S7E02 | How the U.S. Sentencing Commission has defined E&C

Abstract:

Most ethics and compliance professionals have heard of the “seven hallmarks” of an effective E&C program that is enshrined in the U.S. Sentencing Commission’s Federal Sentencing Guidelines:

• Implementing written standards of conduct, policies, and procedures.
• Designating a compliance officer and compliance committee.
• Conducting effective training and education.
• Developing effective lines of communication.
• Conducting internal monitoring and auditing.
• Enforcing standards through well-publicized disciplinary guidelines.
• Responded promptly to problems and undertaking corrective action.

But where did these guidelines come from, and who is involved in the process of deciding these standards? In this episode of the Principled Podcast, host Eric Morehead of LRN’s Advisory group talks about the evolving role of the U.S. Sentencing Commission with Kathleen Grilli, the commission’s General Counsel. Listen in as the two discuss the history of compliance—going back more than 30 years—and unpack what sentencing data can tell us about E&C today.

Read the full Federal Sentencing Guidelines for an effective E&C program.

 

What You’ll Learn on This Episode:

[1:19] - The history of the sentencing commission and the different roles of the organization.

[2:36] - How did the sentencing commission become such an integral part of corporate compliance?

[6:40] - With whom does the sentencing commission consult with to find collaboration when considering revisions to guidelines?

[12:35] - The 2004 amendments and incorporating ethics into the criteria for an effective program and examples of how changes to the organizational guidelines can come about.

[15:36] - Does public comment have to come from advocacy organizations?

[17:01] - Trends seen in organizational data over the years.

[21:26] - Potential future changes to the organizational sentencing guidelines. 

 

Featured guest:

Kathleen Cooper Grilli is the General Counsel for the United States Sentencing Commission, having been appointed to the position on October 7, 2013. Ms. Grilli has been on the staff of the Commission since 2003, serving as an assistant general counsel from 2003-2007 and deputy general counsel from 2007-2013. As the General Counsel, Ms. Grill provides legal advice to the Commissioners on sentencing issues and other matters relating to the operation of the Commission. Ms. Grilli is the agency’s Ethics Officer and has conducted training on white collar crime and the organizational guidelines at numerous training events.

Prior to working for the Sentencing Commission, Ms. Grilli was with the Office of Staff Counsel for the Fourth Circuit Court of Appeals. Before relocating to Virginia, Ms. Grilli was a partner in a small firm in Fort Lauderdale, Florida, handling civil and criminal litigation. Her previous work experience includes serving as an Assistant Federal Public Defender in the Southern District of Florida and as an associate at Akerman, Senterfitt and Edison, handling commercial litigation. Ms. Grilli is a member of the Bars of Florida and Virginia. She received a Bachelor of Arts in International Relations, with honors, from Florida International University. She graduated cum laude from the University of Miami School of Law.

 

Featured Host: 

Eric Morehead is a member of LRN’s Advisory Services team and has over 20 years of experience working with organizations seeking to address compliance issues and build effective compliance and ethics programs. Eric conducts program assessments and examines specific compliance risks. He drafts compliance policies and codes of conduct, works with organizations to build and improve their compliance processes and tools, and provides live training for Boards of Directors, executives, managers, and employees.

Eric ran his own consultancy for six years where he advised clients on compliance program enhancements and assisted in creating effective compliance solutions. He was formally the Head of Advisory Services for NYSE Governance Services, a leading compliance training organization, where he was responsible for all aspects of NYSE Governance Services’ compliance consulting arm. Prior to joining NYSE, Eric was an Assistant General Counsel of the United States Sentencing Commission in Washington, DC. Eric served as the chair of the policy team that amended the Organizational Sentencing Guidelines in 2010.

Eric also spent nearly a decade as a litigation attorney in Houston, Texas where he focused on white-collar and regulatory cases and represented clients at trial and before various agencies including SEC, OSHA and CFTC.

 

Transcription: 

Intro:                                    

Welcome to The Principled Podcast, brought to you by LRN. The Principled Podcast brings together the collective wisdom on ethics, business, and compliance, transformative stories of leadership, and inspiring workplace culture. Listen in to discover valuable strategies from our community of business leaders and workplace change-makers.

Eric Morehead:                

Why is the US Sentencing Commission involved in compliance and ethics? It's a question that both new compliance officers, as well as seasoned professionals, often ask. We've all heard of the seven hallmarks of an effective compliance program that are enshrined in the sentencing guidelines, but where did they come from and who is involved in the process of deciding these standards?

