Organizational sentencing.

• Author: Mrazek, Joseph C., Jr.
• Position: Eleventh Survey of White Collar Crime

1. INTRODUCTION II. GUIDELINES PROVISIONS: OFFENSES COVERED AND SANCTIONS PERMITTED

   1. Remedial Measures

   2. Probation

   3. Imposition of Fines

   1. Base Offense Level

   2. Base Fine

   3. Culpability

      1. Calculation

      2. Corporate Cooperation

      3. Corporate Compliance Programs

   4. Multipliers

   5. Disgorgement

   6. Implementation

   7. Departures III. PROPOSED AMENDMENTS

1. INTRODUCTION

   Corporate self-policing, which began in the United States with securities regulation in the 1930's, reached a new level on November 1, 1991. On that date the Federal Sentencing Guidelines for Organizations ("Guidelines") went into effect.(1) Along with a few other industrial nations, the United States holds corporations and other organizations vicariously liable for criminal offenses committed by their agents.2 This article describes the Guidelines' provisions, including the steps a corporation may take to limit its potential criminal liability.

   Under federal law, a company is indictable for any crime committed for its benefit by any employee acting in the scope of employment.(3) Thus, "[a]s the civil doctrine of respondeat superior becomes the standard for corporate criminal liability," the number of corporate indictees is rising significantly.(4) The cost of corporate criminal misconduct increased substantially with the promulgation of the Guidelines for organizational defendants. These "guidelines" are a set of rules that require courts to sentence convicted organizational defendants in much the same systematic way they sentence individual defendants.(5)

   While the Guidelines have been enforced against different types of corporations--including government contractors, financial institutions, and health care entities--they have been applied primarily to small closely held corporations, and in a small number of cases.(6) The Guidelines define "organization" as "a person other than an individual."(7) Thus the term includes corporations, partnerships, associations, joint-stock companies, unions, trusts, pension funds, governments and their political subdivisions, as well as unincorporated and non-profit organizations.(8) This article uses "corporation" interchangeably with "organization," because, as the United States Sentencing Commission data reveals, primarily corporations have thus far been sentenced under the Guidelines.(9)

   The Sentencing Commission designed the Organizational Guidelines so as to create powerful incentives for companies to implement effective means of preventing, detecting, and reporting violations of the law.(10) These incentives were cast in classic carrot-and-stick form: heavy fines and other sanctions that can be mitigated by effective compliance programs.(11)

   There have been no reported judicial decisions thus far directly addressing the Organizational Guidelines.(12) One commentator presumes this is due to all such cases having been resolved by plea agreements or guilty pleas.(13)

2. GUIDELINES PROVISIONS: OFFENSES COVERED AND SANCTIONS PERMITTED

   The Organizational Guidelines apply to Certain federal felonies and class A misdemeanors, including most of those crimes committed in a corporate context, such as fraud, theft, tax violations and antitrust offenses.(14) Among the few areas not covered are: (1) environmental crimes, (2) food, drug and agricultural offenses, (3) export control violations, and (4) obstruction of justice.(15)

   The Guidelines prescribe three types of sanctions for convicted organizations. First, whenever practicable, the court must order the organization to remedy any harm caused by the offense, either through restitution or other means.(16) Second, probation may be used to "ensure that another sanction will be fully implemented, or to ensure that steps will be taken within the organization to reduce the likelihood of future criminal conduct."(17)

   Finally, the Guidelines authorize the more conventional sanction of fines. If the organization operated primarily for a criminal purpose or primarily by criminal means, the court must set the fine sufficiently high to divest the organization of all its assets.(18) For all other organizations, the fine range should be based on the seriousness of the offense and the culpability of the organization, measured by (1) the pecuniary gain or loss (or by a guideline table), (2) the attempts of the organization to prevent or remedy the offense, and (3) the extent of involvement by certain personnel.(19) In most situations, the Guidelines require fines higher than under the pre-Guidelines regime.(20)

   1. Remedial Measures

      The Guidelines provide three ways to remedy any harm caused by a corporate criminal offense. First, a court must impose a restitution order in accordance with 18 U.S.C. [subsections] 3663-3664,(21) or as a condition of probation.(22) A court will impose a restitution order when it determines there is a need to make the victim or victims whole, through monetary relief or other means.(23)

