Corporate Crime
Have the Organizational Sentencing Guidelines Produced Results?

By Dean Reeves, CFE

On Sept. 30, 1995, Frederick Copeland found out that he was $19 million richer. He was to receive the money from a whistleblower lawsuit he initiated more than two years earlier resulting from fraud allegations. In 1993, Copeland, a former machinist, and an assistant attorney general filed a qui tam law suit in civil court alleging that defense contractor Lucas Western Inc. and Lucas Aerospace Inc. falsified charts to conceal major defects in gearboxes used in aircraft and military systems.

Lucas Industries pleaded guilty to 37 counts of making false certifications to the Department of Defense and was ordered to pay, under the-then new U.S. Organizational Sentencing Guidelines, criminal penalties of $18.5 million.² The total amount of restitution, fines, and all penalties was $88 million.³

The impact of the 1991 guidelines is undetermined. However, we now have more than eight years of statistics and anecdotal evidence, such as the Lucas case, from which to draw a meaningful analysis. When Edwin H. Sutherland coined the term white-collar crime, he probably had in mind the idea of corporate crime, and the notion that illegal acts are committed by the wealthy and powerful to further their capitalistic and business interests. Could it be that the most effective corporate crime legislation in the history of our country is taking place some 70 years after the works of criminologists Sutherland and his prot間? Donald R. Cressey? Or could it be that the Organizational Sentencing Guidelines are just another token legislative movement enacted to pacify the agenda of the anti-corporate faction of our country? Or is it something in between?

Background of the Guidelines

In 1984, the U.S. Congress mandated uniform sentencing guidelines through the Comprehensive Crime Control Act. The act established the United States Sentencing Commission (USSC), which began studying sentences for individuals. In 1987, the USCC announced Sentencing Guidelines for Individuals, which were applied in U.S. federal courts.

In 1991, USSC submitted to Congress its Proposed Guidelines for Sentencing Organizations and it became law late that year as the Organizational Sentencing Guidelines. Among other things, the guidelines provide for the substantial reduction of fines for corporations that have vigorous fraud prevention programs.⁴

So the guidelines were established to encourage business to develop compliance plans and become better citizens in a kinder and gentler capitalistic system. Critics say that it ties the hands of judges in sentencing criminal corporations and its executives; proponents of the guidelines say the guidelines help make federal sentencings more consistent and create an incentive for companies to treat the public right. Despite the pros and cons, the guidelines bring the issue of corporate wrongdoing to the forefront, and create a sanctioned forum for discussion on corporate criminality.

The first drafting of the guidelines was a collaboration of law enforcement, private industry, and the public. The guidelines have the maximum possible fines of $290 million per offense and possible corporate suspensions of business for up to five years. The theory is that the fines will minimize profits to investors, which will decrease the company抯 market value ?a serious deterrent of corporate crimes.

The OSG outlines seven critical and indispensable steps that corporations must follow to show they are taking minimum care to prevent or mitigate damages that might result from wrongdoing of employees or executives:

1. Policies defining standards and procedures are to be followed by the organization抯 agents and employees.
2. Assign specific high-level personnel who have ultimate responsibility to ensure compliance.
3. Use due care not to delegate significant discretionary authority to persons whom the organization knew or should have known had a propensity to engage in illegal activities.
4. Communicate standards and procedures to all agents and employees and require participation in training programs.
5. Take reasonable steps to achieve compliance, e.g., by use of monitoring and auditing systems and by having and publicizing a reporting system where employees can report criminal conduct without fear of retribution (hotline or ombudsman program).
6. Consistently enforce standards through appropriate discipline ranging from dismissal to reprimand.
7. After detection of an offense, the organization must have taken all reasonable steps to appropriately respond to this offense and to prevent further similar offenses including modifying its program and appropriate discipline for the individual(s) responsible for the offense and those who failed to detect it.

The guidelines punish companies where it hurts the most ?in their profits. If a corporation is found guilty of perpetrating a $10 million fraud, the base amount of that fine is $10 million. The guidelines would then follow a schedule to determine an extra punitive fine based on the seriousness of the offense, and the culpability of the organization. When the crime isn抰 a random act, but part of a serious pattern that shows the company is determined to be a criminal organization, the guidelines can command the divestiture of all assets of that corporation and put it out of business.⁵

Punitive damages are determined, in part, on several mitigating factors, including:

• occurrence of the offense despite the existence of an effective compliance program designed to prevent and detect violations;
• lack of knowledge of the offense on the part of high-level management;
• prompt reporting of the offense to governmental authorities;
• full cooperation in any investigation; and
• clearly demonstrated recognition and acceptance of responsibility for criminal conduct.

