The Revised Federal Sentencing Guidelines: What do they mean for organizations?

It was 1991 - the first year the Federal Sentencing Guidelines, promulgated by the United States Sentencing Commission, were to be applied to individuals and organizations. Since then, and until a U.S. Supreme Court ruling in January 2005, federal judges were required to use the Guidelines to determine whether a defendant organization had an "effective compliance program" in place to prevent the violations for which it was being charged. If an organization had implemented and maintained such a program, the judge overseeing the case would consider the organization's acts of due diligence in trying to prevent the illegality when deciding whether to increase or mitigate sentences.

Amendments to clarify and strengthen
Prior to the 2005 seminal Supreme Court ruling (more on it later), the Commission in 2004 amended the Guidelines to clarify and strengthen the requirements of an "effective compliance and ethics program." Specifically, the 2004 amendments require organizations to:

• exercise due diligence to prevent and detect criminal conduct;
• promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law;
• establish, at minimum, that:
  - the organization's governing authority (that is, the board of directors, or highest-level governing body) must be knowledge-able about the program's content and operation, and exercise oversight with respect to its implementation and effectiveness;
  - high-level personnel must be assigned overall responsibility for the program; and
  - specific individuals within the organization must be assigned day-to-day operational responsibility for the program and periodically report to high-level personnel on the effectiveness of the program; furthermore, these individuals are to be given adequate resources, appropriate authority, and direct access to the governing authority for proper operation of the program;
• communicate the program's standards and procedures periodically and practically to the previously mentioned individuals;
• conduct effective training programs for individuals involved in the implementation, effectiveness, and maintenance of the program (that is, governing authority, high-level personnel, employees, and agents as appropriate);
• monitor and audit for criminal conduct;
• periodically evaluate the program's effectiveness;
• implement and publicize reporting mechanisms within the organization that allow employees or agents to anonymously or confidentially1 report or seek guidance regarding potential or actual criminal conduct without fear of retaliation;
• provide incentives for performing in accordance with the organization's program; and
• remedy any harm caused by an offense whenever practicable (for example, by taking appropriate disciplinary action for engaging in criminal conduct, and/or making changes to the current program). 2 

Adequate compliance and ethics programs are essential in light of defunct corporate compliance oversight in the past decade. Fraud examiners, compliance officers, and in-house counsel should be acutely aware of these recent amendments to the Sentencing Guidelines to ensure due diligence in preventing and detecting criminal conduct. The failure of an organization to follow these guidelines can lead to grave consequences of significant monetary and probationary sanctions.

Six factors and then a state of panic
Prior to the Supreme Court decision in January of 2005, in determining the culpability of an organization, sentencing courts were required to consider six factors:
1. the involvement in, or tolerance of, criminal activity;
2. the prior history of the organization;
3. whether the organization violated an order;
4. whether the organization obstructed justice;
5. whether the organization had an effective compliance and ethics program in place; and
6. whether the organization self-reported or cooperated with appropriate agencies, or accepted responsibility for improper acts. 3 

While the first four factors above allowed courts to increase an organization's penalty, the last two provided courts with a justification for mitigating punishment under the Sentencing Guidelines. And then came Blakely.4 In June of 2004, the Supreme Court in Blakely v. Washington found that the state of Washington's sentencing guidelines violated the 6th Amendment because they allowed a judge to increase a defendant's sentence based on a "preponderance of the evidence" not reviewed or decided by the jury or admitted by the defendant.5 The ruling in Blakely caused a state of panic in the legal system. For almost six months, federal judges and prosecutors faced the threat of appeals based on holdings (rulings and the rationale on which they're based), in which judges increased sentences that were founded on aggravating factors without a jury's determination of the facts. This state of legal flux also begged the question as to whether sentencing judges could use the Sentencing Guidelines for increasing the sentences of organizations for inadequate compliance programs or the lack of them.

Those two key Supreme Court rulings
In January 2005, the Supreme Court in United States v. Booker and United States v. Fanfan clarified Blakely by holding that the Federal Sentencing Guidelines are no longer mandatory but merely advisory. The Court reasoned that to increase a sentence beyond that which could have been rendered by a jury based on facts, or declared by the defendant, would be a violation of the 6th Amendment.6 In his opinion, Justice Stephen Breyer stated that judges are still required to "consider the Guidelines 'sentencing range established for... the applicable category of offense committed by the applicable category of defendant,' the pertinent Sentencing Commission policy statements, [and] the need to avoid unwarranted sentencing disparities."7 Thus, it appears that sentencing judges must consider the guidelines when sentencing, but are not required to sentence within the range set forth by the Guidelines. Further, it's important to note that the rulings in Blakely and Booker-Fanfan apply to individuals.