      Second, a remedial order may be imposed as a sentence or as a condition of probation to provide for corrective action and prevent future injury from the instant offense.(24) An administrative agency may also have authority to order remedial measures in the same case. If so, a remedial order by the court may not be necessary. Therefore, if a remedial order is imposed, it should be coordinated with any administrative or civil actions taken by the appropriate agency.(25)

      Third, a court may order community service as a condition of probation where community service is reasonably designed to repair the harm caused by the criminal offense.(26) When a convicted organization possesses knowledge, facilities, or skills that uniquely qualify it to repair the damage, community service may provide an efficient remedy.(27) Community service is an indirect monetary sanction because an organization must use its own resources and employees to conduct the community service.(28) For that reason, the Guidelines consider it a less desirable sanction than a direct monetary sanction because the convicted organization has some control over the amount of resources, and therefore monetary expenditures, it will expend.(29)

   2. Probation

      Federal courts may also sentence convicted organizations to a term of probation.(30) In order to deter future misconduct and ensure compliance with the sentence, judges have great discretion in setting the conditions of probation. At a minimum, a court must impose conditions pursuant to 18 U.S.C. [sections] 3563, including a requirement that the organization not commit another federal, state, or local crime during the term of probation.(31)

      The court may impose other conditions that are reasonably related to the nature and circumstances of the offense or to the history and characteristics of the organization, provided they involve only such deprivations of liberty or property as are necessary to effect the purposes of sentencing.(32)

      The Guidelines recommend several conditions of probation for organizations, including: publication of the offense, the fact of conviction, and the nature of the punishment; and surprise audits and periodic submissions to the court of reports on the organization's financial condition (in order to ensure its ability to pay any deferred portion of restitution, fine or other monetary sanction).(33)

   3. Imposition of Fines

      As noted above, if an organization is operated primarily either (1) for a criminal purpose, or (2) by criminal means, then a court must set the fine to divest an organization of all of its net assets.(34) The court is to make this "criminal purpose" determination based on (1) the nature and circumstances of the offense, as well as (2) the history and characteristics of the organization.(35)

      For non-criminal purpose organizations, the Guidelines provide a scheme for setting fines.(36) This scheme applies only to those counts with offense guidelines listed in [sections] 8C2. 1 (a) and (b).(37) Once the court determines that a count is covered by [sections] 8C2.1, the court must proceed through the fine guidelines to determine the base offense level, the base fine, culpability, the fine range and, ultimately, the fine.

      1. Base Offense Level

         The first step in calculating a fine is to set the base offense level, which is determined by the applicable offense guideline for the count upon which a conviction was obtained, along with appropriate adjustments.(38) Where a defendant is convicted on multiple counts, Chapter Three, Part D of the Guidelines must be used to determine a single offense level.(39)

      2. Base Fine

         The next step toward calculating a fine is to determine the base fine, which is done in one of three ways: (1) by the amount, based on the offense level, from the table in [sections] 8C2.4(d); (2) by the pecuniary gain to the organization from the offense; or (3) by the pecuniary loss caused by the organization, to the extent that such loss was caused intentionally, knowingly, or recklessly.(40) In certain cases, special instructions apply for determining either the amount of loss or the offense level.(41)

         In general, the base fine measures the seriousness of the offense. When increased by the multipliers derived from the culpability score,(42) the base fine is meant to "deter organizational criminal conduct and to provide incentives for organizations to maintain internal mechanisms for preventing, detecting, and reporting criminal conduct."(43)

         Pecuniary gain is used to determine the base fine when it is the greatest of the three measurements, so that organizations will be deterred from engaging in criminal conduct and in order to prevent losses caused by their agents.(44)

      3. Culpability

         After determining the base fine level, the court must determine the organization's culpability. Section 8C2.5(a) requires the court to start with five culpability points, and to add or subtract points depending on the culpability factors discussed below.(45)

         1. Calculation

            The Guidelines list a number of factors which will increase an...