By Theodore Banks and Gretchen Winter
The concept of “discipline” is an important part of a compliance program, but it arises in two slightly different situations. First is the notion, under the U.S. Sentencing Guidelines Manual (USSG), that a compliance program should include incentives for employees to follow the program, along with punishment or discipline for failing to do so. Second is the concept that a company should have a rational program of employee discipline for various policy violations. But more than just being seen as an attribute of compliance, consistent discipline is also an attribute of good management practices in general.
Chapter eight of the USSG deals with sentencing of organizations. The chapter covers various considerations that go into determining a sentence when an organization is convicted of a federal crime. In most cases, an organization’s punishment is in the form of a fine, which is determined by a number of factors, including the nature of the offense, a prior history of violations, and the extent to which the organization cooperated with the government. The punishment may also take the form of restitution, disgorgement, debarment from federal contracts, and a period of probation.
The guidelines also include the important concept of the “effective” compliance program. US law generally imposes liability on an employer for actions of an employee, even if the actions were not authorized or directed. But how can an organization credibly assert that the actions of an employee, which may have benefitted the organization, were not authorized? The guidelines provide the answer: If an organization can show that it used due diligence to prevent and detect criminal conduct, it may qualify for a reduction in any fine that might be imposed for violation of a federal criminal law. Due diligence is established by following certain basic principles of compliance that the guidelines outline, which essentially provide a credible basis for the assertion that the organization had no intent to violate the law. In essence, the guidelines provide the basis for the organization to say, “Look at all we did to try to prevent any sort of violation by our employees. What more could we have done?”
The guidelines outline the basic attributes of a compliance program designed to promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law. This article will focus on one of those attributed, the concept of discipline or punishment. Specifically, the guidelines provide:
(6) 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 concept of considering discipline of individuals was specified in the Sentencing Reform Act, which allows a court to take into consideration, when sentencing an organization, any measures taken by the organization to discipline responsible employees.
The guidelines note that while adequate discipline of individuals responsible for an offense is a necessary component of enforcement, the form of discipline that will be appropriate will be case specific. So, while the guidelines do not specify what kind of discipline should be imposed for violations, the organization will be expected to demonstrate that it has an appropriate disciplinary program or policy, and that it is fairly applied. Just having a policy on paper, which is ignored in reality, will not be sufficient.
Courts have recognized that employees may be under pressure, for example, to increase profits and “do whatever it takes” to meet quarterly or annual goals. A corporate policy that dryly recites the requirement that employees must obey various laws often gets overlooked, particularly when all or part of a salary is tied to meeting goals. Thus, an effective compliance program must have sufficient “teeth” to punish employees for violating the law or company policies. A policy of punishment for violations should be designed to make it clear to employees that there will be consequences for illegal actions, and the pressure to make profits will not excuse the conduct.
If a violation is detected, the guidelines also require that:
(7) After criminal conduct has been detected, the organization shall take reasonable steps to respond appropriately to the criminal conduct and to prevent further similar criminal conduct, including making any necessary modifications to the organization’s compliance and ethics program.
So, one factor in determining if a compliance program is “effective” as the guidelines define the term, and therefore worthy of justifying a sentencing reduction, is the response of the organization in the face of a criminal violation. One aspect of the organization’s response is the discipline of employees who may have been involved.
In the guidance issued by the Department of Justice on prosecuting corporations, it noted that it would consider the “the corporation’s remedial actions, including, but not limited to, any efforts to implement an adequate and effective corporate compliance program or to improve an existing one, to replace responsible management, to discipline or terminate wrongdoers, or to pay restitution.” The existence of employee discipline for the violations is an important factor in negotiating with a prosecutor in an attempt to avoid an indictment or civil action. If a company failed to punish a wrongdoer, it will be hard to convince a prosecutor that the company was serious about its commitment to abide by the law.