Comments for FSGO panel

To: ERC panel members re: 2012 FSGO report [see certain individual emails to panel members here]

The below comments are provided regarding the Ethics Resource Center 2012 report "The Federal Sentencing Guidelines For Organizations Twenty Years Later".

I.  Report Executive Summary -successes; challenges; recommendations [For making these comments, it is useful to set forth the Executive Summary of the Report virtually in full, which follows.]

Executive Summary
Twenty years ago, on November 1, 1991, the U.S. Sentencing Commission (USCC) put into
effect new guidelines to help federal judges impose fair and consistent sentences when
corporations violated U.S. law. Formally known as the Federal Sentencing Guidelines for
Organizations (FSGO), the new rules were mandated by Congress to address wide variation in
sentences by federal judges who, at the time, were guided only by their own subjective thinking.
The FSGO established, for the first time, a uniform framework for punishing corporations that
broke the law. But the FSGO did something else that was just as important: they created
incentives for companies to self-police. Recognizing that under American law corporations
“stand in the shoes” of their employees and, thus, are generally accountable for their acts –
even when their actions violate the company’s stated rules – the FSGO sought to distinguish
between companies that worked hard to prevent crime and those that turned a blind eye to
misconduct or even created circumstances that encouraged it.
Believing the Guidelines could be a tool to encourage ethical business conduct, the Commission
created a “carrot and stick” regime for assessing corporate culpability and giving credit,
including sharp reductions in penalties, when an effective compliance and ethics program
(ECEP) was in place “to prevent and detect violations of law.” On the other side of the coin,
FSGO penalties would be severe for companies that “tolerated, encouraged or condoned”
improper behavior.
This carrot-and-stick approach aimed to convert organizations from passive bystanders who
hoped employees would behave well, into active advocates of an ethical culture in the
workplace – in short, enlisting companies themselves in the fight against corporate crime. Given
the potentially serious consequences of corporate misconduct and the limited ability of after-thefact
prosecutions to undo the damage or deter future law breaking, the Commission hoped that
corporate self-policing through strong compliance and ethics programs could reduce the
frequency and severity of misconduct.

Companies Have Widely Embraced Compliance/Ethics Programs
The FSGO have achieved significant successes, notably the vigorous efforts by many U.S.
companies and other organizations to adopt comprehensive compliance/ethics programs. The
new rules led to the creation of a new profession of compliance/ethics professionals, who now
number in the thousands, to develop and implement the new corporate programs. In addition,
as the FSGO have matured and their requirements been toughened by the Commission, boards
of directors and senior corporate management in many companies have taken on leadership
roles in promoting law-compliant and ethical cultures. Numerous books and articles have been
written and conferences convened to help them know how to do that, and companies have
identified best practices to help build compliance into everyday decision-making.
Survey data indicate that these efforts are producing tangible results. The ERC’s 2011 National
Business Ethics Survey (NBES), for example, shows that employees in companies with
effective, meaningful codes of conduct and programs based on the FSGO witness fewer
incidents of misconduct, and are far more likely to report misconduct when observed. In part,
this is because organizations with FSGO-based programs are more likely to have strong ethical
cultures, and employees observe misconduct less often in organizations with stronger cultures
than in those with weaker cultures.
The FSGO’s “seven-step” standards for compliance/ethics programs have become the de facto
framework for U.S. corporations and also serve as a reference point for many U.S. regulatory
and enforcement agencies.
Most significantly, with the exception of the Antitrust division, the U.S. Department of Justice
now recognizes as a matter of policy that an ECEP should be a factor in deciding whether or not
DOJ will file criminal charges in cases of organizational misconduct. The DOJ view on
compliance was first spelled out in 1999 by then Deputy Attorney General Eric H. Holder, Jr. in
the so-called “Holder Memo” and later ratified in subsequent memoranda by two of Holder’s
successors, Paul McNulty and Larry Thompson.

But Substantial Challenges Remain
Notwithstanding these successes, this Report identifies a number of developments and
government policies that could erode the effectiveness of the FSGO and cause some
businesses to reduce their commitment to ECEPs. The Report concludes that pro-compliance
corporate practices and government policies created by the FSGO are not working together in
the most effective and self-sustaining ways. It pinpoints four specific challenges:

Challenge 1: There are few FSGO cases involving large companies because criminal
cases against bigger corporate defendants are largely being detoured around the judges
for whom the Sentencing Guidelines were intended.
Corporate offenders are not receiving credit for ECEPs at sentencing because cases are being
steered out of the traditional criminal justice process. Prosecutors are, instead, opting to
resolve most cases involving large companies through Deferred Prosecution Agreements
(“DPAs”), non-prosecution agreements (“NPAs”), or other administrative/civil settlement
agreements – and, without convictions, there are no sentences to which the FSGO apply. For
both parties, settlement has benefits. It eliminates the cost and risks of litigation. DPAs and
NPAs also avoid the potentially devastating collateral damage, often to innocent parties, that
can occur when a company is convicted of a crime.
DOJ policy directs prosecutors to consider the existence of an effective compliance program in
deciding whether to prosecute, enter into a DPA or NPA, or take no action in cases of alleged
misconduct. But there is little hard evidence that organizations are receiving the promised
consideration for their compliance programs and prosecutors rarely point to compliance/ethics
programs when publicly discussing case resolutions. A Conference Board study in 2009 found
that after-the-offense compliance program requirements are often mandated in settlements, but
it found very few cases where DOJ acknowledged granting credit for – or even carefully
assessing – a pre-existing compliance/ethics program.
The failure to publicly recognize the role of ECEPs suggests that they do not matter to
prosecutors, which creates the risk that corporations will scale back their commitment to
compliance/ethics. As one corporate compliance/ethics officer explained in response to a 2010
ERC survey:
The current DOJ approach allows cynical executives to conclude that any violation justifies a DOJ conclusion that the compliance program was ineffective no matter how robust the program was in preventing other problems. As a result, additional resources are diverted elsewhere, an outcome potentially harmful to society at large and in opposition to what the DOJ probably intended.

