Reasons to Have a Company Legal Compliance Plan

Langdon Owen
November 6, 2008 — 1,616 views  
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Protection from creditors may involve the use of trusts, limited liability companies, and similar structures.  However, avoiding liability in the firs place is a major leg on which any solid protection plan stands.  The best planning thus involves planning to assure compliance with various rules the violation of which could create devastating liability, either criminal or civil.  Sometimes clients are reluctant to do such planning.  Here are some solid reasons why such planning is worthwhile and some ideas to make such planning more likely to succeed.

1. The Risk Is So Great, Why Would You Not Want to Have One?
(a) Criminal Enforcement Activity Has Increased Dramatically on Business Matters.

(i) New definitions of crimes and the increased number of criminal provisions expand the scope of prohibited activity.

(ii) Several crimes do not require actual intent.  Some are based on "knowingly and willfully" but others only require "reckless disregard" or "knew or should have known," negligence, or similar non-intent standards.

(iii) Increased funding for Department of Justice, Federal Bureau of Investigation, Office of Inspector General, and other agencies for audits, investigations, and prosecutions in a number of areas.

(iv) State enforcement activity continues, as well.

(v) Respondeat Superior doctrine can create corporate criminal and civil liability for acts of agents (who may also be criminally or civilly liable).

(vi) Federal sentencing guidelines substantially reduce penalties if organization has effective compliance program.

(vii) Prosecutorial discretion is affected by use of compliance plans.

(b) Increased Tax, Environmental, and Antitrust Scrutiny of Business.

(i) Civil claims may arise from government or, especially as to environmental and antitrust matters, from other businesses or competitors.

(ii) Criminal provisions exist with respect to all such subject areas.

(iii) State and local civil or criminal rules may well apply, too.

(c) Civil Enforcement by Governmental Agencies Has Increased.

(i) Huge monetary recoveries and penalties have occurred in a number of industries.

(ii) Exclusion from government contracting can be a major sanction.

(iii) License revocations by state licensing officials may follow a fraud or abuse case or a criminal case.

(d) Private Enforcement of Fraud Rules Is Strongly Encouraged.

(i) Qui Tam lawsuits under civil False Claims Act (15%-30% of overpayments recovered may be collectable by the whistle blower) is available in industries dealing with government contracts or government payments.

(ii) Racketeering Influenced and Corrupt Organizations Act (RICO) applies to patterns of illegal conduct.  There are state racketeering acts, too.

(iii) State court invalidation of contracts is possible on public policy or illegal contract basis.

(iv) State court enforced duties of the Board of Directors (and apparently officers, too) to assure compliance with law and financial propriety can lead to large damage awards, injunctions, and other remedies; these duties may be asserted by shareholders, trustees in bankruptcy, etc., as well as by government officials.  Class actions may be possible.  Similar duties apply to managers of limited liability companies and top officials of other forms of organization.

(v) Rewards for whistle blowers (which do not require the time and financial commitment to qui-tam actions) will increase whistle blowing.

(vi) Employment relationships or disputes are affected where employees threaten whistle blowing or claim retaliatory firing, etc.  Many qui-tam claims arise from employment disputes.

2. Benefits of Plans - What's in it for the Company?

(a) Criminal.

(i) Prevention of the crime.

(ii) Reduced penalties for any crime (especially crime by employees, etc.).

(iii) Lower likelihood of prosecution.  Plan needs to be effective (not perfect) and if effective, it is much harder to prove "recklessness" or other standards.

(iv) Failure to have a compliance plan suggests "deliberate ignorance;" although having a plan is voluntary, not having one, or worse, having one and not letting it be truly effective, looks rather suspicious to regulators and others.

(v) Greater likelihood of settlement; government settlements often require a compliance plan, and where an effective plan is in place, settlements are more easily negotiated.

(b) Civil.

(i) Prevention of civil claims of various sorts, from False Claims Act to employment disputes.

(ii) Reduced exposure to penalties, damages, license revocations, program exclusions, etc.

(iii) At least one Delaware case has made corporate directors liable to corporation and shareholders for large loss in failing to have a compliance plan.  A Bankruptcy Court has extended this potential liability to officers as well.

(c) Internal.

