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Society of Corporate Compliance and Ethics
6500 Barrie Road, Suite 250, Minneapolis, MN 55435, United States
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Applying the Federal Sentencing Guideline Compliance and Ethics Standards to Federal
Contractors
John R. Steer
Attorney, Allenbaugh Samini LLP
United States Sentencing Commission (Retired)
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Principal Discussion Topics
• New Regulatory Requirement – Compliance and Ethics Programs now mandated for certain Federal Contractors
• Federal Sentencing Guideline Compliance and Ethics Standards provide model for meeting new requirements
– Elements to be compared
• Proposed Additional Specific Requirements from Federal Sentencing Guidelines, Cooperation
• Organizational Sentencing Guidelines in Practice
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Two Decades of Compliance and Ethics Developments
• Defense Contractor Scandals – Defense Industry Regulatory Initiatives
• 1991 Federal Sentencing Guidelines for Organizations
– Commentary outlined seven basic elements for effective compliance programs
– Applied in context of sentencing mitigation
– Filled need for set of basic compliance standards
• Various federal regulatory agencies incorporate FSG compliance standards
– Use in enforcement decisions.
– Require as remedy for violations (e.g. HCFA Integrity Agreements)
• Caremark decision – Delaware Chancery Court ties FSG standards to shareholder rights
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Two Decades of Compliance and Ethics Developments
• Department of Justice folds standards into Principals of Prosecution
– Holder, Thompson, McNulty memoranda
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2004 Federal Sentencing Guideline Compliance Program
Amendments
• Elevated status to stand-alone sentencing guideline (§8B2.1)
– Greater visibility and legal significance than commentary alone
• Expressly incorporated terms “Ethics,” “Corporate Culture”
– Consistent with Sarbanes-Oxley Act
• Modernized, strengthened all program elements
– Specific responsibilities for Board, top Management
– Added concept of periodic Risk Assessments
• Emphasized small business needs
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OVERVIEW OF CHAPTER 8
• Organizational Guidelines effective in 1991
– Amended in 2004
• Chapter 8 reflects general principles –
– Organizations should remedy harm offense
– Organizations with criminal purpose should be divested
– “Carrot and Stick Approach” - Fine ranges determined by seriousness of offense and culpability
– Probation to implement sanctions and reduce recidivism
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MEASURING CULPABILITY
• Goal: provide “structural foundation from which an organization may self-police its own conduct through an effective compliance and ethics program.”
• Six Factors to calculate “culpability score”:
� Tolerance of criminal activity
� Prior history
� Violation of order
� Obstruction of justice
� Effective compliance and ethics program
� Self-reporting, cooperation, acceptance of responsibility
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220 218
255
304
238252
200
130
177
217
197
0
50
100
150
200
250
300
350
FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07
Number of Organizational Cases FY97-FY07
SOURCE: United States Sentencing Commission, 1997-2007 Sourcebook of Federal Sentencing Statistics.
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Percentage of Organizational Cases Receiving Reduction in Culpability Score Under §8C2.5(g)
FY03-FY07
1.1
40.041.1
0.0
49.0
30.6
2.9
60.9
21.7
0.9
48.6
28.8
4.5
44.9
27.0
0.0
20.0
40.0
60.0
80.0
100.0
FY03 FY04 FY05 FY06 FY07
Self-Reported Offense
Cooperated with Investigation
Accepted Responsibility
1FY04 data consists of only pre-Blakely data from October 1, 2003 through June 24, 2004. FY05 data consists of only post-Booker data from January 12, 2005 through September 30, 2005.
SOURCE: United States Sentencing Commission, 2003-2007 Sourcebook of Federal Sentencing Statistics.
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§8B2.1(a)CRITERIA FOR EFFECTIVE PROGRAM
1. Exercise due diligence to prevent and detect criminal
conduct
AND
2. Promote organizational culture that encourages ethical
conduct and a commitment to compliance with the law
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§8B2.1(b) 8 MINIMAL REQUIREMENTS
1. Standards and procedures to prevent and detect criminal conduct
2. High level responsibility for compliance
3. Screening “substantial authority personnel”
4. Training
5. Monitor and evaluate compliance program, with whistleblower safeguards
6. Incentives for compliance and discipline for failure
7. Remediation
8. Assess risks
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Percentage of Organizational Cases Receiving Compliance or Ethics Related Sentence
Components FY03-FY07
12.0 11.6
20.3 19.824.1
0.0
20.0
40.0
60.0
80.0
100.0
FY03 FY04 FY05 FY06 FY071FY04 data consists of only pre-Blakely data from October 1, 2003 through June 24, 2004. FY05 data consists of only post-Booker data from January 12, 2005 through September 30, 2005.