Hello, and welcome to another episode of LRN's Principled Podcast. I'm your host, Eric Morehead with LRN's advisory services team. And today, I'm joined by Kathleen Grilli, the General Counsel for US Sentencing Commission. We're going to be talking about the Sentencing Commission, discussing a little compliance history going back more than 30 years, covering what the Commission's role is and was, and talking about what sentencing data might tell us about compliance today. Kathleen, thanks for coming on The Principled Podcast.

Kathleen Grilli:                  

Eric, thanks for inviting me.

Eric Morehead:                

Can you tell us a little bit about the history of the Sentencing Commission itself and the different roles of the organization?

Kathleen Grilli:                  

Certainly. The Commission is an independent agency in the judicial branch of the federal government. It was established in 1984 by a bipartisan act of Congress called the Sentencing Reform Act of 1984. Congress tasked the Commission with the responsibility of developing federal sentencing policy. So the Commission's principle purposes are to establish sentencing policies and practices for the federal courts, including issuing guidelines regarding the appropriate form and severity of punishment for offenders convicted of federal crimes, to advise and assist Congress, the federal judiciary, and the executive branch in the development of effective and efficient crime policy, and to collect, analyze, research, and distribute a broad array of information on federal crime and sentencing issues. The Commission effectuates this mission in various ways through the guideline amendment process, our data collection research on the issuance of publications, and by providing training to judges, lawyers, and probation officers on federal sentencing issues.

Eric Morehead:                

And historically, why and how is it that this Sentencing Commission became such an integral part of corporate compliance?

Kathleen Grilli:                  

Well, in 1984, when the Sentencing Reform Act was enacted white-collar crime scandals abounded, and the prevailing view was that corporate crime was a cost of doing business, Congress was concerned about inequities and sentencing and created the Commission to ensure that similarly situated defendants convicted of similar crimes received similar punishments. One of the perceived inequities was that affluent defendants were treated more leniently than indigent defendants.

Although the primary focus of the Sentencing Reform Act was individual defendants and not organizational defendants or companies, the Act did make changes to the law that impacted companies. It authorized courts to impose a sentence of probation, or fine, or both on companies, and further permitted companies to be subject to orders of forfeiture notice to victims and restitution orders. The Commission understood these changes to mandate that it developed guidelines for sentencing organizations in addition to developing guidelines for sentencing individual defendants.

This was quite controversial at the time and many in the business community openly opposed the Commission as it engaged in the process of developing the organizational guidelines. Back then, as I understand the historical record, there were no professional ethics and compliance officers, no professional organizations focused on ethics and compliance, no professional field of study, no business certifications in the topic. There was at least one voluntary association of defense contractors seeking to promote business ethics, and compliance programs in some form were recognized in the antitrust field but were not a prevalent part of corporate America.

So the Commission wanted to find a way to deter corporate crime. Because it arises when an employee or an agent commits a crime while acting within the scope of his employment, the Commission thought that self-policing by corporations was the most effective tool to accomplish the goal of deterring corporate crime. Corporate criminal sanctions are a monetary payment to the court and/or restitution to the victims. Since corporations are in the business of making money, the Commission came to the realization that financial incentives would probably be the best way to incentivize corporations to self-police.

The implementation of ethics and compliance programs was an outgrowth of the notion of self-policing. Under the chapter 8 guideline fine provisions, an organization has the ability to significantly reduce its fines by having an effective compliance and ethics program, reporting its crime to authorities, and cooperating with those authorities. The Commission thought that this punishment scheme would promote crime deterrence in this area of the law.

Chapter 8 was the product of years of work with input from a wide variety of sources. The Commission started work on it in 1986 and held several public hearings featuring witnesses from federal and state agencies, probation officers, academics, the corporate sector, and special interest groups. After publishing several drafts of the organizational guidelines and about five years' worth of study, the Sentencing Commission received and considered a broad array of public comment, including proposals for incorporating affirmative governance factors into the guidelines. These efforts were informed by staff and outside working groups, and the seven elements for an effective ethics and compliance program grew out of this collaborative process.

In addition, the Commission purposely drafted the elements in broad terms so that they could be individually tailored by a vastly different types of organizations to which they would apply.