Challenge 2: There is a lack of consistency in policies toward ECEPs across the various
government agencies that play a role in corporate law enforcement and regulation
because there is neither a requirement that these policies be aligned nor a mechanism
available for doing so.
More than 20 federal agencies play a role in enforcing laws that govern corporate conduct, but
each agency – and even divisions within agencies – has its own approach to corporate
compliance/ethics programs. Businesses organizations are left to parse the differences. This
lack of consistency is compounded by a lack of transparency.
It is often difficult to even discern an individual agency’s policies on ECEPs. Some agencies
have an official policy embedded in regulation or statute. At others, one may be able to infer the
agency’s policies by reviewing official remarks or comment letters or by examining particular
cases. For still other agencies, it is hard to discern any particular policy, practice, or point of
view at all. The Antitrust Division at the Justice Department (DOJ) even takes a position on
compliance programs contradictory to the rest of DOJ.
It is often difficult to determine what elements agencies look for in evaluating compliance/ethics
programs. While some agencies rely heavily on the FSGO framework, others do not. Nor is it
always clear that an agency, in fact, grants credit for effective programs even when that agency
has a policy that ostensibly supports their adoption.

Challenge 3: Many compliance/ethics programs fall short of their potential because
portions of the FSGO remain underemphasized or unclear.
The ability of business managers to embrace and implement the ECEP criteria outlined in the
FSGO is tied to their ability to understand the specific actions or decisions expected of them.
On the one hand, FSGO criteria are principles-based, which provides organizations with
valuable flexibility in tailoring an approach that best fits their circumstances and avoids a “onesize-
fits-all” standard for compliance. This flexibility encourages innovation and discourages the
“check the box” type of mentality that discourages critical judgment about how to instill
effectiveness.
The benefits of flexibility and innovation notwithstanding, the principles-based nature of the
FSGO criteria means that reasonable minds can disagree on what certain high-level principles
mean. To address this issue, the FSGO would benefit from ongoing review and a greater use of
“plain English.”

Challenge 4: Too many business executives take a “check the box” approach to their
programs, rather than satisfying the full intent of the FSGO.
It is impossible to meet the FSGO standards with a mechanistic approach. The FSGO’s
emphasis on diligence, actual effectiveness, and an inherent philosophy of structured flexibility
are all intended to promote results-oriented innovation by individual companies within the
Guidelines’ general framework. This intent needs to be better understood and applied.
Moreover, priority needs to be given to two areas that are fundamental to compliance/ethics.
First, the mission of for-profit companies needs to be seen as comprising both strong financial
performance and a strong commitment to integrity. Second, the chief ethics and compliance
officer must be properly positioned to ensure that he or she has the independence, access,
authority, and empowerment necessary to effectively discharge these vital corporate
responsibilities.

This Report focuses largely on the efforts needed by government to promote compliance/ethics
programs, but the ultimate responsibility for corporate integrity rests with the private sector.
While many business leaders are genuinely passionate about ethical performance and operate
best-in-class compliance/ethics programs, many others ignore the level of diligence and
commitment needed to follow the FSGO. As a result, often times the individuals responsible for
implementing effective compliance/ethics initiatives face more internal resistance than they
should because they lack stature, access to key decision makers, and the necessary resources.
The FSGO contain language emphasizing that creditworthy compliance/ethics programs are not
ones thoughtlessly built on a check-the-box framework. The FSGO make clear that the
overarching goal of a creditworthy compliance program is that it will actually “be effective” in
most circumstances, and they direct companies to exercise “due diligence” and “evaluate
periodically” their programs to make sure this goal is met. Moreover, the FSGO are built around
a philosophy of structured flexibility that is meant to encourage each company to find its own
particular path to effectiveness within the FSGO’s general framework. This approach enables
companies to take into account their own unique characteristics (e.g., nature of its business,
history, risk profile, size, etc.) in developing compliance/ethics strategy.
Ultimately, when companies are truly committed, the board and management have defined the
very mission of the company as fusing financial performance with an equally strong commitment
to integrity. Moreover, committed companies ensure that the compliance and ethics program,
including the person with day-to-day responsibility for the program, is fully empowered,
autonomous, properly positioned, and resourced to help support this mission. Ideally, the chief
ethics/compliance officer is a member of senior management and, at the very least, has
meaningful and regular access to the company’s board and senior management. Ideally, too,
the board of directors has a member or committee with specific expertise in compliance and
ethics.
The private sector must apply the types of effective management steps called for in the FSGO
with the goal of achieving an ethical culture sustained by best-in-class programs. Merely “going
through the motions” in implementing a compliance/ethics program will neither meet the intent of
the FSGO standards nor result in the kind of ethical cultures in companies that society
increasingly expects

