1 HOW THE ORGANIZATIONAL SENTENCING GUIDELINES AFFECT HOW THE ORGANIZATIONAL SENTENCING GUIDELINES AFFECT COMPLIANCE AND ETHICS PROGRAMS FIFTH ANNUAL PHARMACEUTICAL REGULATORY AND COMPLIANCE CONGRESS WASHINGTON, D.C. NOVEMBER 15, 2004 JOHN R. STEER COMMISSIONER AND VICE CHAIR UNITED STATES SENTENCING COMMISSION

2 “CARROT AND STICK” Operation of the Criminal Penalty Structure Encourage partnership in crime control Encourage partnership in crime control Reward self-policing, self-reporting, and voluntary disclosure Reward self-policing, self-reporting, and voluntary disclosure

3 FINE RANGE §§8C2.7; 8A1.1 n.2 Fine Range x = Seriousness of the Offense Culpability BASE FINE MULTIPLIERS Minimum Maximum Exception Environmental, Export, Food/Drug Violations

4 DETERMINING CULPABILITY SCORE §8C2.5 BASE OFFENSE LEVEL 5 POINTS BASE OFFENSE LEVEL 5 POINTS Level of Authority + 5/+4/+3 Level of Authority + 5/+4/+3 Size of Organization + 2 or + 1 Size of Organization + 2 or + 1 Prior History + 2 or + 1 Prior History + 2 or + 1 Violation of an Order + 2 or + 1 Violation of an Order + 2 or + 1 Obstruction of Justice + 3 Obstruction of Justice + 3 Effective Program to Prevent and Effective Program to Prevent and Detect Violations of Law - 3 Detect Violations of Law - 3 Self-Reporting, Cooperation and - 5/ - 2 Self-Reporting, Cooperation and - 5/ - 2 Acceptance of Responsibility - 1 Acceptance of Responsibility - 1

5 INCENTIVE STRUCTURE: WHAT’S IT WORTH? $40,000,000 $500,000$10,000,

6 GENESIS OF 2004 AMENDMENTS Decade of compliance and business ethics practice Decade of compliance and business ethics practice Caremark case and corporate governance Caremark case and corporate governance Expanded field of practitioners Expanded field of practitioners Legislative and regulatory responses to corporate scandals Legislative and regulatory responses to corporate scandals Sarbanes-Oxley Act, SEC, NYSE Sarbanes-Oxley Act, SEC, NYSE Recommendations of Ad Hoc Advisory Group Recommendations of Ad Hoc Advisory Group See October 7, 2003, Report at See October 7, 2003, Report at

7 Stand-alone Guideline for “Compliance and Ethics Program” Stand-alone Guideline for “Compliance and Ethics Program” Promote ethical conduct & organizational culture of compliance Promote ethical conduct & organizational culture of compliance Seven minimum steps expanded Seven minimum steps expanded Small organizations addressed Small organizations addressed Assessing risks of criminal conduct made explicit Assessing risks of criminal conduct made explicit Cooperation credit not contingent on privilege waiver Cooperation credit not contingent on privilege waiver OVERVIEW OF CHANGES

8 §8B2.1(a) CRITERIA FOR EFFECTIVE PROGRAM Exercise due diligence in fulfilling seven minimum requirements at §8B2.1(b)(2) Exercise due diligence in fulfilling seven minimum requirements at §8B2.1(b)(2) Promote ethical conduct and organizational culture that encourages a commitment to compliance with the law Promote ethical conduct and organizational culture that encourages a commitment to compliance with the law

9 §8B2.1(b)(1) STANDARDS AND PROCEDURES “[E]stablish standards and procedures to prevent and detect criminal conduct” “[E]stablish standards and procedures to prevent and detect criminal conduct” “[S]tandards and procedures” = “standards of conduct and internal controls that are reasonably capable of reducing the likelihood of criminal conduct” “[S]tandards and procedures” = “standards of conduct and internal controls that are reasonably capable of reducing the likelihood of criminal conduct” See Application Note 1 See Application Note 1