Eric Morehead:                

One of the things that I think comes up when you start talking about the role and the process of the Commission is this collaborative effort you mentioned. And the organizational sentencing guidelines have evolved since that first promulgation back in 1991, now, over 30 years. Can you talk a little more specifically about where the Sentencing Commission looks for that collaboration? Whom does it consult with when considering revisions to, not broadly speaking the guidelines, but maybe more specifically, the organizational sentencing guidelines?

Kathleen Grilli:                  

Sure, Eric. So I've already briefly described the multi-year pro that led to the creation of chapter 8. I would note that while the Commission has made over 800 amendments to the guideline manual, only two of those in the last 30 years have made substantive changes to chapter 8, where you find the organizational guidelines. The 2004 amendment and the 2010 amendment, both of which changes to the criteria for an effective ethics and compliance program.

Each of those changes became part of the Commission's amendment cycle in a different way. So let me just briefly describe how that cycle works. The amendment cycle is annual, it's scheduled around certain deadlines set by Congress in the Sentencing Reform Act, our organic statute. For example, the earliest that the Commission can deliver amendments to Congress is at the start of a congressional session in January. And the latest date for delivery is May the 1st. The Act requires the Commission to comply with a notice and comment provisions of the Administrative Procedures Act, which means the Commission has to publicize proposals for Commission action and receive and consider public input about those proposals.

So there are various opportunities for solicitation for public comment throughout the amendment cycle. The cycles typically starts in May or June when the Commission holds a planning session. At that session, they consider written materials that detail the work completed on priorities from the prior year and identifying any work that remained to be completed, and includes possible ideas for Commission action from a variety of outside sources. Correspondence, possibly received from judges and/or other members of the public. If we receive those suggestions outside of common period, what we do is we save them and we deliver them to the Commission during an open common period.

We look at case law, particularly focusing on opinions from circuit court of appeals that arrive at conflicting decisions on issues surrounding the guidelines. We look at other scholarly materials that suggest changes to the guidelines. Crime legislation is considered. Our helpline database is looked at to find frequently occurring questions that we receive on guideline issues. And our training staff provides input on questions that they receive while training on the guidelines around the country.

Sometimes, individual commissioners receive notes from judges or their other acquaintances containing similar suggestions. And the commissioners themselves often have ideas on policy issues that they want to address an amendment cycle. So they discuss these materials and they decide on a tentative list of priorities for the upcoming amendment cycle. We publish that in The Federal Register and on the Commission's website with a deadline for submission of public comment. And the Commission considers that public comment prior to deciding on its final priorities.

Certain organizations send a letter to the Commission every year, like the Department of Justice who provides the executive branch a suggestion, for Commission action, the federal public defenders who represent indigent defendants. They also offer suggestions. The Commission has standing advisory groups that represent specific interest groups. Privately retained criminal defense lawyers, probation officers, victims, and Native American tribes who also submit public comments.

And then we have certain advocacy groups that are regular submitters to the Commission. But in any given year, the Commission receives a variety of public comment letters from any number of organized groups and individual members of the public. The Commission reads that, decides on final priorities, votes on that at a public meeting, and then we begin our work. Work on these priorities is assigned to the staff of the Commission, which includes lawyers, social scientists, and training staff. And we assist the Commission in developing a robust administrative record on the issues under consideration. So we review case law, legislation, legislative history, Commission historical documents, and other scholarly or scientific literature. We also conduct data analysis using the sentencing data regularly compiled by the Commission. We meet with interested stakeholders to obtain additional information designed to inform the Commission's policy discussion.

The staff working groups or the teams report their findings to the Commission in written materials and in oral presentations at the Commission's regular monthly business meetings. Ultimately, these teams develop proposed guideline amendments for the Commissioner's consideration. Draft amendments are published in The Federal Register for a 60-day comment period after the Commission votes to publish those amendments at a public meeting. Those are usually held in December, January. And during the public common period, the Commission holds at least one public hearing, which invited witnesses testify on the policy changes under consideration.

After the hearing and review of all public comments, the Commission votes to promulgate amendments at a public meeting in April. The Commission delivers those amendments to Congress no later than May the 1st, at which point Congress has 180 days to review the amendments. Unless Congress enacts legislation, affirmatively disapproving the amendments, the guidelines automatically take effect at the end of the 180-day review period. So the 2004 amendment initially grew out of comments made to a group of seven new commissioners who were appointed in 1999. And they began hearing from these commenters that the organizational sentencing guidelines had been successful in inducing many organizations, both and indirectly, to focus on compliance and to create programs to prevent and detect violations of the law.