Recommendations
To address these challenges and to reinforce the carrot-and-stick framework that promotes
ethical performance, this Report presents recommendations for the Sentencing Commission,
the Department of Justice, the President, the Congress, the federal Courts, and the private
sector:
Recommendations to the U.S. Sentencing Commission
Recommendation 1.1 - The Commission should renew – and regularly – focus on the
FSGO with an eye toward continuous improvement to take account of changes in the
business world.
Companies’ embrace of the FSGO as a guide for their compliance/ethics efforts creates a
responsibility for the Sentencing Commission to monitor and update the FSGO, as necessary,
on an ongoing basis. Over the last 20 years, the Commission has devoted most of its attention
to its separate Guidelines for sentencing individuals who have violated federal law and struggled
to maintain a significant focus on the FSGO. The Commission must do what the Guidelines ask
of companies: continuously improve. To this end, the Commission might establish an advisory
group of FSGO practitioners analogous to its Practitioners Advisory Group for the individual
Guidelines.
Recommendation 1.2 - Clarify portions of the FSGO.
This Report identifies specific areas for improvement in the FSGO and also says the
Commission should promote further study on the issue of evaluation of their compliance/ethics
programs. The Report suggests that the FSGO should:
1) More strongly encourage companies to use incentives to promote their programs,
including compliance/ethics as a key component of employee evaluations and reviews;
2) Emphasize and clarify commentary language pertaining to the role of managers and
supervisors in promoting “an organizational culture that encourages ethical conduct and a
commitment to compliance with the law;”
3) Give new emphasis to language relating to the compliance and ethics officer, including
a strong relationship with the organization’s highest governing authority and providing
sufficient autonomy, empowerment, and resources;
4) Encourage large organizations with more complex compliance/ethics management
systems to ensure that at least one member of the governing authority possesses
expertise on effective compliance/ethics management;
5) Encourage companies to increase compliance/ethics efforts at the local and regional
level in order to better reflect the increased geographical dispersion of large corporations,
especially multi-nationals;
6) Expand on current language by clarifying what it means to “take reasonable steps to
respond appropriately” when criminal conduct has been detected by promoting the
adoption of effective internal investigation protocols; and
7) Suggest some possible outcome metrics by which organizations can demonstrate the
impact and effectiveness of their programs.
Recommendations to The U.S. Department of Justice
Noting the U.S. Department of Justice’s (DOJ’s) responsibility as the lead federal law
enforcement agency, this Report directs five recommendations to the DOJ as the agency with
the potentially decisive “vote” on whether the government will keep its oft stated promise to
credit ECEPs.
Recommendation 2.1 - The DOJ should ensure that pre-existing compliance/ethics
programs are a critical factor in the resolution of corporate misconduct cases.
Merely having a policy does not mean that it is communicated, understood, or followed. DOJ’s
senior officials must make sure stated policies are effectively implemented. The Attorney
General should direct all federal prosecutors to take proper account of ECEPs.
Recommendation 2.2 - The DOJ should establish standards, based on the FSGO, to
govern how ECEPs will be judged as well as standards to guide how ECEPs should
affect case outcomes.
The DOJ Principles of Prosecution should be revised to make clear that prosecutors should look
to the FSGO compliance/ethics program standards when making assessments about ECEPs.
Using other standards – or a “we know a good program when we see it” approach – prompts
companies to ask why they have obediently followed the Guidelines for two decades.
DOJ “boiler plate” requirements for a company’s compliance/ethics program, often mandated in
DPAs, consent decrees, and other forms of settlement should start with the FSGO criteria. DOJ
may want to add other requirements on top of the Guidelines’ framework, but ignoring the
framework invites confusion and inconsistency.
Separately, the Department should provide substantially more guidance to prosecutors on how
a pre-existing ECEP – as well as the lack of one – should affect settlement terms, including the
monetary penalty, the length of the DPA term, reporting requirements, whether a monitor will be
required, and the scope of the monitor’s activities.
Recommendation 2.3 - The DOJ should move to require greater internal consistency
among its own divisions in the treatment of ECEPs.
DOJ’s Antitrust Division has consistently insisted it will not take ECEPs into account in enforcing
anti-trust law. While there is logic in the context of multi-party conspiracies for the Division’s
policy of placing great weight on a voluntary disclosure by the first disclosing party, DOJ
handles other kinds of corporate cases that involve conspiracies without applying the blanket
“no credit for compliance programs” policy adopted by the Antitrust Division.
Recommendation 2.4 - The DOJ should adopt a credible process for evaluating ECEPs.
Directing U.S. attorneys to give due consideration to compliance/ethics programs requires the
Department to provide the tools necessary for proper evaluation, which is not typically part of
legal education or practice. The Department should provide training to key DOJ personnel on
compliance/ethics program best practices. This training process might include dialogue with the
private sector about emerging best practices.
When cases arise, companies should have the burden of demonstrating not only that they have
designed their compliance/ethics program well, but also that they have evaluated it to make
sure this is so. Importantly, if a company otherwise makes a case that it has diligently sought to
institute an effective program meeting the FSGO standards, evidence from its program
evaluation that the program is not “perfect” should not be used against its bid for credit.
Penalizing an organization based on the findings of its own internal review is a recipe for halfhearted
inquiries and could seriously erode support for self-policing.
Recommendation 2.5 - The DOJ must communicate what it is doing with respect to the
treatment of ECEPs in cases.
The dearth of information about the impact of ECEPs in DOJ decision-making undermines the
FSGO policy of incentivizing the development of best practice compliance/ethics programs.
DOJ should provide a public accounting of the impact of ECEPS in DPAs and require that press
releases and other statements regarding cases of corporate or other organizational misconduct
explicitly discuss the role played by compliance/ethics. It also should collect and publish
aggregate data on the role of ECEPs in such cases. This Report cites some recent and
commendable examples of cases in which the Fraud Section of the Criminal Division has begun
to include more communication about its treatment of ECEPs in its cases, and we hope these
cases can help inform future DOJ’s policies and practices in this area.
Recommendation to the President of the United States Regarding All Other Executive
Branch Agencies
Recommendation 3.1 - The President should use available authorities to direct all
executive branch agencies to adopt, publicize, and apply clear written policies with
respect to how they promote and consider ECEPs in enforcement and other relevant
