by Carla Miller
In his article “On the Edge,” Gregg Fields wrote about the recent criminal case filed against SAC Capitol Advisors and noted a shift in that the indictment “criminalizes corrupt corporate cultures.” Interestingly, after the indictment, SAC bragged about its “strong culture of compliance” in a New York Times article. SAC even went so far as to say their compliance program was “cutting edge,” and cost tens of millions of dollars with 38 staff, including top-notch lawyers and consultants. Reporter James Stewart asked “Which sets up the question: What were they doing?” Indeed, what were they doing?
As a former federal prosecutor, I have closely followed the history of a unique aspect of prosecuting corporations—the Federal Sentencing Guidelines for Organizations (FSGO). The FSGO are used to set the penalty for a corporation's criminal acts. Credits have been created for corporations that have established an effective ethics program; these credits can generate very valuable reductions in fines and penalties. How will SAC's “cutting edge” compliance program, as stated above, impact the end result in this prosecution? What is the value of having spent tens of millions of dollars? Could it get any worse without the program? The ethics community will be closely watching the outcome of the case to see if the FSGO is used, and how, in setting any criminal penalties.
There is a broader question as it relates to the concepts of institutional corruption and the work of the Lab at the Edmond J. Safra Center for Ethics. Over the last decade, the FSGO has begun to have a life of its own outside of the criminal justice system and it drives the creation of thousands of ethics programs, including some in my area of interest, municipal governments.
Can something that has its genesis in the criminal justice system effectively outline the components of a comprehensive structure that not only prevents crime, but addresses the non-criminal aspects of institutional corruption? Do we define the structure and content of ethics programs from the bottom up (fear of punishment) or from the top down (prevention of institutional corruption)?
The Basics (FSGO in a Nutshell)
- In 1987, Guidelines were formulated by the U.S. Sentencing Commission to promote fairness in sentencing individuals convicted of a crime.
- Organizations can also be held liable for the criminal acts of their employees (vicarious liability) and can be charged with crimes. If convicted, the entity can pay large fines, be placed on probation and be monitored by outside parties.
- In November, 1991, the standards were released for sentencing organizations; these are the Federal Sentencing Guidelines for Organizations (FSGO)
- These guidelines apply to all corporations, labor unions, pension funds, non-profits, and governmental entities. They come into play after the entity is charged with a crime, gets convicted, and is at the sentencing stage.
- The most significant section is Part B2.1 — “Effective Compliance and Ethics Program” which is the section that lays out the criteria that is used to evaluate whether an ethics program is effective or just a facade. If it is effective, credits are applied and money is saved.
- The FSGO guidelines focus on the prevention of crimes, and define an effective ethics program as one that “prevents and detects criminal conduct.”
- Within a few years after these standards were created, most major corporations had ethics programs in place. Either the threat of more severe punishment or the incentive of perhaps even avoiding a prosecution altogether served as a “nudge” (maybe a kick) to create these ethics programs.
- Since 1991, there has been a huge growth in corporate ethics programs, which includes outside consultants, certifications and organizations (e.g. the ECOA). Conferences dissect the guidelines and share best practices on creating programs that fit the FSGO criteria. It has been estimated that business ethics consulting and related spin-offs have created a billion dollar industry.
- The FSGO was the catalyst for hundreds of thousands of hours of work and hundreds of millions of dollars in investment to create strong structures and materials for ethics programs. Many of these programs are exemplary, and the ethics professionals working in them are dedicated and diligent within the parameters of their company's policies.
- Government ethics consulting at the local level is sporadic and not well funded, but FSGO standards have spilled over into municipal governments as the framework for creating local ethics programs (e.g. Austin ethics audit; Denver ethics audit).
- The FSGO standards, even though created in the context of sentencing in criminal cases, have become the de facto blueprint on how to implement ethics programs in the U.S.
The Report of the Ethics Resource Center
In 2012, the Ethics Resource Center (ERC) released an excellent study summarizing 20 years of FSGO practices. The report acknowledged many positive results, but also listed several challenges to the program.
Statistically, over the last 20 years, only five corporations out of 3,433 sentenced have received the “credit” for having a good ethics program. The challenge is that the large companies seem to be able to get their cases dropped or settled prior to a trial, and the statistics are murkier at this stage. Larger corporations have more money and more lawyers to fight the prosecution in the early stages. The real goal is not to get credit for an ethics program at sentencing, but for the criminal indictment to never see the light of day in the first place.
The ERC also noted confusion, and inconsistencies across numerous federal agencies, in applying ethics standards and in making them transparent. This increase in complexity only invites “experts” to offer costly solutions. In fact, there is an ethics revolving-door phenomena. Those government employees intimately familiar with the complex ethics regulations are highly sought after in the private sector, the “ethics industry.”
In 2010, there were active lobbying efforts to lighten the requirements of the FSGO; these efforts were successful. As the guidelines become more technical, the complexity of the subject matter provides the opportunity for a monopoly or capture by the few attorneys who understand how to adroitly utilize them to fend off prosecutions for their clients.
Another challenge noted in the ERC report was that it is difficult for some people to comply because of the general nature of the guidelines; people like to check the box as to compliance and they need clear directions in plain English. If some people have difficulty in applying the 7 steps of the FSGO, they would have even more of a problem with an analysis for institutional corruption.
