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ERC Report: Compliance and Ethics Programs Deserve More Recognition

Jaclyn Jaeger | May 3, 2012

More than two decades after the U.S. Sentencing Commission implemented the U.S. Sentencing Guidelines, a number of substantial challenges remain that could cause companies to reduce their commitment to ethics and compliance programs.

That's according to the latest research from the Ethics Resource Center (ERC), which concluded that pro-compliance corporate practices and government policies created by the U.S. Sentencing Guidelines are not working together in the most effective and self-sustaining ways.

According to the ERC, the U.S. Sentencing Guidelines incentivize corporations to self-police and aim high on ethics. If these incentives are not consistently applied in prosecutorial decisions, however, will the Guidelines become irrelevant? Without an incentive to promote ethical cultures, will executives lower the bar? And if so, will corporate misconduct increase?

To address the answers to these questions, the ERC assembled a 23-member advisory group of distinguished law enforcement officers, federal judges, prosecutors, academics and compliance and ethics professionals. In its report, “The Federal Sentencing Guidelines for Organizations at Twenty Years,” the advisory group examined the Sentencing Guidelines, its successes and failures over the past two decades, and opportunities for improvement.

The Report pinpoints four specific challenges:

Few U.S. Sentencing Guideline-related cases involve large companies

Corporate offenders are not receiving credit for their ethics and compliance programs at sentencing because cases are being steered out of the traditional criminal justice process. Instead, prosecutors are opting to resolve most cases involving large companies through deferred-prosecution agreements, non-prosecution agreements, or other settlement agreements.

Justice Department 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 evidence to show that companies are receiving the promised consideration for their compliance programs and prosecutors rarely point to compliance/ethics programs when publicly discussing case resolutions.

There is lack of consistency in policies toward ethics and compliance programs across the various government agencies that play a role in corporate law enforcement and regulation.

More than 20 federal agencies play a role in enforcing laws that govern corporate conduct, but each agency has its own approach to corporate compliance/ethics programs. Thus, companies are left to parse the differences.

Lack of consistency is compounded by a lack of transparency. Discerning an agency's policies on ethics and compliance programs is often difficult, as well as determining what elements agencies look for in evaluating compliance/ethics programs.

Many compliance/ethics programs fall short of their potential because portions of the U.S. Sentencing Guidelines remain under-emphasized 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 “one-size-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.”

Too many business executives take a “check the box” approach to their programs, rather than satisfying the full intent of the FSGO

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.

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.

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.

The Advisory Group concluded that more consistent promotion and recognition of compliance and ethics programs by the U.S. enforcement community would incentivize businesses to invest more fully in self-policing efforts against corporate crime.

The full report can be read here.