But these commenters also suggested that changes could and should be made to chapter 8, to give organizations greater guidance regarding the factors that are likely to result in effective programs. Among other things, the Commission was urged to expressly incorporate ethics into the criteria for an effective program. In light of this feedback, the Commission decided to create an ad hoc advisory group to examine the issue and develop proposals for its consideration. Among the members of that group were the current Inspector General for the Department of Justice, Mike Horowitz, the former Attorney General, Eric Holder, and many ethics and compliance professionals from both small and large organizations.

Not long after the formation of that group, Congress enacted the Sarbanes–Oxley Act, which directed the Commission to examine penalties for organizations. So the ad hoc groups work tied in very nicely to help the Commission respond to that directive. The ad hoc group did its due diligence, reviewing literature, public comment, soliciting feedback, conducting a hearing. And its work resulted in a draft proposal for changes to chapter 8 for the Commission to consider.

The Commission then went through the regular amendment cycle that I just described to you, which resulted in the 2004 changes. As you well know, Eric, since you were at the Commission in 2010 and worked on this policy issue, that amendment grew out of the Commission's catch-all priority for the miscellaneous guideline amendment issues. Then Commissioner, now Chief Judge for the United States District Court in DC, Beryl Howell, believed that chapter eight could be approved upon. And she was able to convince her colleagues to consider this issue. Because the Commission believed that the issue would be very important to the ethics and compliance community, the Commission, through its staff, Eric, made concerted efforts to bring the matter under consideration to the attention of the actors in that community, soliciting comment, and inviting witnesses from the ethics and compliance community to testify at a public hearing.

I must say, I have been on the staff of the Commission for 18 plus years, and that was the only hearing at which a miscellaneous amendment garnered two panels of witnesses at a hearing and more public comment than any other amendment under consideration during the amendment cycle. So that's a different example of how changes to the organizational guidelines can come about.

Eric Morehead:                

And just to clarify one thing, you talked about advocacy groups, and earlier on mentioned that with the original promulgation in 1991, the Defense Initiative was involved. But does public comment have to come from advocacy organizations? Can it come from anyone?

Kathleen Grilli:                  

Public comment can come from anyone, and it can come in any form. Folks can email it to our Public Affairs Office. They can send a letter to a Commissioner saying, "Commissioner, I think you need to make this change to the guidelines." They can send it to a member of staff and we compile it, and keep it, and present it to the Commission, no matter who it comes from. In the past, in some of our other guideline amendments, the Commission has received and considered a huge amount of public comment that came from individuals out in the community who were not necessarily active at all in the criminal justice arena.

Eric Morehead:                

Yeah. And I think that's an important point as that this process is very well documented and transparent. We see guidance on compliance coming from other regulators out there, but the process that goes on at the Sentencing Commission is something that really is public-focused. And I think that's an important distinction. One of the other key components of the Commission that you mentioned when you were talking about the role is data gathering, and that's gathering data on all the individuals and organizations who have either pled guilty, or been found guilty, and are now being sentenced in front of a federal court. What are some of the trends that we see when we look at organizational sentencing data over the years?

Kathleen Grilli:                  

Well, I'm glad you asked me about trends, Eric, because one of the things that we're working on right now is a publication to sort of commemorate the 30th anniversary of the organizational guidelines. And we're actually going to be taking a deeper dive into looking at trends. Because normally, when we report out data on the organizational guidelines, it's on an annual basis using our fiscal year data.

Well, let me give you some information about a couple of things that I do know about. And I have seen in the years that I've been working on this. First of all, in the 30 years since the adoption of the organizational guidelines, only 11 organizations have received a culpability score reduction for having an effective ethics and compliance program. I view this as a very positive statistic because the Department of Justice tells the business world that it considers ethics and compliance program when evaluating whether to prosecute an organization criminally.