The Seven Guidelines
The FSGO guidelines for an effective ethics program focus on the prevention and detection of crimes. There are seven components that need to be in place. Here is my simplified version.
1. Have standards and procedures in place to prevent crimes.
What about standards and procedures that will prevent the legal and systemic corrupt influences and dependencies in the organization? Are there such standards that could be applied in concise guidelines? Do they exist? If not, why not? It is not likely that people will work with the concepts of institutional corruption unless they are condensed into practical nuggets for practitioners.
2. The Governing Board shall have oversight over the ethics program; there will be a high level “point person” for the program with direct access to the Board.
It is easier to do risk assessments and reports to a Board on what is being done to prevent actual crimes. It conceivably would be much harder for an employee to report to the Board on issues that involve the more abstract concepts of legally corrupt activities in the culture of the group, of which the Board itself could be an inextricable part; this has been a recipe for disaster in the past. Ultimately, the reporting ethics personnel have their economic future tied to what the Board thinks of them; they can be “blinded” to significant issues regarding legally corrupt activities. This is especially true if they are not lawyers and bow to the more “sophisticated” analysis of their attorneys.
3. Don't give discretionary authority to people in the organization who have a criminal history.
How about identifying the positive characteristics for those in authority: courage in reporting offenses; going against the group culture; and identifying more than just the crimes of the organization? How do we identify, encourage, train and cultivate those few people in the group who can take on institutional corruption?
4. You need to train people on your standards.
This usually involves classroom settings or online courses that people certify they have completed. Sometimes values training is added to the legal rules. The vision for training would be to introduce the group to ideas of institutional corruption and how it relates to the fragility of our democratic institutions. See William English's paper on “Institutional Corruption and the Crisis of Liberal Democracy.” If they have an emotional connection to the bigger picture, one that conceivably could threaten their future, the more specific rules and values might stick.
5. There must be monitoring and auditing to detect crimes and to evaluate the program. There may be anonymous ways to report crimes without fear of retaliation.
May be anonymous reporting? Should be. Most people will prefer to keep quiet rather than risk losing their jobs; and that's for reporting crimes. What about people coming forward with early warning signs of corruption? The focus on actual crimes is essential, but it is only the first step in correcting corrupt cultures that push the envelope on technical compliance with the law.
6. Create incentives and disciplinary measures for your ethics program.
(See number 1, above. The focus is too narrow if only on criminal violations and not broader organizational corruption.)
7. After a crime occurs, don't let it happen again.
It's always good to learn from mistakes; hopefully this isn't used in a more devious fashion in which the activity is continued, but done in a “technically legal” manner.
Gaming the System
Enron had an ethics code and a sophisticated ethics program, most likely in conformance with the FSGO standards which had been in effect for almost a decade when Enron's code was released in July, 2000. In December 2001, Enron was bankrupt, and the breakdown will be the source of lessons on fraud and institutional corruption for decades.
Malcolm Salter of the Edmond J. Safra Center stated in his paper (“Short-Termism at Its Worst”) that Enron pursued one of the “greatest gaming strategies of all times” and that “much of this behavior was not clearly unlawful.” “Many of Enron's complex transactions . . . lived instead in the penumbra between the clear light of wrongdoing and the clear light of rightdoing.” Gaming can be spotted when there are ambiguities in laws, unclear language and confusion; the ERC has already noted these challenges with the Federal Sentencing Guidelines. The programs that were put in place for “ethics” can themselves be subject to capture by the forces of institutional corruption.
Gaming the system is at the heart of institutional corruption. If the FSGO program maintains its focus on criminal conduct alone, then it can be used as a joystick for a very large game. If a company or a government heralds its “ethics program” it should mean something to the public; it should be something they can trust is not a charade.
Institutional corruption should be seen as the overarching construct that can be utilized to repair institutions, including local governments. By narrowing the scope of “ethics” programs to the prevention of crimes and legalistic regulations, we have the “tail wagging the dog.”
 Gregg Fields, “On the Edge,” Research in Action Blog, The Lab @ Edmond J. Safra Center for Ethics, August 1, 2013, http://www.ethics.harvard.edu/lab/blog/327-on-the-edge.
 James B. Stewart, “At SAC, Rules Compliance With an ‘Edge,’” New York Times, July 26, 2013, http://www.nytimes.com/2013/07/27/business/at-sac-rules-compliance-with-an-edge.html?pagewanted=all.
 <§ 8A1.1. “ ‘Organization’ means ‘a person other than an individual.’ 18 U.S.C. § 18. The term includes corporations, partnerships, associations, joint-stock companies, unions, trusts, pension funds, unincorporated organizations, governments and political subdivisions thereof, and non-profit organizations.”
 William English, “Institutional Corruption and the Crisis of Liberal Democracy,” Edmond J. Safra Research Lab Working Papers, No. 15 (2013), SSRN: http://ssrn.com/abstract=2281305 or http://dx.doi.org/10.2139/ssrn.2281305.
 Malcolm S. Salter, “Short-Termism at Its Worst: How Short-Termism Invites Corruption . . . and What to Do About It,” Edmond J. Safra Research Lab Working Papers, No. 5 (2013), SSRN: http://ssrn.com/abstract=2247545 or http://dx.doi.org/10.2139/ssrn.2247545.