Magazine article Risk Management

New Rules on Corporate Sentencing

Magazine article Risk Management

New Rules on Corporate Sentencing

Article excerpt

THE 1980S WERE A DECADE punctuated by insider trading, savings and loan fraud, environmental pollution, civil and criminal Racketeer Influenced, Corrupt Organizations Act (RICO) cases and international criminal prosecutions. During those years,judges imposed a wide range of punishments for the same crime. However, the punishment doled out by the courts was usually directed at individuals; the corporation at large was seldom brought to trial. A white-collar defendant who pleaded guflty to a given charge, paid the fines and confessed to a lapse in judgment might have gotten off with probation and community service. A less sympathetic judge might have sentenced the same defendant to jail.

The need for sentencing consistency in cases of corporate wrongdoing grew throughout the decade and prosecutors are now making good on their promise to attack crime in the executive suites. Novel notions of what constitutes criminal behavior are bringing hefty fines for corporate abuses once attacked solely through civil suits. Not only is the government using criminal laws to punish errant Wall Street inside traders, but also to police defense contractors and the environment and guarantee workplace safety. Indeed, the rise in white-collar prosecutions has resulted in many executives trading their boardroom pinstripes for prison stripes.

As more executives serve time in prison, corporate wrist slapping will soon become outdated as an effective means of dealing with white-collar crime. In fact, in November 1991, guidelines promulgated by the U.S. Sentencing Commission for sentencing business organizations took effect, requiring payment of restitution, disgorgement of ill-gotten gains and mandatory fines amounting to millions of dollars for a wide variety of corporate crimes.

The goal is to see that everyone convicted of the same crime gets the same treatment. The guidelines will dramatically increase the sanctions that are typically imposed on corporations convicted of crimes, even for a variety of criminal offenses such as commercial bribery, tax evasion and customs violations.

The guidelines, in effect, abolish the discretion U.S. federal courts have historically exercised in sentencing organizations and are a radical departure from the way corporations and businesses were treated in the past by federal law enforcement agencies. In addition, the guidelines may be one of the most significant recent developments affecting risk management functions in the corporation.

Due Diligence BECAUSE IT IS CRITICAL that compliance design reasonably ensures that all types of criminal conduct have been anticipated and prohibited, companies need to familiarize themselves with rapidly evolving developments in criminal legislation and regulation, law enforcement priorities and judicial interpretations. The dramatically increased risks of criminal investigation and prosecution in the United States, and the focus of the sentencing guidelines on preventive compliance, are incentives for companies to develop compliance prevention and detection programs. Indeed, any corporation that does not act promptly to implement such programs or to assess existing programs against the guideline standards could face not only harsh penalties from a criminal conviction but also shareholder derivative actions for not having undertaken precautionary measures.

Companies must undertake the following due diligence steps in establishing a guidelines compliance program: establish compliance standards and procedures that reasonably reduce the prospect of criminal conduct (for example, through formal written programs for large corporations); assign compliance oversight to high-level personnel (for example, persons with substantial control over the organization or those with a large role in policy making); and screen employees adequately to prevent delegating substantial discretion to workers who the company "should have known" might engage in illegal conduct. …

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