The Independent Counsel

Compliance


Avoid or Mitigate Penalties Through a Compliance Program


BY J. ALDEN LINCOLN

Federal indictments of companies have jumped tenfold of late from about 40 per year in the early 1980s to more than 400 nationwide, and state indictments also have increased. Intensified enforcement of "white collar crime" laws as well the implementation of the Federal Sentencing Guidelines (the "Guidelines") is increasing the need for companies to implement internal compliance programs.

Many of the indicted companies operate legitimate businesses whose normal activities have run them afoul of laws and regulations. Such laws may cover matters such as environmental protection, foreign sales, federal and state government procurement, medical device and drug testing and marketing, and the like.

A company that implements an effective compliance program under the Guidelines and cooperates with law enforcement agencies will suffer less severe penalties in the event of a criminal indictment than a company with no such program. Fines may be reduced by as much as 90%, and the company may avoid court supervised compliance. In addition, directors and managers of corporations may avoid being singled out for discipline or personal liability.

The Corporate Counsel Quarterly reported recently that 15 out of 16 state attorneys general afford more lenient treatment to companies that employ effective compliance programs. On the federal level, the mitigation incentives under the Guidelines require judges to credit companies for effective compliance in determining sentences to be imposed for any number of criminal violations.

As former U.S. Attorney General William Barr wrote recently, "companies doing business in the United States cannot afford to disregard the Sentencing Guidelines."

Two recent events in Massachusetts illustrate the difference that a compliance program can make. A Haverhill, MA division of C.R. Bard manufactured and sold faulty heart catheters, and admitted in April 1994 to falsifying test data to inflate the safety of their devices. There is no indication that the company had followed a compliance program. The result: a $61 million criminal penalty levied against C.R. Bard, and six former executives brought under criminal indictment.

The John Hancock insurance company got off much more lightly in a recent scandal involving its influence buying of state legislators. The company admitted to the Massachusetts Ethics Commission in March 1994 to having committed gross violations of Massachusetts law through the lavish entertaining of state legislators. The company had provided legislators with golf outings at resorts in the South and the Caribbean, meals, and sports tickets, spending over $30,000 on these activities over a period of six years.

Although the company paid a $1.1 million fine, it suffered no criminal indictments of any of its executives. The Boston Globe reported that Assistant U.S. Attorney Jonathan Chiel, chief of the criminal division, chose not to indict "for a number of reasons, including [Hancock's] cooperation".

The Guidelines establish the following criteria for an effective compliance program:

  1. Establish company-wide mandatory standards and procedures to avoid criminal violations;
  2. Appoint a high level manager to oversee compliance;
  3. No delegation of authority to persons viewed as likely to violate the law;
  4. Train and communicate proper standards to employees;
  5. Establish monitoring and reporting procedures;
  6. Enforce standards through discipline;
  7. Formulate appropriate policy responses to violations;
  8. Implement changes to prevent similar offenses.

A survey of the company's compliance needs should identify areas that need to be addressed and to determine the measures that need to be taken. This survey should be conducted by a lawyer to increase the likelihood that the communications will be covered by the attorney-client privilege. The results of such a survey can be used to design and implement a program bringing the company into line with these guidelines.

Comment: Regular compliance surveys within your company will help detect violations of the law and/or identify possible problem areas. Implementing a compliance program should help prevent those violations from occurring.

© ASSOCIATION OF INDEPENDENT GENERAL COUNSEL 1994; (all rights reserved). This article is not intended as legal advice. Consult a qualified attorney for assistance concerning a specific issue or problem.