SOURCE: United States Sentencing Commission, 2003-2007 Sourcebook of Federal Sentencing Statistics.
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Primary Offenses of Organizational Cases FY07
Antitrust
Food and Drug
Drugs
Pollution
Other
Fraud
Import/
Export
SOURCE: United States Sentencing Commission, 2007 Sourcebook of Federal Sentencing Statistics. The Pollution category includes the following offense types: Environmental-Water Pollution,
Environmental-Air Pollution, and Environmental-Hazardous/Toxic Pollutants.
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74.0 74.4
67.2
74.7 75.0
0.0
20.0
40.0
60.0
80.0
100.0
FY03 FY04 FY05 FY06 FY07
Percentage of Organizational Cases Receiving Probation FY03-FY07
1FY04 data consists of only pre-Blakely data from October 1, 2003 through June 24, 2004. FY05 data consists of only post-Booker data from January 12, 2005 through September 30, 2005.
SOURCE: United States Sentencing Commission, 2003-2007 Sourcebook of Federal Sentencing Statistics.
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Types of Monetary Sentences FY07
No Fine or
Restitution
16%
Fine/No
Restitution
52%
Restitution/
No Fine
16%
Fine and
Restitution
16%
SOURCE: United States Sentencing Commission, 2007 Sourcebook of Federal Sentencing Statistics.
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$0
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
$400,000
FY03 FY04 FY05 FY06 FY07
Fine Restitution
Median Fine and Restitution for Organizational Cases FY03-FY07
1FY04 data consists of only pre-Blakely data from October 1, 2003 through June 24, 2004. FY05 data consists of only post-Booker data from January 12, 2005 through September 30, 2005.
SOURCE: United States Sentencing Commission, 2003-2007 Sourcebook of Federal Sentencing Statistics.
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● 34.8% of the organizations had 10 or fewer employees
● 63.5% had 50 or fewer employees
● 77.4% had 100 or fewer employees
● 84.4% had 200 or fewer employees
● 88.7% had 500 or fewer employees
● 11.3% had 500 or more employees
● 10.4% had 1,000 or more employees
Size of Organization
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Comparison of Sentence and Fine Guideline Range FY07
Within-Range
Government
Sponsored
Below-Range
Above-Range
Substantial
Assistance
SOURCE: United States Sentencing Commission, 2007 Datafile.
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Non- & Deferred Prosecution Agreements
• DOJ does not report statistics on deferred prosecution or non-prosecution agreements.
• Parameters of deferred agreements often include requirements such as (but not limited to):
– Implementation or expansion of compliance and ethics programs;
– Monitoring; and
– Cooperation with criminal or regulatory investigations.
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Number of Deferred or Non-Prosecution Agreements Per Year{Source: Finder & McConnell, Annual Corp. Pre-Trial Agreement Update 2007.]
0
5
10
15
20
25
30
35
2003 2004 2005 2006 2007
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Final Rule – Contractor Code of Business Ethics and Conduct
• 72 Fed. Reg. 65881; Effective December 24, 2007
– Published as FAR case 2006-007, February 16, 2007
– Amends 48 FAR Part 3 (Improper Business Practices and Personal Conflicts of Interest)
• Adds new Part 3.10 – Contractor Code of Business Ethics and Conduct
• Prescribes policies and procedures for contractor BE&C codes and display of fraud hotline posters
• Jointly published by DOD, GSA, NASA (Civilian Agency AcquisitionControl and Defense Acquisition Regulations Council (Councils))
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Generally Applicable Policy Guidance for All Contractors
• Contractors MUST operate with highest degree of integrity and honesty
• Contractors SHOULD have written Code of Business Ethics and Conduct
• Contractors SHOULD have Ethics and Compliance Training Program and Internal Control System:
– Suitable to company size, extent of Government contracting
– Facilitates timely discovery and disclosure of improper conduct
– Ensures prompt corrective measures
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Mandatory Requirements for Certain Contractors
• Covered Contracts
– Contract value expected to exceed $5 Million, and
– Performance period 120 days or more
• Excluded Contracts
– Acquisition of commercial items, or
– Contracts to be performed entirely outside U.S. (50 states, DC, outlying areas)
• Specific Mandatory Requirements
– Code of business ethics and conduct (all business sizes)
– Awareness program and internal control system (not required of small business concerns)
– Flow down for subcontracts meeting $ value and performance time
– Display of Fraud Hotline Posters
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Code of Business Ethics and Conduct
• Required within 30 days of contract award (unless extension granted)
• Copy to each employee involved in contract performance
• Contractor shall promote compliance with Code
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Awareness Program and Internal Control System Requirements
• Small business contractors exempt
• Established within 90 days of contract award (unless extended)
• Internal control system capabilities:
– Facilitate timely discovery of improper conduct
– Ensure prompt corrective measures
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Additional Suggested Attributes of Internal Control System
• Periodic reviews of company business practices, procedures, policies and internal compliance controls, focusing on government contract compliance.
