The Critical Importance of a Corporate Compliance Program

Businesses often place tasks that produce no immediate revenue on the back burner.  One of these seemingly inconsequential chores- initiating and enforcing an effective legal compliance program- should never be overlooked.

A legal compliance program is an internal set of procedures designed to prevent engaging conduct that could give rise to a civil investigation or criminal prosecution.  When they think of corporate wrongdoing, most people picture fraud on a mass scale, Ponzi schemes, book cooking, and insider trading.  In fact, corporate wrongdoing encompasses a much wider range than that, and often covers acts undertaken by non-management employees.

Whenever a corporation is indicted by the government for illegal acts undertaken in its name, senior executives must answer for the conduct of its employees.  Presuming the conduct did, in fact, occur, the severity of the punishment imposed can be significantly reduced if it can be demonstrated that the corporation adopted and enforced an internal compliance program.

Federal sentencing guidelines reference a “culpability score,” essentially a calculator for determining fines when a corporation is found guilty of criminal wrongdoing. The higher the culpability score, the greater the fine imposed. An important factor in calculating the culpability score is the existence and effectiveness of a compliance program.

The guidelines contain a rebuttable presumption that a corporate defendant’s compliance program was not effective if senior management officials within the company participated in or permitted criminal conduct, or looked the other way when they saw it occurring.  In other words, guilty until proven innocent.

However, under newly drafted amendments to the guidelines, the presumption would not apply if all of the following conditions are met: (i) the individual(s) responsible for overseeing the compliance program directly reports to senior management; (ii) the compliance program detected the offense before discovery outside the organization or before such discovery was reasonably likely; (iii) the organization promptly reported the offense to appropriate governmental authorities; and (iv) no individual responsible for the compliance program participated in, condoned, or been willfully ignorant of the offense.

These rules not only demonstrate the vital importance of having a program, but also show that simply having one is not enough. If a corporation is convicted, it must demonstrate that the program was “effective.”  The rules include some guidance on measuring the effectiveness of corporate compliance programs, and state that a key measure of its effectiveness is the extent to which the program outlines “reasonable steps” for the corporation to take when it detects criminal conduct through its compliance program.  Reasonable steps can include providing restitution to victims, self-reporting, cooperation with the authorities, an assessment of existing compliance programs, and the use of professional advisers.

An effective compliance program includes proper oversight, and must also set forth steps that must be taken when criminal conduct is detected through that oversight.  Companies that are considering a corporate compliance program would be well advised to seek the assistance of outside counsel.

Compliance with the laws, rules, and regulations that apply to your business is just as important as sales.  After all, what use is money that you can’t keep?



Author: Seth Heyman
Seth D. Heyman is a California attorney with extensive experience in advertising and marketing law, corporate law, contracts, governmental regulations, international business, and Internet law. He has counseled numerous successful companies, both public and private, and was responsible for regulatory compliance, contract management, corporate governance, and HR best practices for multiple organizations in many diverse industries, including marketing, telecommunications, energy, and technology development. He offers insight and guidance on federal and state direct mail, TV, radio, telemarketing, and Internet marketing laws, as well as online promotions, Internet privacy, data protection regulations, and similar matters.

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