settings.
While DOJ is responsible for enforcement of criminal law – the only area to which the
Guidelines legally apply – other government agencies also have embraced the concept of
recognizing compliance/ethics. But government enforcement agencies have been too closemouthed
about the way they assess and account for compliance/ethics programs. The
President should address this shortcoming by directing agencies to promote effective
compliance and ethics programs and instructing them to establish and publish clear policies to
that effect.
Recommendation 3.2 - Each agency of the federal government should develop and
implement their own compliance and ethics programs, applying the FSGOs standards.
The President should use available authorities to direct all executive branch agencies to
do so as well.
The FSGO standards apply to all organizations, including governments. Requiring federal
agencies to adopt strong compliance and ethics programs would further promote the underlying
policy of the FSGOs while also helping to ensure that the human beings staffing federal
agencies understand and follow the laws and standards that apply to them. In addition, for
government agencies, having their own internal compliance programs would help them to better
understand such programs in the regulated community.
Recommendation to the President and Congress to Designate a Cross-Government
Working Group
Recommendation 4.1 - Using available authorities, the President and Congress should
establish a cross-government working group to create a Core Federal Model for
corporate compliance/ethics programs.
Federal agencies deserve applause for supporting ECEPs, but the lack of cross-government
coordination has resulted in a patchwork of inconsistent and duplicative demands. The
President and Congress should direct federal agencies to work toward a more consistent
government-wide approach that enables organizations to more effectively meet (or exceed)
expectations for compliance/ethics and, in turn, reduce the frequency of misconduct by
organizations and their employees. While some customization is appropriate to reflect the
intricacies of specific risk areas, organizations deserve a single government-wide model, based
on Sentencing Guidelines’ criteria for compliance/ethics programs.
Recommendations to Congress
Recommendation 5.1 - Congress should use its oversight authority to insist that federal
regulatory and enforcement agencies establish, and demonstrate that they are
implementing policies for the promotion, evaluation, and consideration of
compliance/ethics programs.
Congress can play an important role in encouraging organizational compliance/ethics efforts by
insisting on transparent and consistent policy implementation by federal regulatory and
enforcement agencies. Ideally, Congress and the Administration will agree on mutuallysupporting
actions to guide federal agencies and assure their full commitment to effective
compliance/ethics programs, but Congress should exercise its oversight powers to enforce this
commitment.
Recommendation 5.2 - Congress should consider the impact on organizational
compliance/ethics programs when it develops legislation related to law enforcement and
regulatory oversight of organizations by the federal government.
Congress should avoid legislation that unintentionally undermines the FSGO principles or
organizational compliance efforts. It should consider the views of compliance and ethics
experts when addressing issues of corporate crime and misconduct. For example, some
believe that poorly drafted whistleblower provisions or other reward programs designed to
encourage reporting of misconduct can erode compliance/ethics programs by encouraging
reporting outside the company as a first resort.
To ensure that its actions are consistent with the FSGO’s approach to compliance and to
organizational compliance/ethics efforts, Congress should consider the potential impact of
legislation on the compliance/ethics function.
Recommendation 5.3 - Congress should exercise its authority to ensure that at least one
member of the U.S. Sentencing Commission has experience with the FSGO.
Current law requires that at least three of the USSC’s voting members must be federal judges
and also that no more than four members may belong to the same political party. To emphasize
the importance of the FSGO, Congress should amend the law to require that at least one
member of the Commission has substantial knowledge of and experience with the FSGO.
Recommendation to the Courts
Recommendation 6.1 - Judges should exercise judicial oversight of DPAs and other
settlement agreements filed with the Courts to ensure that such agreements indicate on
their face the consideration of the FSGO criteria for “an effective compliance and ethics
program” and other FSGO factors in the development of the settlement’s terms.
Judges should assert their inherent authority to review settlement agreements that are filed with
the court to confirm consideration of FSGO principles, especially the compliance/ethics program
criteria, so that companies that have worked hard to ensure ethical performance and
compliance receive proper credit. Judges would not supplant the prosecutor’s judgment with
their own approach, but rather would verify the consideration of FSGO factors.
Judges will, of course, need to accept that additional requirements that supplement FSGO may
be appropriate in individual cases, while ensuring that the FSGO should remain the foundation
for evaluating ECEPs in enforcement and dispute resolution involving U.S. law.
Recommendations to the Private Sector
Recommendation 7.1 - While we have made recommendations to U.S. Sentencing
Commission on how the FSGO criteria might be improved, we encourage the private
sector to act now. Private sector organizations need to embrace the intent of the
Guidelines’ diligence standards and implement compliance/ethics programs that are part
and parcel of the business fabric and not the result of mere box-checking. This begins by
defining the mission of a company as comprising both strong financial performance and
a strong commitment to integrity. Proper positioning, empowerment, and autonomy of
the chief ethics and compliance officer must also be a priority.
Boards of directors and senior executives should demand compliance/ethics programs that are
effective in preventing and detecting misconduct and help build ethical and law-abiding cultures.
Corporate leaders should require regular assessment of company compliance and ethics efforts
including measures of the corporate culture and incorporate commitment to compliance and
ethics as a key factor in all performance reviews and compensation systems, including those of
senior officers. The board should ensure that the chief ethics and compliance officer is a senior
corporate officer with sufficient empowerment, autonomy, resources, and access to senior
management and the board of directors to be effective. The compliance and ethics program
should reach all parts of the business. Boards also should include at least one director with
expertise on effective compliance/ethics management and familiarity with FSGO standards.
Recommendation 7.2 - Invest in initiatives that raise the bar for “best practice.”
Businesses should consider the full range of management tools in their compliance and ethics
programs and never treat the FSGO as if they are a simple checklist. They should continue to
search for the most effective ways to reach their employees and others who act for the company
to ensure compliance with all applicable laws and ethical conduct. The FSGO are an excellent
framework, but managers should apply their experience and imaginations to ensuring their
employees always do the right things.