Now, I know that there are other ways that organizations get sanctioned by regulatory authorities. Civil fines, non-prosecution agreements, and deferred prosecution agreements. But the bottom line is that Commission data reflects that very few organizations with an effective ethics and compliance program have been prosecuted and criminally sentenced. And I think that's a very big deal. I can tell you that the majority of organizations sentenced in recent years have fewer than 50 employees. And as I mentioned, the publication will be able to report whether that trend holds true over the almost three decades that we've been collecting data on organizational offenders.                                               

In the last 20 years, we've seen a steady increase in the percentage of cases in which courts have ordered the development of an ethics and compliance program as a condition of probation. In FY 2000, only 14% of cases involve such a condition compared to nearly that 27% in FY 2020, our fiscal year. Likewise, we have observed an increase in the percentage of cases involving co-defendant individual offenders who were not high-level officials of the organization. In the fiscal year 2000, we observed only 31% of the cases involving a co-defendant who is not a high-level official compared to almost 60% in FY 20.

Eric Morehead:                

I think that's a real key data point that can be helpful to organizations when they're talking to their employees about the potential risks involved in misconduct and compliance failures, that doubling basically, of the percentage of individual actual humans that might find themselves facing a federal criminal sanction.

Kathleen Grilli:                  

Yes. But it's also important to note that they are not high level officials, which might contribute to the fact that you haven't seen so many organizations sentenced in our dataset. That and the culpability score reduction.

Eric Morehead:                

Yeah. There's a lot of conventional wisdom. I think that can get debunked by looking at the Sentencing Commission's data. There's that point that it's not all the high level officials, but also that it's smaller organizations because we the headlines that involve the Enrons and other major corporations all the time. That's what gets the ink publications about corporate misconduct. But when we look at the data, it tells a different story.

Kathleen Grilli:                  

Yes, it does.

Eric Morehead:                

And then one other thing that I think is helpful when we're looking at this data is it gives a proper context to the organizations that are facing the most significant punishment, if you will. Because you mentioned before, non-prosecution agreements and deferred prosecution agreements and other regulatory settlements, but there are other consequences out there for organizations that take a federal conviction, including debarment from doing future federal work. And I think the most famous case also is Arthur Anderson, that ceased to exist because they could no longer audit public corporations after they took a federal conviction. So there's other consequences out there when organizations face this ultimate consequence. Last area I wanted to spend just a couple minutes talking about, Kathleen, is what we might see down the road. What are some potential future changes to the organizational sentencing guidelines? What might be over the horizon for people that are paying attention to this?

Kathleen Grilli:                  

Well, Eric, let me get out my crystal ball and see what I can tell you. First of all, let me just say that I need Commissioners.

Eric Morehead:                

Yes. That's true.

Kathleen Grilli:                 

This lack of voting quorum of Commissioners for three years now, and I'm quite hopeful that sometime in the very near future, the president will be nominating a slate of seven to replace the terms of the Commissioners that have expired. And the one last man standing are acting here, judge Brier. So I don't know what the potential future is. What I can say is that the guidelines were purposely drafted. The organizational guidelines that is were purposely drafted to broadly apply to all types of organizations.                                               

And the Commission has been loathed to make changes to those guidelines in the absence of a real hue and cry from either enforcement officials like the Department of Justice, or from the ethics and compliance community identifying a real need for changes. We are well aware of the fact that the two times that the Commission has made substantive changes to the chapter 8 guidelines, that it caused quite a ripple in the stream. And we're hearing a lot about the impact whether intended or not of the chapter eight guideline changes. So I think a new Commission would be loathed to take on consideration of policy changes in this area, absent that hue and cry. But I am not a presidential appointee. I'm simply the general Counsel of the agency. And I will go where my bosses tell me to go. So if they want to work on it, I say, Let's do it.:

Eric Morehead:                

Wow. I hope that our audiences got a sense that there's a little bit more to the Sentencing Commission than just the seven hallmarks of the sentencing guidelines that they learned about when they first came into this area. But I'm afraid we're out of time for today. But Kathleen, thank you so much for joining me on this episode.

Kathleen Grilli:                  

Eric, thank you so much for inviting me. I really had a good time.

Eric Morehead:                

Well, my name is Eric Moorhead, and I want to thank all of you for listening to The Principled Podcast by LRN.

Outro:                                  

We hope you enjoyed this episode. The Principled Podcast is brought to you by LRN. At LRN, our mission is to inspire principled performance in global organizations by helping them foster winning, ethical cultures rooted in sustainable values. Please visit us at lrn.com to learn more. And if you enjoyed this episode, subscribe to our podcast on Apple Podcasts, Stitcher, Google podcasts, or wherever you listen. And don't forget to leave us a review.