(i) Provides understanding of actual business operations.

(ii) Monitors employee behavior.

(iii) Corrects risky conduct and increases financial security against massive damage (note: shareholder action may be available against board of directors personally).

(iv) Enhances gathering and dissemination information to providers' personnel on governmental and other legal requirements.

(v) Provides help in defending against allegations of failure to comply with law.

(vi) Encourages employee reporting to management rather than filing qui-tam action (employees are the single greatest risk for source of qui-tam action and all qui-tam cases must be investigated by the Department of Justice, increasing the odds of a criminal charge).

(vii) Facilitates protection of attorney-client privilege, which is under attack, yet may be of critical importance.

(viii) Helps avoid court or government imposed compliance programs; your plan is probably more livable than someone else's imposed plan.

3. Negatives of Plans - Is Ignorance Bliss?

(a) Failure to follow - looks very bad; consistent enforcement is critical, so be sure to provide complete follow-up and documentation of all complaints.

(b) Effectiveness of the plan may be compromised if:

(i) Plan is not kept current on changes in law or operations or plan not understandable.

(ii) Offense is by high-level individuals or person in charge of the plan.

(iii) Unreasonable delay in reporting occurs; quick and accurate disclosure to payors of any billing or coding errors is important.

(iv) Where plan is not developed from a baseline audit, it is vulnerable (otherwise, no one will know problems upon which to focus).  Note: such audits may be full-blown report card audits or may be (and often are) more limited.

(v) Failure in continuous employee training or where plan is not provided to all employees.

(c) Cost and Effort of Creating and Following Plan.

(i) Dollar costs are heavily outweighed by plan benefits.  Plans need to be tailored, and this makes them cost-effective.

(ii) Plans need not be excessively complex, but should be tailored to the actual operations of the organization (e.g., in the health care industry, a hospital's plan will likely be much more complex than a physician group's plan) and should focus on the areas of greatest risk.

(iii) May combine with others to obtain a less-costly plan.

(d) Need to make refunds of overpayments and may need to report errors.

(i) If errors found, need to correct them to avoid false claim allegations of concealing overpayment from government.

(ii) May or may not be an affirmative duty to disclose; voluntary disclosure may or may not be wise.  This should be carefully reviewed case by case.

(iii) Voluntary self disclosure protocols available in some industries take time, effort, and money but reduce chance of qui-tam action, enhances credibility, rebuts allegations of intentional wrong doing, and may obtain leniency (no guaranty, however).

(iv) Self disclosure may trigger further audit.

(v) Self disclosure may trigger action by private parties, state, or other federal agencies.

(vi) Need to analyze effect on available evidentiary privileges.

(vii) Self audits, on the other hand, also may identify amounts payable to the organization.

4. Basics Required for Plan.

(a) Reasonably Meet Requirements.

(i) Plan must be effective but not foolproof.

(ii) Small organization's plan may be much simpler than large organization's plan.

(iii) May combine with other groups for a common plan.

(b) Basic Requirements - The Seven Cardinal Virtues.

(i) Compliance officer with clout and responsibility, who is accessible. (Best if the officer's compensation or bonus is not profit driven, since a profit tie may create perverse incentives.)

(ii) Clear, written policies and procedures.

(iii) Careful delegation and screening.

(iv) Periodic training and creating a culture of compliance.

(v) Monitoring and auditing (neutral reviews, hotlines, etc., may be a part of this); annual analytic reviews of performance and improvement.

(vi) Consistent enforcement.

(vii) Prompt investigation and corrective action.

(c) Other Matters.

(i) Seek assistance from government in questionable or ambiguous areas and document the guidance.

(ii) Have plan interactive with plan of key contractors or suppliers where appropriate (they likely need a proper compliance plan, too).

Langdon Owen


Langdon T. Owen, Jr. is a member of the law firm of Parsons Kinghorn Harris, p.c. in Salt Lake City, Utah. Mr. Owen is a transactional lawyer who practices in the areas of estate and tax planning, business and commercial transactions involving both corporate and partnership taxed enterprises (including tax, employment, and benefit issues relating to such transactions), loans and creditors' workouts, pension and profit sharing plans, health care law, probate, and real estate.