The Impact of the Guidelines

Number of Sentences

From the inauguration of the guidelines in November 1991 through September 1993, only 26 organizations were sentenced nationwide. In 1995, more than 100 organizations were sentenced under the guidelines, and in 1996 more than 150 organizations were sentenced. In 1999 (the most recent figures available), 255 organizations were sentenced under the guidelines, an increase of 15.9 percent from 1998 and a ten-fold increase from 1991 through 1993.

Two hundred of the 255 organizations sentenced in 1999 received fines, and 91.4 percent of the 255 organizations plead guilty with 8.2 percent being convicted after trial (one case plead nolo contendere).⁶ The trend of prosecutions has clearly risen over the past nine years.

Restriction of Trade

Constraint of business and commerce always is a primary concern when legislation is introduced that places added responsibilities on the private sector. Free market theorists warn that placing increased regulations and subsequent restrictions on corporations through legislation may damage companies, result in the loss of thousands of jobs, and have a devastating result on the economy as a whole. Data from the U.S. Sentencing Commission and related studies don抰 show any unintended and overly burdensome limitations on organizations over the past nine years. The free marketers?argument has merit when applied to industries that produce goods but falls short when applied to traditional market economy industries such as banking, brokerage, etc.⁷ For example, increased governmental regulation on the automobile industry could affect the production of goods and threaten the livelihood of millions of Americans whereas increased regulation on financial institutions are less likely to adversely affect the economy or jobs on a large scale.

What Crimes are Being Targeted?

Fraud has been and continues to be the number one crime for which a company is sentenced under the guidelines. In 1995, 38.9 percent of companies fined under the guidelines were found guilty or fraudulent activities; in 1997, 41 percent; and in 1999, 33.7 percent. (Environmental prosecutions have consistently remained the second most prevalent prosecution type with 20.4 percent of all violations in 1995 and 23.5 percent in 1999.)⁸

Organization Size and Other Differences

According to research done by Day, Berry and Howard, LLP, between 1991 and 1996, 1) newer and smaller corporations were usually the target of investigation, and 2) the investigation and subsequent sentencing produced serious if not terminal financial results on the organization. ⁹ The research also concluded that in 1996, of the 86 companies sentenced, a majority of those entities had less than 50 employees or had annual gross earnings of $1 million or less. Of the 111 organizations sentenced in 1995, 52 percent employed less than 15 people and were in business less than 14 years. Of the 111 businesses sentenced in 1995, none of the organizations received recognition under the guidelines for having an effective program in place to prevent and detect violations of law at the time of the event.¹⁰

Financial Impact on Organizations

Just as the Lucas case showed, fines under the guidelines can be substantial. Between 1991 and 1993, fines ranged from $3,000 to $400,000.¹¹ In 1995, the mean fine was just under $250,000 and the median fine approximately $30,000. By 1999, the mean fine for an organization sentenced under the guidelines with total fine and restitution imposed was more than $5.5 million with a median fine of $100,000.¹² In 1999, 75 percent of the organizations sentenced under the guidelines were able to pay the fine imposed while 25 percent had to have the fine reduced because they couldn抰 pay the full penalties. Nearly one-third of the companies sentenced in 1995 and 1996 either went out of business or filed for bankruptcy.

According to a study involving 333 corporations of various sizes representing various industries, 44 percent of the respondents stated the guidelines triggered the enhancement of their compliance procedures while 20 percent said the guidelines were directly responsible for the implementation of a compliance program within their organization. A separate study of large companies concluded that 38 percent of organizations significantly improved their compliance environment after the enactment of the guidelines.¹³

Intriguingly, while studies such as these imply U.S. organizations are beginning new and enhanced compliance programs, the U.S. Sentencing Commission Annual Reports don抰 necessarily show that. Of the 111 organizations sentenced in 1995, not one of them had a proactive compliance program to detect and prevent violations of law. That percentage didn抰 increase dramatically over the next four-year period; only one percent of all companies sentenced in 1999 had an effective proactive plan in place to prevent and detect violations of the law.¹⁴ Because many studies include self-reported data, it抯 difficult to determine the precise influence of the guidelines on the implementation and enhancement of compliance programs or the deterrence of wrongdoing as a result of the guidelines.

