Federal Sentencing Guidelines
In 1991, the United States Sentencing Commission promulgated guidelines to govern the imposition of sentences by Federal Judges on organizational defendants. Referred to as the Federal Sentencing Guidelines for Organizations (FSGO), the guidelines impose harsh penalties upon organizations whose employees or other agents have committed federal crimes. Penalties include restitution, remedial orders, community service, and substantial fines, based upon a point system for determining severity of offense.
The guidelines encourage organizations to develop "effective programs to prevent and detect violations of law," and prescribe seven "types of steps" that should be included in an effective program. Where organizations demonstrate an effort to implement the seven steps, lower sanctions are levied by Federal Judges. The seven steps involve:
- Organizational implementation of compliance standards and procedures that are reasonably capable of reducing the prospect of criminal conduct.
- The assignment of high-level personnel to oversee compliance with such standards and procedures.
- Due care in avoiding delegation to individuals whom the organization knew, or should have known, had a propensity to engage in illegal activities.
- Communication of standards and procedures, by requiring participation in training programs or by disseminating publications that explain in a practical manner what is required.
- Establishing monitoring, auditing, and reporting systems by creating and publicizing a reporting system whereby employees and other agents can report criminal conduct without fear of retribution.
- Enforcing standards through appropriate mechanisms, including, as appropriate, discipline of individuals responsible for the failure to detect an offense.
- Developing appropriate responses to offenses by taking all reasonable steps to respond appropriately and to prevent further similar offenses, including any necessary modification of programs.(1)
The Guidelines apply to almost all types of organizations including corporations, partnerships, unions, not-for-profit organizations and trusts. One significant aspect of the Guidelines is that each organization is responsible for the wrongful acts of its employees as long as the employees were acting in their official capacity. The theory is that each organization shares a degree of culpability if an employee acts in an unlawful manner, even if the organization did not know of or approve of their actions.
Research by the ERC indicates that, in organizations with ethics programs in place, one in four employees observe misconduct in the workplace(2). While many large corporations have ethics infrastructures, small- to medium-sized organizations are especially at risk for ethical misconduct and subsequent sanction by the FSGO. Organizations with fewer than 500 employees are less likely to have formal ethics programs in place(3), yet many are subject to Federal Sentencing Guideline regulations. Additionally, as candidates for mergers and acquisitions, small- to mid-sized organizations are better positioned if they have taken steps to bring themselves into compliance with FSGO, and pose no additional risk to large corporate purchasers.
New Legal Requirements
Revisions to the Federal Sentencing Guidelines for Organizations which take effect in November 2004 contain new requirements for companies to heighten their efforts to detect and prevent violations of law, and to implement efforts to establish an ethical culture.
Measurement of Program Effectiveness
Among the changes, the Guidelines require high-level personnel to take steps to measure the effectiveness of their programs. Specifically, recommendations that take effect require that businesses:
- Ensure that the organization "has an effective compliance and ethics program";
- "Evaluate periodically the effectiveness of the organization's compliance and ethics program"; and
- "Periodically assess the risk of criminal conduct and take appropriate steps to design, implement, or modify each requirement to reduce the risk of criminal conduct identified through this process."
This requirement of the FSGO applies to the majority of companies.
Where companies have already implemented some form of ethics and compliance program, it is now necessary to gather data to measure the impact of the program on employees' perceptions of company standards. In cases where organizations do not have an ethics program, it is even more crucial to implement an ethics/compliance program effort, and to be able to demonstrate its impact.
Regardless of the status of a company's effort to address ethics and compliance, the collection of data and comparison with the ERC Ethics Index™ will serve as a key source of information regarding issues in need of corporate leadership attention.
2. Ethics Resource Center. (2003). National Business Ethics Survey. Washington, DC: Ethics Resource Center.
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