[end of quotation from Executive Summary]

II. Self-policing and the external police

The Report, relative to the societal goal of deterring corporate wrongdoing, takes an extremely strong stand on behalf of corporate self-policing by means of corporations having and following  ECEP's, and the Report makes strong advocacy for things needed to get corporations to have and follow ECEP's.

There are many actors external to self-policing by corporations who undertake significant roles in society's efforts to deter corporate wrongdoing. These include prosecutors, state attorneys general, governmental regulators, plaintiffs' lawyers, lawmakers and judges (call these parties the "external police").

The Report includes numerous recommendations directed to some of the "external police" (to wit, the Department of Justice, the President and other Branch Agencies, Congress, and judges), relative to what those external police should do in order to strengthen the "carrot and stick" regime for getting corporations to have ECEPs.  The Report does not otherwise say much about about what the external police do, or should do, to try to deter corporate wrongdoing, what the thinking and methods of the external police are in trying to achieve that goal, whether there could be improvements in how the external police go about their job, how the methods of the external police may impact corporate self-policing, or about how corporate self-policing and the efforts of the external police can or might be best melded to deter corporate wrongdoing on a combined basis.

It is assumed that the proponents of the Report were not intending the Report to be comprehensive about how society should go about trying to deter corporate wrongdoing.

It is submitted that it would have been better if the Report expressly acknowledged its limited and incomplete nature and if the Report had a little more discussion of how corporate self-policing fits into the bigger picture of society's efforts to deter corporate wrongdoing.  Failing to do that may contribute to thinking that is too narrow and potentially detrimental to societal goals of deterring corporate wrongdoing.  My further comments below will address deficiencies of the Report in this regard.

III. Preventing versus punishing after the fact

The approach extolled by the Report embodies a preference for achieving prevention under corporate ECEP's, compared to after the fact punishment, and the deterrence to others that results from after the fact punishment.  This preference is indicated in the below quotations from the Report.

Such misdeeds attest to the continuing need for tough law enforcement. But, meting out
punishment only after the damage is an inherently limited approach with little benefit to victims –the more so for behavior that skirts the law, but may not break it. This conundrum points to a
need for strategies that prevent misconduct or at least minimize its prevalence. One way is a
more positive approach of rules and incentives that encourage ethical conduct and stress
compliance with the law as an essential obligation that society imposes on companies. (Report, pp. 15-16)

The Commission also was concerned, however, about deterrence and believed that traditional,
after-the-fact enforcement efforts were not sufficiently effective in deterring organizational crime. Likened by some to enforcing speeding laws through random arrests, these efforts catch a limited number of offenders. But there is considerable doubt that the low incidence of such ex
post enforcement broadly deters other misconduct; it seemed to the Commission that many
offenses were uncovered only after substantial harm had occurred or escaped detection altogether. The Commission believed that to better promote prevention and deterrence,
companies themselves should be “conscripted” into the fight against corporate crime. (pp. 21-2)

I think it is fair to say that the external police are more focused on deterrence that can be achieved by after the fact punishment (or other "after the fact" intervention).  It is fine for the Report to assert that this is "an inherently limited approach" and that they are "not sufficiently effective in deterring organization crime," but the Report also exhibits a mindset that results in holes, defects, internal contradictions and other blindness about a bigger picture. 

IV. DOJ Prosecution Principles; FSGO Sec. 8B2.1(b)(6); accountability of individuals 

A big hole or blindness can be found in the Report's discussion  of  the "nine factors" under the DOJ Prosecution Principles that appears on pages 39 and 40 of the Report.

The Report urges that most of these nine factors also appear in the FSGO, with footnote 62  of the Report specifying that the factor of “remedial efforts” are considered under the definition of a creditworthy compliance program, see USSC §8B2.1 (Effective Compliance and Ethics Program), the factor of "collateral consequences" are referenced in USSC §8C2.8(a)(3) (Determining the Fine Within the Range) (Policy Statement), and "the only DOJ factor not accounted for in the FSGO is whether individuals are being held accountable for the offense."

