Organizational sentencing.

• Author: Joseph, Molly E.
• Position: Thirteenth Survey of White Collar Crime

1. INTRODUCTION: SCOPE AND PURPOSE OF THE ORGANIZATIONAL GUIDELINES

   In the United States, organizations are held vicariously liable(1) for criminal offenses committed by their agents.(2) The validity of corporate criminal prosecution was recognized by the United States Supreme Court as early as 1909(3) while corporate self-policing dates back to the advent of securities regulation in the 1930s.(4) Originally, however, the United States Sentencing Guidelines ("Guidelines") which the U.S. Sentencing Commission ("Commission") enacted in 1987 did not include standards for sentencing corporations.(5) Four years later, the Commission amended the Guidelines to include Chapter Eight, Sentencing of Organizations, which became effective November 1, 1991.(6)

   Part I of this Article discusses the background, scope, and purpose of the organizational guidelines. Part II outlines the provisions in Chapter Eight, which include: (1) mechanisms, consisting of restitution, remedial measures, and community service, to remedy harm caused by an organization; (2) probation. ranging from the requirement that no further crimes be committed during the prohibition term to the issuance of surprise audits and periodic reports; and (3) the imposition of monetary fines, largely determined by calculating the base level, base fine, and culpability factor. Part II also discusses the structure and implications of compliance programs,(7) designed to enable organizations to reduce potential liability by self-policing.(8) Part III discusses recently enacted and proposed amendments to Chapter Eight of the Guidelines. Part Iv discusses a significant recent development: the use of corporate compliance programs to determine whether directors can be held personally liable for corporate wrongdoing.

   Under the American system of federal law, "a company is indictable for any crime committed for its benefit by any employee acting" within the scope of his or her employment.(9) The number of indicted corporations has risen significantly " [a]s the civil doctrine of respondeat superior becomes the standard for corporate criminal liability."(10) In addition, the promulgation of the Guidelines for organizational defendants increased the cost of corporate criminal misconduct.(11) The Guidelines require courts to sentence convicted organizational defendants in a systematic manner similar to the sentencing of individual defendants.(12)

   While the Guidelines have been enforced against a number of different types of corporations, including government contractors, financial institutions, and health care entities, most defendants have been small, closely-held organizations.(13) The Guidelines define an "organization" as "a person other than an individual."(14) Thus the term encompasses corporations, partnerships, associations, joint-stock companies, unions, trusts, pension funds, governments and their political subdivisions, as well as unincorporated and non-profit organizations.(15)

   The Commission designed the Organizational Guidelines to create powerful incentives for companies to implement effective means of preventing, detecting, and reporting violations of the law.(16) The incentives are cast in classic carrot-and-stick form: effective compliance programs are suggested as means to mitigate heavy fines and other severe sanctions.(17)

   While several court decisions bear on the authority of Organizational Guidelines,(18) a cohesive body of case law addressing their application does not yet exist.(19) One commentator presumes the paucity of case law is due to the high percentage of cases which have been resolved by plea agreements or guilt), pleas.(20) Another attributes it to the ordinary time lag between criminal conduct and prosecution: the Guidelines do not apply in a large number of recent cases because the relevant crimes occurred before the Guidelines went into effect on November 1, 1991.(21)

2. GUIDELINES PROVISIONS: OFFENSES COVERED AND SANCTIONS PERMITTED

   The Guidelines apply to all federal felonies and Class A misdemeanors, including fraud, theft, tax violations, antitrust offenses, money laundering, and bribery and kickbacks.(22) Presently, environmental, food and drug, and export control offenses are not included in the fine provisions of the Guidelines.(23)

   The Guidelines delineate 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 by other means.(24) 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."(25) Finally, the Guidelines authorize the more conventional sanction of monetary fines. If the organization operated primarily for a criminal purpose or largely by criminal means, the court must set the fine high enough to divest the organization of all of its assets.(26) For all other organizations the fine is to be based on the seriousness of the offense(27) and the culpability of the organization.(28) In most situations, the application of the Guidelines will result in fines higher than those imposed under the pre-Guidelines regime.(29) This Section examines the sentencing provisions in Chapter Eight. Part A discusses remedial measures; Part B describes probation; and Part C addresses the imposition of monetary fines and the mitigating effect of corporate compliance programs.

   1. Remedies

      The Guidelines provide three ways to remedy harm caused by a corporate criminal offense: restitution, remedial measures, and community service.(30) A court must impose a restitution order in accordance with 18 U.S.C. [subsections] 3663-3664.(31) A court may also impose a restitution order to make the victim or victims whole, through monetary relief or other means.(32) Restitution is not mandatory either when the organization has independently made restitution or when the court determines that the complication and delay to the sentencing process caused by mandatory restitution outweighs its value.(33)

      Alternatively, a court may also impose a remedial order to provide for corrective action and "to prevent future injury from the instant offense."(34) An administrative agency such as the Environmental Protection Agency may also have authority to order remedial measures. In such a case, "a remedial order by the court may not be necessary."(35) Therefore, if a remedial order is imposed, "it should be coordinated with any administrative or civil actions taken by the appropriate governmental regulatory agency."(36)

      A court may also order community service where such a remedy "is reasonably designed to repair the harm caused by the [criminal] offense."(37) When a "convicted organization possesses knowledge, facilities, or skills that uniquely qualify it to repair damage caused by the offense, community service" may provide an efficient remedy.(38) In addition, community service is "an indirect monetary sanction" because an organization must use its own resources and employees to conduct the community service.(39) Because a sentence of community service gives the convicted organization some control over the amount of resources it will expend, the Guidelines consider it a "less desirable [sanction] than a direct monetary sanction."(40)

   2. Probation

      Federal courts may sentence convicted organizations to a term of probation.(41) In order to deter future misconduct and ensure compliance with a sentence, judges have wide 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."(42)

      A court may also impose other conditions that are "reasonably related to the nature and circumstances of the offense or 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."(43) The Guidelines list several conditions of probation for organizations, including publication of the offense, facts of conviction, and nature of the punishment.(44) A court may also order surprise audits and require an organization to submit periodic reports concerning the organization's financial condition (in order to ensure its ability to pay any deferred portion of restitution, fine, or other monetary sanction).(45)

   3. Imposition of Fines

      The imposition of fines is used to deter and punish conduct, eliminate illegal gain, and implement other statutory penalties (e.g., forfeiture or the assessment of production costs).(46) The Guidelines contain fine provisions for offenses which are easily quantifiable (e.g., fraud, theft, and tax violations) and specific formulas for less readily quantifiable offenses such as bribery and kickbacks, antitrust violations, and money laundering.(47) However, there are no fine provisions for most environmental, food and drug, and export control violations.(48)

      As noted above, an organization which operates primarily for criminal purposes or by criminal means must be fined at a level "sufficient to divest the organization of all of its net assets."(49) Courts are to make this "criminal purpose" determination based on the nature and circumstances of the offense, as well as the history and characteristics of the organization.(50)

      For organizations operating without a criminal purpose, the Guidelines provide a scheme for setting fines. (51) This scheme applies only to those counts with offense guidelines listed in [sections] 8C2.1(a) and (b).(52) Once the court determines that a count is covered by [sections] 8C2.1, the court must proceed through the fine guidelines(53) to determine the base offense level, the base fine, culpability, the fine range, and, ultimately, the actual...