The U.S. Sentencing Commission has promulgated new guidelines for Chapter Eight of the Federal Sentencing Guidelines which deal with Organizations. The effect of the new guidelines is to substantially increase the level of responsibility of corporate Officers and Directors for criminal or unethical activity within the Company. The guidelines enhanced burden parallels the increased responsibilities imposed by the Sarbanes-Oxley Act of 2002 for Officers and Directors.

Under the new guidelines, Officers and Directors are required to be knowledgeable about the content and operation of company compliance and ethics programs. If a Corporation is convicted of a criminal offense, the scope and effectiveness of a compliance and or ethics program will have a bearing on the sentence to be imposed. This creates a requirement that Directors educate themselves about these programs.

The Organizational Sentencing Guidelines were first implemented in 1991 as a basis to impose penalties on corporations for criminal conduct committed by employees. Criminal liability can attach to a business when an employee commits an illegal act while performing duties within the scope of their employment. Under the old guidelines a company’s high-level personnel were required to oversee compliance with all laws both State and Federal that govern corporate action. The compliance and ethical burdens have now been increased, and the criteria for Federal Judges to use in evaluating the effectiveness of compliance and ethical programs has been strengthened. The increased level of responsibility is consistent with recent legislative and regulatory focus on ethical corporate conduct.

In order to demonstrate that a Company has a compliance and ethics program, an organization must demonstrate that it exercised due diligence in fulfilling the requirements set forth in the Guidelines, and promoted in other ways a organizational culture that encourages ethical conduct and a commitment for compliance with all applicable laws. Arguably it is no longer sufficient to merely have a set of written compliance and ethical procedures. Corporations must now insure that their written programs are effective and be able to demonstrate their efficacy. The Overview to the Guidelines describes the criteria for a sound program as one that “embod{ies} broad principles that, taken together, describe a corporate “good citizenship” model”.

The rewards for compliance can be significant in that a Corporation can potentially mitigate its responsibility for an employee’s illegal acts in terms of fines by up to 95 percent, if it can demonstrate that it maintains an effective compliance and ethics program.

The message to all Directors is that they must actively insure that compliance is occurring rather than relying on representations of management. In short there is no more free lunch for Directors.