The above statement that the only DOJ factor not accounted for in the FSGO is whether individuals are being held accountable needs to be read in conjunction with  FSGO Sec. 8B2.1(b)(6), which provides that:

The organization 's compliance and ethics program shall be promoted and enforced consistently throughout the organization through (A) appropriate incentives to perform in accordance with the compliance and ethics program; and (B) appropriate disciplinary measures for engaging in criminal conduct and for failing to take reasonable steps to prevent or detect criminal conduct.

The "appropriate disciplinary measures" referred to in clause (B) is a form of "after the fact" punishment that does not fit within the preference for prevention under the approach extolled by the Report.  The importance that proponents of the Report place on the actual presence and use of "appropriate disciplinary measures" is very unclear.  The fact that footnote 62 says the DOJ factor of whether individuals are being held accountable is not present in the FSGO is suggestive that clause (B) is empty window dressing and that the proponents of the Report have little interest in a corporation's use of disciplinary measures in fact under the FSGO.

Last April, I sent Dr. Harned the below email about FSGO Sec. 8B2.1(b)(6).

From: RDShatt@aol.com
To: pat@ethics.org
Sent: 4/24/2012 4:06:14 P.M. Central Daylight Time
Subj: Questions re: FSGO Sec. 8B2.1(b)(6)
Dear Dr. Harned,
Sec. 8B2.1(b)(6) of the Federal Sentencing Guidelines for Organzations provides that:
"The organization 's compliance and ethics program shall be promoted and enforced consistently throughout the organization through (A) appropriate incentives to perform in accordance with the compliance and ethics program; and (B) appropriate disciplinary measures for engaging in criminal conduct and for failing to take reasonable steps to prevent or detect criminal conduct."
Questions:
1. Does the Ethics Resource Center receive and study information about instances in which disciplinary measures have been taken by corporations, in order to evaluate whether corporations are employing disciplinary measures in an "appropriate" way, to evaluate the effectiveness of such measures, and to develop guidance, standards and procedures for corporations and their ethics officers concerning the use of disciplinary measures?
2. Does compliance and ethics extend beyond the strictly criminal, and does Sec. 8B2.1(b)(6) apply as well to corporate wrongdoing that gives rise to civil liability (i.e., are disciplinary measures to be used in the case of corporate wrongdoing that gives rise to civil liablity)?
3. Taking as an example the recent $25 billion robo-signing settlement agreement among the Justice Department, state attorneys general, and Ally Financial, JPMorgan Chase, Wells Fargo, Citigroup, and Bank of America, do you know whether, under the compliance and ethics programs of those banks, anything has happened or will happen as regards disciplinary measures being taken against officers and employees of the banks?
4. Taking again as an example the robo-signing settlement, what interaction do you think there is between, on the one hand, the actions of the banks in responding to and ultimately disposing of the civil action (or threat of civil action) by the Justice Department and state attorneys general, and, on the other hand, the use of internal disciplinary measures by the banks against officers and employees? Does the former (i.e., the actions in responding to and effectuating settlement with the government) facilitate the latter (i.e., the internal disciplinary measures)? Does the former impede or impair the latter in any way? Does the "no admission of wrongdoing" in the legal settlement and the lack of a determination whether wrongdoing has or has not taken place create difficulty in using internal disciplinary measures against officers and employees? Is there diversion of corporate resources and attention to the legal enforcement matter that deprives the compliance and ethics program of adequate attention and resources to do its job?
5. Questions 3 and 4 concern a very large legal case. There are probably hundreds of civil actions annually of all sizes against corporations in which corporate wrongdoing is alleged (which are frequently settled with no admission or determination of wrongdoing) , and about which questions such as those posed in 3 and 4 above could be asked. Do you feel ethics and compliance officers at corporations should be asking themselves and their management such questions?

Dr. Harned did not reply to me.

More generally, in a separate email to fsgocomments@ethics.org in March, I urged that the 20th anniversary review of the FSGO ought to include a review of what new learning, if any, has been acquired about the uses, effectiveness, and appropriateness of entity level liability versus officer and employee individual liability for purposes of deterring corporate wrongdoing. I said that, if nothing new has been learned in the past twenty years, then presumably the premise and foundation of the FSGO continue valid currently as 20 years ago. If, on the other hand, significant new learning has been acquired, I suggested the 20th anniversary review could include a reexamination of the premise and foundation of the FSGO that takes into account the new learning.  I received no response to my March email either.

There is much evidence that the external police are wrestling hard with the the individual accountability question, its relevance for deterring corporate wrongdoing, its relationship to entity level liability (including the "collateral consequences" problem), and other significant issues.  Public commentators have been very vocal on this matter the past few years. 

The Report notes that the DOJ can be sometimes opaque, and exactly what the thinking of the Department of Justice is on the matter of individual accountability under its Prosecution Principles may not be possible to pin down.

In 2009 Judge Rakoff of the Southern District of New York rejected a proposed settlement in the Bank of America/Merrill Lynch controversy because individuals were not being held accountable.  See this September 14, 2009 New York Times article.

See also these April 2012 Wall Street Journal articles  on the subjects of the SEC crackdown on fraud and the BP oil spill.

In sum, there appears to be a significant hole and blindness in the failure of the proponents of the Report to consider and  address questions and issues surrounding individual accountability.

Among other things, insofar as the DOJ and other external police consider individual accountability an important component in trying to deter corporate wrongdoing, the proponents of the Report  risk losing credibility with the external police and also with the public if it is perceived that Sec. 8B2.1(b)(6) is window dressing that the Report proponents do not assign any importance to.

