companies that have received credit under either the DoJ or SEC policies for having effective preexisting (i.e., in existence at the time of the offense) E&C programs. The causes of this information shortfall are more complex than is the case with the Sentencing Guidelines.
Lack of information about governmental practices for crediting ethics and compliance system effectiveness in specific enforcement decisions has potential impact on
program innovation and efficacy. Ethics and compliance professionals want and need this information. In the September 2007 surveys referenced earlier, 95 percent of the responding members said more information about “credit” given to companies by the government in enforcement and sentencing situations would help them promote and implement their programs. When asked whether or not the government provided sufficient information on this subject, only 13 percent said yes.
By contrast, there are many publicly available examples where settlement-based programs—as opposed to programs in effect at the time of an offense—were rewarded. For example, the Guidelines require that where a corporate defendant with more than 50 employees does not have an E&C program, such a program be imposed as a condition of probation. Additionally, there have been countless examples of the DoJ or SEC imposing E&C programs on corporate defendants in connection with settlements.
However, from an ethics and compliance incentives perspective, publicly recognizing settlement-based programs (but not preexisting ones) in enforcement decisions is hardly optimal. In essence, it sends a message that the companies need not be concerned with E&C programs until after a violation, and thereby undercuts the important law enforcement policy of deterrence.
When was the program implemented? When it comes to the enforcement use of ethics and compliance programs, there is an important distinction to be made between four distinct temporal categories:
Type 1 Pre-existing programs—in place at the time of
the offense.
Type 2 Post offense/pre-investigation referred to as pre-
investigation programs—implemented, at least in part, subsequent to the violation but prior to the initiation of the government’s investigation (or the company’s learning of such investigation).
Type 3 Investigation-based programs—commenced
voluntarily and not pursuant to a settlement, but subsequent to the company’s learning of
a government investigation.
Type 4 Settlement-based program—implemented as
part of a settlement agreement.
*Note: The full report is available to members of The Conference Board via http://www.conference-board.org/publications/describe_ea.cfm?id=1670. Non-members can get a copy by e-mailing Frank Tortorici at f.tortorici@conference-board.org.
Source
The Conference Board.
The report says companies can address that concern by compiling annual “ethics and compliance reports” that detail key aspects of their programs, a practice that Kaplan says some companies have already adopted. If the government signaled that those reports might help in an enforcement review, Kaplan says, the practice would likely become widespread and would help provide a better basis for assessing pre-existing programs.
Another worry: that enforcement personnel may not feel they have sufficient expertise to assess a program’s effectiveness. The Conference Board suggests that the private sector, through groups such as the ECOA, SCCE,and others, can help by capturing and publicizing information about ethics and compliance cases. Those groups can also develop resources for compliance programs, such as by offering to instruct prosecutors on how to assess compliance programs at the Justice Department’s National Advocacy Center or by developing Web-based materials.
Others say the government can overcome the difficulty of disclosing its thoughts on a company’s compliance program. Prosecutors can gather all sorts of information about a company’s compliance efforts during an investigation, but they don’t necessarily need to use it all when making a charging decision—and therefore, that shouldn’t shed excessive light on prosecutors’ typical strategies and bargaining positions.
Moreover, the report notes that the government frequently provides public examples of how it rewards self-reporting, presumably to encourage other companies to follow suit. Taking the same approach with compliance programs could lead to similar benefits and wouldn’t be any more limiting, the report contends.
Sabin
“It’s a matter of putting institutional processes in place for the U.S. attorney offices and the DoJ divisions,” says Barry Sabin, a former deputy assistant attorney general and now partner at the law firm Latham & Watkins. “That can be done without too much time and effort, and from a cost-benefit perspective, it would certainly be beneficial to both sides.”
Sabin notes that prosecutors already collect case information in areas such as asset forfeiture and use of investigative techniques. The data can be added to the checklist prosecutors look at when they’re making corporate charging decisions, he says. Information about how a compliance program influenced a charging decision and resolution can also be included in a plea agreement or press release.
The reports also suggests that state and federal agencies could pool their knowledge and resources through task forces or committees under leadership of the Justice Department, or each one could designate a compliance “point man.” Sabin says existing coordinators in various Justice Department offices involved in white-collar crime or fraud could track the case information with assistance from support personnel.
Finally, the report calls on enforcement agencies to marshal the experience of their various attorneys in making program assessments. When necessary, the report notes that the Justice Department can hire an expert at the company’s expense to evaluate its program, as it did in a recent criminal tax case involving Mellon Bank.
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