Figures do seem to indicate that the old adage they抮e only sorry if they get caught applies to numerous organizations. In 1995, 26 percent of the organizations sentenced failed to self-report, cooperate with the investigation, or accept responsibility. That number fell to 10.9 percent in 1999. On the other hand, corporate recidivism doesn抰 seem to be an issue as organizations listed as having no prior record have consistently remained at or above the 95 percent mark for the life of the guidelines. In other words, few, if any, corporations are being sentenced under the OSG a second time.

Findings also indicate a large impact on small businesses. U.S. Sentencing Commission figures clearly indicate that smaller organizations (less than 100 employees) are sentenced a great deal more than large businesses. Various studies confirm this fact and even seem to imply that small businesses are being targeted disproportionately to large organizations. While the overwhelming ratio of small businesses sentenced under the OSG is interesting, it is in accordance statistically with the ratio of organizations in the U.S. As one study noted, of the 111 organizations sentenced in 1995, 52 percent employed less than 15 people. According to U.S. Census Bureau statistics, nearly 90 percent of all U.S. firms in 1997 had fewer than 20 employees, and of the 5.5 million U.S. firms in 1997, less than 100,000 of them had more than 100 employees.¹⁵ So it抯 not surprising that the guidelines affect smaller companies far more often than large organizations.

Even if the raw data collected over the previous nine years don抰 provide conclusive evidence of the deterrent factor of the guidelines, the guidelines are still having an impact on corporations. Theories about corporate crime have long held that if nothing else, negative media attention is a deterring factor in the behavior of organizations, because the incentive for corporations to settle civil suits is much greater with the looming threat of the guidelines and possible bad publicity and stiff fines.¹⁶

Will the impact of the OSG continue to increase, decline, or has it hit its plateau and leveled off? Perhaps nine more years of figures will give us a more definitive long-term picture. But one thing is clear: more organizations are being sentenced each year, the fines and probationary criteria are severe and objective, and the sentencing standards, as designed, are consistent. The Organizational Sentencing Guidelines are having an impact on corporate crime.

Dean Reeves, CFE, is a compliance consultant for a major insurance company and a member of the adjunct faculty of Metropolitan State College of Denver抯 Department of Criminal Justice and Criminology. He was given the Distinguished Achievement Award by the Association as the runner up to the 1997 Walker Award.

¹ U.S. Department of Justice press release, 10/2/1995, Lucas Industries Pays U.S. $88 Million to Settle Lawsuit

² TAM False Claims Act and Qui Tam, Quarterly Review , April, 1995

³ U.S. Department of Justice press release, 10/2/1995, Lucas Industries Pays U.S. $88 Million to Settle Lawsuit

⁴ Fraud Examiners Manual, Third Edition, copyright 1998 Association of Certified Fraud Examiners, Austin, Texas

⁵ United States Sentencing Commission Federal Sentencing Guidelines. St. Paul, Minn.: West Publishing Co. 1995. P.16

⁶ United States Sentencing Commission 1999 Annual Report. Chapter 5, p. 45.

⁷ Kitty Calavita and Henry N. Pontell, Heads I Win, Tails You Lose: Deregulation, Crime, and Crisis in the Savings and Loan Industry. In White-Collar Crime: Classic and Contemporary Views by Geis, et al. 1995, p. 201.

⁸ United States Sentencing Commission 1999 Annual Report, chapter 5, p. 46.

⁹ Berry Day, and Howard, LLP, Governmental Investigations Update Dec. 1997

¹⁰ United States Sentencing Commission 1995 Annual Report, p. 122.

¹¹ Berry Day, and Howard, LLP Corporate Sentencing: Encouraging the Good Citizen Corporation December 1997.

¹² United States Sentencing Commission 1999 Annual Report, Table 22.

¹³ Dove Izraeli, and Mark S. Schwartz. What we can learn from the U.S. Federal Sentencing Guidelines for Organizational Ethics? European Institute for Business Ethics. 1996.

¹⁴ U.S. Sentencing Commission 1999 Annual Report, chapter 5, Table 54.

¹⁵ U.S. Census Bureau. 1997. Employer statistics, table 2c Employment Size of Employer Firms 1988 to 1997.

¹⁶ Joseph S. Hall, Corporate Criminal Liability (Thirteenth Survey of White Collar Crime). American Criminal Law Review, Spring 1998 v35 n3 p. 549.