V. Pre-offense ECEP versus "after the offense" compliance program

The mindset in favor of pre-offense ECEP of the proponents of the Report gets carried to great length and may conrtibute to an inability to adequately apperciate "inherent" shortcomings of pre-offense ECEP.

The proponents of the Report are bothered that the external police don't seem to have the same mindset in favor of pre-offense ECEP, and that the external police seem hung up on post-offense compliance programs.   For example, the Report says, "The lack of information on whether and how DOJ takes ECEPs into account in real cases was documented in a 2009 study, “Ethics and Compliance Enforcement Decisions – the Information Gap,” by the Conference Board.  The study found that while 'there are many publicly available examples' of cases where after-the-offense compliance program requirements have been included in a DPA or other government agreement, “there have been very few publicized cases of companies that have received credit under …DOJ … policies for having effective preexisting (i.e., in existence at the time of the offense) compliance and ethics programs.”  (Report, pages 41-42.)

Business ethicists have been long debating two approaches to pre-offense prevention  and which works or can work better, to wit, a rules based approach for governing conduct that is specific, detailed and lengthy, or a principles based approach which enunciates more general principles for governing conduct that are supposed to be applied by the actor in deciding the actor's conduct concerning particular facts and circumstances.  This debate has been suggestive that there are inherent limitations in the ability of society to achieve pre-offense prevention.  The proponents of the Report very much want pre-offense prevention to carry the day and the proponents may not be able to accept that external police, such as the DOJ, have a legitimate basis for their dubiousness about how successful pre-offense ECEP's can ultimately be.

An instructive recent example is the $25 billion "robo-signing" settlement mentioned in my above email to Dr. Harned.  Read the description of the wrongdoings set forth in the Complaint and then read the extremely extensive "after the offense" compliance program set forth in the Servcing Standards in Exhibit A to the consent judgement each of the five banks signed, of which the Ally Financial, Inc. consent judgement is an example.  Then ask why the banks' ECEP's (to the extent they had them) did not work, or whether any ECEP, could have prevented the wrongdoing.

Further, look at this Wall Street Journal article about bank pressures put on mortgage foreclosure workers, and consider whether this is a case where the banks should take steps to impose "appropriate disciplinary measures" on individuals pursuant to Sec. 8B2.1(b)(6).

It would seem there are significant internal contradictions caused by a mindset of the proponents of the Report in favor of pre-offense ECEP's, to wit, there is provision for imposing disciplinary measures on individuals pursuant to Sec. 8B2.1(b)(6), and the proponents evidence no interest in the actual use of such disciplinary measures in a situation where prosecutors and regulators opted for an extensive post-offense program. .

VI. Venturing outside the criminal law

A.  Federal agency non-criminal enforcement actions

Although the FSGO apply only to the criminal law, the Report makes a hard push for other Federal agencies to recognize and give credit for ECEP's in non-criminal enforcement actions of such other agencies. To the extent the FSGO in the criminal domain is beneficial for deterring corporate wrongdoing, there should be value in the concept being applied by other agencies outside the criminal domain.

It would seem that, if Federal agencies are going to take account of an ECEP in their non-criminal enforcement actions, the repeated use of the language "criminal conduct" in Sec. 8B2.1 and the related Commentary is in need of expansion to cover non-criminal conduct that nonetheless violates laws, regulations or standards that an agency is responsible for enforcing.

Further, it would seem, as mentioned above, to the extent other agencies consider individual accountability an important element in their trying to deter corporate wrongdoing, it would behoove the Report proponents to demonstrate that Sec. 8B2.1(b)(6) is supposed to have real bite and is not just window dressing.

B.  Private civil litigation

The proponents of the Report seem unwilling to venture outside the FSGO to another legal domain that offers potential for utilization in their mission in a way similar to the utilization of the FSGO they seek.  This other legal domain has aspects that are problematic for the mission of business ethicists.

Thus far, it seems a bridge too far for the Report proponents to investigate and consider the application of FSGO concepts in the private class action litigation domain.

For several years I have been urging business ethicists to investigate and consider whether private class action litigation undermines business ethics.  See, e.g., this article of mine  Does the civil liability system undermine business ethics?

For purposes of these comments on the Report, I wish to say briefly a few things.

1.  The compensatory element in private class action litigation

Private class action litigation has a compensation component, and any application of FSGO concepts in private class action litigation would need to separate out the compensatory element from any punitive or other deterrence motivated component of the civil litigation.  In this regard, it should be pointed out that some non-criminal Federal agency enforcement actions seek compensation for harmed parties, and the application of FSGO concepts to these would require separating the compensatory component from the punishment or other deterrent component.

On this point of compensatory purpose, proponents of the Report ought to consider the extent to which private class action litigation may suffer distortion in which plaintiffs' lawyers try to create a faux deterrent thrust of the case that obscures that the case for compensation is minimal or othewise defective and flawed.  See this objection I am filing in certain pending securities class action litigations against Citigroup and Bank of America.

2.  Holes in best in class programs

My next comment will attempt to describe a big hole in best-in-class (and other) compliance/ethics programs.  To do this, let me quote the below from pages 66-7 of the Report.