• Internal reporting mechanism (such as Hotline) for employee reporting of misconduct (with encouragement to use)
• Internal and/or external audits
• Disciplinary action for improper conduct
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Fraud Hotline Poster Requirements
• Where Displayed: At all contract work sites and in common work areas within business segments performing contract work
– Electronic version on any company website used to provide information to employees
• What Must Be Displayed:
– Agency fraud hotline poster identified by contracting officer as required by agency Office of Inspector General.
• Not necessary if contractor has implemented business ethics and conduct and awareness program with reporting mechanism
• Department of Homeland Security disaster assistance fraud hotline poster
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Proposed Rule to Modify, Strengthen Ethics Code Requirements
• 72 Fed. Reg. 64091; Published for comment November 14, 2007
– FAR Case 2007-006
– Stems primarily from May 23, 2007 DOJ request
– Would require all covered contractors to have code of ethics andbusiness conduct, establish specific internal controls to prevent and detect improper conduct
– Require prompt notification of contract officer of Federal criminal violations
• Mandatory disclosure and full cooperation requirements are principal focus
• Elements of Contractor Code of Business Ethics and Conduct to more closely track Federal Sentencing Guideline 8B2.1
• Applicability parameters unchanged ($5Million, 120 days, within U.S., not commercial acquisitions)
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Contractor Qualifications, Debarment, Suspension
• General qualification standards add requirement that contractorshave satisfactory record of integrity and business ethics
• Causes for debarment, suspension to include:
– Knowing failure to timely disclose violation of federal criminal law in connection with contract award or performance.
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Code of Business Ethics and Conduct Expanded Elements
• Track Federal Sentencing Guideline Language
– Contractor should exercise due diligence to prevent and detect criminal conduct
– Otherwise promote organizational culture that encourages ethicalconduct and commitment to compliance
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Business Ethics Awareness and Compliance Program, FSG
Elements
• Not applicable to small business concerns
• Ongoing business ethics and business conduct awareness and compliance program should include:
– Reasonable steps to communicate standards, procedures through training, information dissemination
– Training to be provided to principals, employees, agents, contractors
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Internal Control System, Strengthened Elements
• N/A to small businesses
• Standards and procedures to facilitate timely discovery of improper conduct
• Prompt corrective measures
• Assignment of high level responsibility and program resources sufficient to ensure effectiveness
• Reasonable efforts to exclude tainted principals
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Internal Control System, Strengthened Elements
• Periodic reviews of policies, procedures, controls (including specific government contracting controls)
– Monitoring and auditing to detect criminal conduct
– Periodic evaluation of program effectiveness, especially if criminal conduct detected
– Periodic assessment of risk of criminal conduct, steps to modifyprogram to reduce risk
• Internal reporting mechanism, such as hotline, allowing for anonymity or confidentiality
• Disciplinary action for improper conduct or failing to take steps to prevent or detect improper conduct.
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Expanded Reporting, Cooperation Standards
• Timely reporting in writing to agency OIG, copy to contracting officer, whenever reasonable grounds to believe anyone (principal, employee, agent, subcontractor) has violated Federal criminal law in contract award or performance
• Full cooperation with any Government agencies responsible for audit, investigation or corrective actions
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Related Developments Affecting Cooperation Requirements
• DOJ McNulty Pronouncements
• Specter Legislation
• Others