These costs have the potential to overwhelm a small business, especially if they are in addition to fines. And, according to the U.S. Sentencing Guidelines, organizational probation can last as long as five years.
Indeed, every business benefits from an effective compliance program. Small businesses, like large corporations, are subject to a plethora of environmental, health and safety, labor, financial and other compliance regulations. If a violation occurs that results in a conviction and a federal sentencing proceeding, all companies, whether large or small, that have more than 50 employees will be sentenced to a term of probation-with a condition that the company establish and maintain an effective compliance program.
In fact, small businesses may feel the effects more than larger companies because they have fewer resources with which to respond.
The cost of a compliance monitor
A compliance monitor may be an expert engaged by the court that will be afforded access to all material possessed by the organization that is necessary for a comprehensive assessment of the court-appointed compliance program. In addition, compliance monitors may conduct a reasonable number of unannounced examinations of the company's books and records at appropriate business premises.
The potential costs to small businesses of this type of corporate scrutiny are prohibitive, to say the least, and businesses are not given the final word as to whom the court may appoint as their corporate monitors. In at least one case, the court appointed an outspoken critic of the corporation as that corporation's compliance monitor.
In reality, there's nothing to prevent the court from appointing a $250-an-hour environmental consultant and giving that consultant the authority to spend a considerable amount of time on site. The costs of this compliance monitor may add up to a tremendous sum over the term of probation. Of course, all of those costs are, by law, to be borne by the company.
A harsher climate for compliance violators
The costs of noncompliance that result in violations of federal law are strategically and deliberately high. The government takes the position that the higher the penalties for noncompliance, the greater the likelihood that businesses will establish and maintain an effective compliance program and, in turn, comply with the law.
Since 1991, when the United States Sentencing Guidelines became effective, the climate for violators of federal criminal law has grown considerably more harsh. According to a 1993 article in the Environmental Law Reporter, the number of environmental-crime indictments increased from 40 in 1983 to 125 in 1991, while fines increased from $341,100 annually to $74,583,348.
Since that time and through fiscal year 1996, the U.S. Department of Justice, through the efforts of U.S. Attorney's offices and the Environmental Crimes Section, has obtained more than 1,800 convictions and secured more than $470 million in federal criminal penalties. Of these convictions, 1,348 were against individuals and 558 were against corporations. This has resulted in the imposition of more than 500 collective years of imposed imprisonment, of which more than 370 years account for actual confinement.
Avoiding organizational probation
In many cases, organizational probation and compliance monitors are not sentencing options. They are requirements imposed by the U.S. Sentencing Commission on all federal sentencing courts. According to the guidelines, the court must place your company on organizational probation if you have 50 or more employees at the time of the sentencing and do not have an effective compliance program in place to prevent and detect violations of law.
There are probably thousands of small businesses in western Pennsylvania-including construction companies, restaurants, small manufacturers and distributors (see related article on the construction industry)-that have 50 employees but not an effective corporate compliance program in place.
If these companies were to be found guilty of federal criminal violations, the court would be forced, under the guidelines, to impose organizational probation with a condition that these companies establish and maintain an effective compliance program. This, of course, would be in addition to fines, restitution, remedial orders and other remedies and sanctions deemed appropriate by the court.
But, if those same companies had an effective compliance program in place that could be documented for the court, it would show that they had tried, in good faith, to prevent and detect violations of law. This good-faith effort may be enough to stave off the imposition of both organizational probation and a compliance monitor.
In addition, the guidelines allow the court to impose lighter sentences for companies that have an effective corporate compliance program in place.
More importantly, however, the case may never even reach the courts if the government is persuaded that the company made a good-faith effort to comply with the laws, had an effective compliance program in place, voluntarily disclosed the violation and cooperated with the federal regulating agency.
Keep in mind that an effective compliance program does not mean that it has to be perfect. As stated by the Sentencing Commission: "Failure to prevent or detect the instant offense, by itself, does not mean that the program was not effective."
Protecting yourself and your employees
Corporate compliance programs do more than keep the court and the compliance monitor off your doorstep. They also can prevent violations from happening in the first place. The courts look favorably on a compliance program that is reasonably designed, implemented and enforced so that it generally will be effective in preventing and detecting violations of law.