10 §8B2.1(b)(2) PROGRAM RESPONSIBLITY Governing Authority Governing Authority Must be knowledgeable and exercise oversight Must be knowledgeable and exercise oversight High-Level Personnel High-Level Personnel Overall responsibility to ensure effectiveness of program Overall responsibility to ensure effectiveness of program Senior Management or equivalent Senior Management or equivalent See Application Note 3(b) §8A1.2 See Application Note 3(b) §8A1.2 Operational Responsibility Operational Responsibility Adequate resources and appropriate authority Adequate resources and appropriate authority Periodic reporting Periodic reporting May be delegated by high-level personnel but then d irect access to governing authority required May be delegated by high-level personnel but then d irect access to governing authority required

11 §8B2.1(b)(3) PERSONNEL SCREENING Screen Substantial Authority Personnel Screen Substantial Authority Personnel See Application Note 3(c) of §8A1.2 for SAR Definition See Application Note 3(c) of §8A1.2 for SAR Definition Applicable Screening Standard Applicable Screening Standard “[O]rganization knew or should have known [individual] had engaged in illegal activities or other conduct inconsistent with an effective... program ” “[O]rganization knew or should have known [individual] had engaged in illegal activities or other conduct inconsistent with an effective... program ” Application Note 4: Factors for Screening Application Note 4: Factors for Screening Relatedness of prior misconduct to specific responsibilities Relatedness of prior misconduct to specific responsibilities Recency of prior misconduct Recency of prior misconduct Frequency Frequency

12 §8B2.1(b)(4) TRAINING Training Now a Requirement Training Now a Requirement Training in standards and procedures for compliance Training in standards and procedures for compliance Extends to All Levels of Organization Extends to All Levels of Organization Directors and senior management Directors and senior management Employees Employees Agents, as appropriate Agents, as appropriate

13 §8B2.1(b)(5)(A)(B): EVALUATION, MONITORING, AUDITING Ensure program is followed Ensure program is followed By monitoring and auditing By monitoring and auditing To detect criminal conduct To detect criminal conduct Periodically evaluate program effectiveness Periodically evaluate program effectiveness

14 §8B2.1(b)(5)(C) REPORTIING SYSTEMS Maintain and publicize a reporting system Maintain and publicize a reporting system To be used by employees and agents To be used by employees and agents To report potential or actual criminal conduct To report potential or actual criminal conduct To seek guidance on potential conduct To seek guidance on potential conduct Reporting systems may include Reporting systems may include Mechanisms for anonymity or confidentiality or Mechanisms for anonymity or confidentiality or Any other system organization may devise to meet goal Any other system organization may devise to meet goal

15 §8B2.1(b)(6): PROMOTE PROGRAM Appropriate Incentives Appropriate Incentives Appropriate Disciplinary Measures Appropriate Disciplinary Measures §8B2.1(b)(7): APPROPRIATE RESPONSE TO DETECTED VIOLATIONS

16 §8B2.1(c): ASSESSING RISK OF CRIMINAL CONDUCT Explicit new requirement Explicit new requirement Design, implement, or modify application of seven requirements within organization to reduce risk of occurrence of criminal conduct Design, implement, or modify application of seven requirements within organization to reduce risk of occurrence of criminal conduct Guidance in Application Note 6 Guidance in Application Note 6 Nature and seriousness of conduct Nature and seriousness of conduct Prior history of organization Prior history of organization Likelihood of violations given nature of business Likelihood of violations given nature of business

17 FOCUS ON SMALL ORGANIZATIONS Modified requirements for smaller organizations Modified requirements for smaller organizations Application Note 2(C)(iii) Application Note 2(C)(iii) Suggests large organizations encourage small organizations to promote ethics and compliance programs, especially with potential and actual vendors Suggests large organizations encourage small organizations to promote ethics and compliance programs, especially with potential and actual vendors Application Note 2(C)(ii) Application Note 2(C)(ii) Establishes a rebuttable presumption if high-level involvement in offense Establishes a rebuttable presumption if high-level involvement in offense See §8C2.5(f)(3)(A) See §8C2.5(f)(3)(A)

18 WAIVER OF PRIVILEGES Addition to Commentary to §8C2.5(f); See Note 12 Addition to Commentary to §8C2.5(f); See Note 12 “Waiver of [privileges] is not generally required in order to qualify for credit for cooperation” “Waiver of [privileges] is not generally required in order to qualify for credit for cooperation” But there may be times when necessary “in order to provide timely and thorough disclosure of all information known to the organization” But there may be times when necessary “in order to provide timely and thorough disclosure of all information known to the organization”

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