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November 04, 2004
Does Your Ethics Program Meet the New Federal Rules? (Part 1)

Legal Editor, Business and Legal Reports

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(Editor's note: This is the first article in a series of two on the federal government's new ethics training requirements.)

Under the amended Federal Sentencing Guidelines, effective November 1, 2004, employers must provide their employees at every level within the company, as well as agents of the company, with compliance and ethics training in order to demonstrate an effective compliance and ethics program. Before November 1, 2004, training was not a required element of an effective compliance and ethics program. These new amendments have rigorously toughened the requirements for companies to reduce their fines if even one of their employees is guilty of criminal misconduct.

Reducing fines 90 percent

The Sarbanes-Oxley Act of 2002 directed the Federal Sentencing Commission to reassess the portion of the Federal Sentencing Guidelines that applies to organizations, with the focus of preventing and punishing criminal conduct.

Whenever an employee commits a criminal act within the scope of his or her employment, the organization as a whole can be held liable for the act of that individual employee. Companies can face hefty fines, probation for a period of up to 5 years, can be forced to restore victims to their positions prior to the offense or the positions they would have been in had the offense never occurred, apologize to the victims, post public notices of the conviction, and face forfeiture statutes. According to "An Overview of the Organizational Guidelines" published by the Federal Sentencing Commission, an organization that has an effective compliance and ethics program can reduce its fines for a criminal conviction by as much as 90 percent.

Do these rules apply to all companies?

Yes. The Federal Sentencing Guidelines apply to "all organizations whether publicly or privately held, and of whatever nature, such as corporations, partnerships, labor unions, pension funds, trusts, nonprofit entities, and governmental units…."

Seven requirements of an effective ethics program

The Federal Sentencing guidelines outline seven steps an employer must take to have an effective compliance and ethics program:

  1. An organization must establish standards and procedures to prevent and detect criminal conduct.

  2. An organization's high-level personnel must be knowledgeable about and oversee the content, implementation, operation, and effectiveness of the program.

  3. An organization must take reasonable efforts to avoid giving substantial authority to an individual that the organization knew, or should have known, has engaged in criminal activity or other conduct inconsistent with an effective ethics program.

  4. An organization must take reasonable measures to periodically conduct training programs for and disseminate information to the organization's governing authority, high-level personnel, employees, and agents.

  5. An organization must monitor and audit for criminal activity, periodically evaluate the effectiveness of the program, and create and communicate procedures for employees and agents to report criminal activity without fear of retaliation.

  6. An organization must provide incentives to comply with the program and enforce disciplinary measures for engaging in criminal conduct or failing to prevent or detect criminal conduct.

  7. An organization must respond appropriately to criminal conduct and modify the compliance and ethics program, if needed, to prevent further criminal conduct.

It is essential now that companies establish compliance and ethics training programs in order to both prevent criminal activity within their organizations and reduce fines if the criminal conviction of an employee does occur. Next week, Part II of this article will address how employers can train their employees, who can perform the training, how often training must occur, and the training topics that should be covered in order to comply with the law.

KF 10-04

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