An effective compliance program normally includes the following: a code of conduct; detailed policy statements; a high-level compliance officer; targeted training programs; a mechanism to allow employees to ask questions, provide feedback and report violations; and a system to audit and monitor the effectiveness of the program. To be effective, a corporate compliance program also needs the support of the highest officials of the organization, including board members, the chief executive officer and other executives who play a role in setting the policies for the organization.
The ethical and legal policies of a company define the organization. Specific policies and guidelines in risk areas, such as environmental management, employment issues and health-care billings, help the employees understand the company's standards and allows them to do their jobs more efficiently.
Compliance programs may also increase employee morale. When employees know that a new in-house safety program is in place, for example, they realize that you care about their health on the job and have taken steps to ensure a safer work environment. In addition, employees feel like they are more a part of the organization and have a voice and role in corporate good citizenship. This is especially true when a compliance program has a mechanism that allows employees to provide feedback to the organization and report violations of the company's policies without fear of retaliation or repercussion.
Compliance programs may also protect company officers, owners and managers from criminal liability under the Responsible Corporate Officer doctrine. That doctrine applies to anyone who supervises a person who violates a public welfare statute. This can include a worker's im mediate supervisor, all the way up to the owner of the company.
Under the doctrine, the actions of the employee who violates such a statute may be imputed to the supervisor by virtue of his or her position of responsibility. However, an effective compliance program, if diligently monitored and enforced, may serve as a defense to this theory of liability.
Under the guidelines, the courts can require companies that do not yet have compliance programs to craft and implement one as part of their sentences. And believe me, post-sentencing is not the ideal time to create a compliance program, particularly if your company is under the watchful eye of a compliance monitor and paying a criminal fine.
The best thing you can do for your business is to institute an effective corporate-compliance program that will be able to grow with your business and define your ethical and legal policies and compliance standards that you expect from all employees in general and targeted high-risk areas. Make sure it includes well-articulated policies and standards, coupled with training, monitoring and enforcement.
These efforts may prevent a violation from occurring. However, in the event that a violation still occurs, your company will be well-positioned to persuade the government not to take criminal action against the company. But if criminal action is taken, the company, under the guidelines, will receive more lenient treatment than the company that does not have in place an effective program to prevent and detect violations of law. An effective compliance program may also serve as an affirmative defense in certain circumstances.
In this day and age, an effective corporate compliance program is the industry standard. Any company that operates below industry standards will lose its competitive edge and fall behind its competitors. Don't let this happen to your business.
Charles A. De Monaco serves as of counsel for Pittsburgh-based law firm Dickie, McCamey & Chilcote, PC, and as chairman of the firm's Corporate Compliance Group. He previously worked for the U.S. Department of Justice and served as lead counsel for the United States in the criminal prosecution of U.S. vs. Exxon and Exxon Shipping Co. for the Exxon Valdez oil spill.
Things to consider when establishing a corporate compliance program
Did you know that, if your company exercises significant and functional control over a subsidiary, your company may be held liable for that subsidiary's actions under certain circumstances? Certainly, a corporate compliance program may implicate corporate governance issues, so you should be aware of how to deal with them. Consider the following:
- Determine director liability. In September 1996, the Caremark Delaware decision held that directors of public companies may be personally liable to stockholders for violations that result in losses to the company if the company does not have an effective compliance program that was diligently monitored by the board. It is imperative that you know how directors might be held liable to stockholders in the event of a compliance violation.
Directors and chief executives have the obligation to ensure that the company has in place an effective compliance program that is being diligently monitored. Some boards have a special audit and compliance committee that works jointly with the chief compliance officer to be certain that this important obligation is being met.
- Be aware of the responsible corporate officer doctrine. This is a broad theory of liability that may apply to all supervisors of employees who violate a public-welfare statute. Make sure you know what this doctrine means and who in your organization is at risk.
- Conduct a legal audit. Make sure you know all the laws to which your company must adhere, including environmental, health and safety, accounting, labor and employment, so that you may identify significant risk areas to your business and establish an effective compliance program.
- Conduct a compliance audit. The company should periodically audit the compliance program to ensure that it is functioning properly and is adjusted, as needed, over time. This feedback must be presented to those in control of an organization so that policies and procedures may be modified to make the compliance program as effective as possible.
- Conduct an internal investigation. Respond appropriately to allegations from employees and audit findings that identify areas of noncompliance and take appropriate action.
- Be prepared for litigation. No matter how good your compliance program may be, violations may occur that lead to litigation. An effective compliance program will help your company deal with the litigation and may offer your company the best defense and mitigation to the allegations.