The majority of this Report focuses on the efforts needed by government officials to promote
compliance/ethics programs, as enforcement efforts and judicial decisions do impact business
practice. But it is equally important to acknowledge that it is not the responsibility of government to set the bar for the highest standard of corporate integrity. That is the responsibility of the private business sector.
Best-in-class compliance/ethics programs set and achieve goals that go beyond the literal
words of the FSGO. In fact, business leaders in these organizations are often quick to say that,
while they monitor enforcement actions and respond to changes in regulation, their primary
focus when it comes to compliance/ethics is weaving integrity into the DNA of a company,
encouraging ethical decision-making at all levels, setting a tone from the top, and otherwise
ensuring that their employees know they can and should raise concerns when they have them. In these organizations, aspiring to be in full compliance with the law is a given.
Unfortunately, the practices of these best-in-class organizations have not been adopted by
many companies where there is still an overwhelming emphasis on government enforcement to
“make the case” for compliance/ethics efforts. In a recent survey of compliance/ethics
professionals, the majority of respondents indicated that one of the most important reasons they
desired more information from the DOJ was that they needed help in reminding company
leaders about the value of the investment in their compliance/ethics programs.
Compliance/ethics professionals should not have to fight for resources to build good programs,
or rely on “worst case scenario” arguments to build corporate commitment to compliance and
ethics. Most business executives already believe that ethics is good business, and they
personally feel they are leading by example when it comes to ethical conduct. Yet few
corporate personnel with the title of compliance/ethics “officer” actually are officers in their
companies, and a regular discussion among compliance/ethics practitioners is that they feel
they do not have “a seat at the table” to make compliance/ethics relevant to their businesses.
On top of this, employees consistently say that compliance/ethics is not a priority at the highest
levels of their organizations.
In short, the managements of too many companies aim for what they perceive as minimally
required when it comes to compliance/ethics – in essence, they aim for the bottom. A major
flaw in this thinking is that – quite apart from the question of what good corporate citizens should be doing on their own without the threat of enforcement – the fact is that minimalistic, check-thebox compliance/ethics programs do not even satisfy the intent of the Guidelines.

Allow me to call attention to the following language from the above quotation

"enforcement efforts and judicial decisions do impact business practice" 

"business leaders in these organizations are often quick to say that, while they monitor enforcement actions and respond to changes in regulation"

"In these organizations, aspiring to be in full compliance with the law is a given".

In should seem obvious that outcomes of private civil litigation impact business practice, such outcomes should be monitored by corporations, and aspiring to be in compliance with law that is articulated by the courts in private civil litigation should be a given.

While there is lots of class action litigation that presents an opportunity for much guidance to a company that is party to the litigation and to other companies, and that all of the foregoing should be the case, something of a black hole is created when much of the litigation is settled with no admission of wrongdoing.

It may be enlightening to go back and read the entirety of the Executive Summary related to Challenge 1 above, including that DPA's, NPA's and other administrative/civil settlement agreements are detouring cases out of the judicial criminal system so that the FSGO cannot get applied by judges; the benefit to both the government and the corporation of eliminating the cost and risks of litigation. as well as avoiding the potentially devastating collateral damage, often to innocent parties, that can occur when a company is convicted of a crime; a failure of prosecutors to publicly recognize the role of ECEPs suggesting that they do not matter to prosecutors, which in turn creates the risk that corporations will scale back their commitment to compliance/ethic programs, allowing cynical executives to conclude that any violation justifies a DOJ conclusion that the compliance program was ineffective no matter how robust the program was in preventing other problems, and, as a result, additional resources are diverted elsewhere, an outcome potentially harmful to society at large and in opposition to what the DOJ probably intended.

Very similar things can be said about much class action litigation and their almost universal settlement in which there is no admission of wrongdoing, and so that the law does not get applied by judges and juries to determine whether there has been wrongdoing and what contstitutes wrongdoing under the law.  Benefits of eliminating the cost and risks of litigation are present, and, while settlement amounts can be very high, there could be exponentially higher liability under a jury verdict.  I and others have been arguing for years that judges rubber stamp settlements and attorneys fees with a great deal of indifference to "justice" and societal interests in large class action litigation.  Cynical executives have concluded that no matter what reasonable and ethical standards of conduct and business practice a corporation tries to implement to ward off class action litigation against the corporation, the plaintiffs' lawyers will find a theory or a ground for bringing a class action lawsuit that judges will not evaluate under any standards of reasonableness and that the corporation will be forced to settle.

If evidence of the foregoing assertions is desired visit http://overlawyered.com/ or Center For Class Action Fairness.

Also, given the the high priority stated in Challenge 1 that the FSGO are being undermined by settlements in criminal cases against bigger corporate defendants that make a detour around the judges for whom the Sentencing Guidelines were intended, it bears repeating that the Report proponents have no interest in the question of whether class action settlements may impair a corporation's ability to impose disciplinary measures against individuals under FSGO Sec. 8B2.1(b)(6).

In sum, the proponents of the Report could have more interest in  private class action litigation, and how it may affect or be used to further their mission.  All I have endeavored to say on the matter seems to fall on completely deaf ears.

3.  Scarce resources

The Report makes references to limited corporate resources for building good ethics and compliance programss.  I and others have argued that there is a lot of wasted corporate resources in unwarranted class action litigation that does not justify the corporate resources spent, and that could be more productively expended in other ways to try to deter corporate wrongdoing.  This seems to have fallen on deaf ears of proponents of the Report.

If there is interest in getting more information about the waste, again visit http://overlawyered.com/ or Center For Class Action Fairness.