Organizations - corporations in particular - are entitled to all protections afforded citizens under the Bill of Rights8, except self-incrimination under the 5th Amendment. The holdings in Blakely and Booker-Fanfan, are clearly based on an individual's 6th Amendment right to a jury trial, so the issue becomes: Are organizations entitled to 6th Amendment protections? The Supreme Court has held that corporations are entitled to 6th Amendment protection in criminal contempt proceedings, thus it's likely that the rulings in Blakely and Booker-Fanfan will also be applicable to organizations.9 

Loosening the noose?
Although it may appear as though the Sentencing Commission's noose on compliance and ethics program requirements has gained some slack, organizations shouldn't become complacent in conforming to the Guidelines' program requirements. The consensus among compliance professionals suggests that, in light of corporate scandal, the emphasis on corporate compliance and ethics and resulting promulgated legislation (such as Sarbanes-Oxley), organizations will continue to be reviewed and stringently, yet properly, penalized under the Guidelines' standards.10  

In addition to understanding the new state of the law as it applies to organizations, it's imperative for organizations to consider the significant and appealing incentives for compliance with the Guidelines:

• Effective compliance and ethics programs may induce judges to further mitigate punishment.
• Organizations can discover internal problems and illegality before the government, and thereby quickly implement recovery actions.
• Several federal agencies take the adequacy and effectiveness of compliance and ethics programs into account when deciding whether to bring civil or criminal charges against the organization.

"The ball now lies in Congress' court," said Justice Breyer in his opinion in Booker-Fanfan. "The National Legislature is equipped to devise and install, long-term, the sentencing system, compatible with the Constitution, that Congress judges best for the federal system of justice."11

1. Note that the Sentencing Commission says that it understands that having anonymous and/or confidential reporting mechanisms poses limitations for ascertaining all the necessary information in an organization's investigation of wrongdoing. Thus, the Commission has stated of this requirement, as it pertains to anonymous and/or confidential reporting, that the organization has "maximum flexibility in implementing a system that is best suited to its culture and conforms to applicable law. A responsible organization is expected, as appropriate, to communicate to its employees any applicable limitations of its internal reporting mechanisms." The United States Sentencing Commission. Amendments to the Sentencing Guidelines, Policy Statements, and Official Commentary, May 1, 2004, 88, www.ussc.gov/2004guid/2004cong.pdf (9 May 2005).
2. The United States Sentencing Commission. Federal Sentencing Guidelines Manual and Appendices, effective Nov. 1, 2004, www.ussc.gov/2004guid/TABCON04.htm (9 May 2005).
3. The United States Sentencing Commission. Amendments to the Sentencing Guidelines, Policy Statements, and Official Commentary, May 1, 2004, 88, www.ussc.gov/2004guid/2004cong.pdf (May 9, 2005).
4. In Blakely v. Washington, the defendant "pleaded guilty to kidnapping his estranged wife. The facts admitted in his plea, standing alone, supported a maximum sentence of 53 months, but the judge imposed a 90-month sentence after finding that petitioner had acted with deliberate cruelty, a statutorily enumerated ground for departing from the standard range. The Washington Court of Appeals affirmed, rejecting petitioner's argument that the sentencing procedure deprived him of his federal constitutional right to have a jury determine beyond a reasonable doubt all facts legally essential to his sentence." See the Syllabus in Blakely v. Washington, 124 S. Ct. 2531 (2004).
5. Blakely v. Washington, 124 S. Ct. 2531 (2004).
6. United States v. Booker and United States v. Fanfan, 125 S. Ct. 738 (2004).
7. Id. at 764 and 765.
8. Barron's Business Review Series, 3rd Edition. 1997. Business Law, "Corporations: Nature, Formation, Types and Powers. Library of Congress Catalog Card No. 96-28702. Ch. 16, p. 301.
9. United Mine Workers of America v. Bagwell, 114 S. Ct. 2552 (1994). The Court found that a corporation could assert the right to a jury trial in a criminal contempt prosecution.
10. Basri, Carole, "Why Implement An Effective Corporate Compliance Program?" in Corporate Compliance Institute 2005, Vol. 1, 325. Examples of settlements with the federal government whereby organizations lacked effective compliance and ethics programs:
11. Justice Breyer in United States v. Booker and United States v. Fanfan, 125 S. Ct. 738, 768 (2004). 

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Juliana Morehead, J.D., Associate Member, is a legal writer and editor for the ACFE.