By Paul J. McNulty and Thurgood Marshall Jr., practicing attorneys with Washington D.C. based law firms
Twenty years ago this month, the U.S. Sentencing Commission (USSC) came up with a groundbreaking answer. In promulgating the Federal Sentencing Guidelines for Organizations (FSGO), the USSC created “carrot and stick” incentives to foster stronger corporate self-regulation. The idea was built around a reality of American corporate law; when a crime is committed, a corporation stands in the shoes of its employees.
For a company that employs tens (if not hundreds) of thousands of employees around the world, that’s a lot of shoes.
When an employee of a company commits a crime, the FSGO model directs courts to consider the behavior of the company. Has the company diligently worked to prevent and detect wrongdoing, only to see an employee go bad despite its best efforts, or was the company turning a blind eye to or actively encouraging the murkier ways in which business sometimes gets done?
The guidelines direct judges to reward the company that genuinely tried to get it right through lesser penalties (the carrot), and severely punish the company that undertook poor self-policing through very high fines (the stick). This framework gives companies a clear incentive to adopt an effective compliance/ethics program (ECEP).
While compliance programs cannot root out all bad actors and corporate fraud schemes, some of which cause enormous suffering, the normalizing of corporate America’s ethics and compliance offices has clearly improved corporate conduct.
Research conducted by the Ethics Resource Center shows that when an organization has a strong compliance program, misconduct is reduced by as much as 50 percent. By simply creating or strengthening ECEPs, corporations have not only discouraged the frequency of wrongdoing, but improved their own ability to detect and appropriately respond when issues do take place.
By most accounts then, the corporate guidelines have worked. But there’s a catch. The FSGO are rarely applied to large companies because their crimes are not being adjudicated in the courthouse where the guidelines apply; they’re being “settled” down the street in the federal prosecutor’s office.
Instead of receiving an FSGO sentence, a company is now likely to get a deferred or non-prosecution agreement – so-called DPAs and NPAs – and this “alternative” approach to resolving corporate cases may be diminishing the incentives for self-policing created by the guidelines.
The FSGO was designed to apply to judges. Prosecutors who negotiate DPAs and NPAs are not required to explain how a company’s efforts to rigorously self-police influenced the outcome of the case.
The FSGO give corporations incentives to self-police and aim high on ethics. If they are allowed to wallow and are not applied will they simply become irrelevant? Instead of promoting ethical cultures, will executives lower the bar?
Now consider what could happen if the guidelines were used as a framework for the 25 government agencies now involved in regulating and enforcing corporate conduct. Their universal application would allow America’s executives to confidently invest their energies in initiatives that will reduce the likelihood of corporate crime while avoiding the entanglements of deciphering a myriad of enforcement standards.
The FSGO’s 20th anniversary is the right moment to examine the effectiveness of the USSC’s pioneering work. As part of an independent Advisory Group established by the Ethics Resource Center, we are considering their implications for public policy. With the help of 20 distinguished colleagues and public comments, we will consider the following questions:
By using DPAs and NPAs to “detour” corporate cases out of the sentencing process where the FSGO incentives are supposed to apply, are prosecutors actually keeping the promise to reduce penalties for companies that undertake rigorous compliance/ethics efforts?
With a host of regulatory and enforcement agencies establishing requirements for corporate compliance programs, is government speaking with a consistent voice, or through a patchwork of perspectives?
What responsibility does Corporate America have to voluntarily imbed the principles of the guidelines without “the carrot” or “the stick” to provide motivation?
Beginning today, we invite a robust public discussion of the draft report under review by the Advisory Group. With input from businesses, law enforcement, academics, and the public, we can complete this important work designed to protect honest workers who get caught in the fallout of scandalous actions by co-workers gone rogue.
The draft report may be downloaded at www.ethics.org/fsgo or you can post comments while looking at the draft at fsgo.ethics.org. Comments and feedback should be directed to FSGOcomments@ethics.org.
Thurgood Marshall Jr. and Paul J. McNulty are practicing attorneys with Washington, DC-based law firms. Marshall, now at Bingham McCutchen, was on the senior staff at the Clinton White House. A former Deputy Attorney General during the Bush Administration, Paul J. McNulty now leads the Business Crimes and Investigations practice at Baker & McKenzie. He authored the memo outlining what prosecutors must weigh when accusing an organization with criminal conduct. That memo is now part of the U.S. Attorney’s Manual.