A truly “egg-gregious” case settled last week with guilty pleas by the company and two top officers.
According to the DOJ’s press release, Quality Egg LLC bribed health inspectors and marketed misbranded, falsely labeled eggs, adulterated with salmonella bacteria. The Congressional investigation in 2010 and media reports painted a picture of a corporate culture steeped in disregard for the public welfare and flouting court and regulatory orders. The company eventually pleaded guilty, reportedly after the bribe-paying supervisor became a cooperating witness against the company.
If Quality Egg ever had compliance officers or any compliance program, it’s not apparent from the public record.
Four years after one the largest food poisoning scandals in recent American history, the case is finally headed into the sentencing phase. No doubt the U.S. Attorneys office, the DOJ and the federal court will mete out tough justice.
However, based on current practice, the resolution of this case will likely omit a specific discussion of whether or not there was an “effective compliance and ethics program” (ECEP) as defined in the Federal Sentencing Guidelines. The public will not learn know if there were any consequences, such as increased sentences or fines.
This is a serious gap in enforcement. Two years ago the RAND Center studied the use of the Federal Sentencing Guidelines. Joe Murphy, a leading compliance expert and the SCCE’s Director of Public Policy, noted (p.61) that DOJ and U.S. Attorney prosecutors often treat pre-existing ECEPs as “mostly fluff” buried amidst “an undifferentiated list of factors that supposedly contributed to an enforcement decision.”
At the same time, a 100-page evaluation of the federal sentencing guidelines by a distinguished advisory group (with extensive public input) found that ECEPs, while effective, are generally ignored by most federal agencies (with the primary exception of FCPA cases). It recommended that the DOJ put its house in order by a change of policy directing all 93 U.S. Attorney offices and the DOJ division heads to prominently evaluate ECEPs in settlements and penalties (pp. 84-93). The courts were also advised to ensure that settlement agreements “indicate on their face” the consideration of ECEPs “in the development of the settlement terms” (pp. 97-98).
Given that there is no disagreement that ECEPs deter crime, the situation is puzzling, reflecting inertia or confusion, not principled opposition. Thus, for the compliance profession, the question is how to improve it, starting with the Quality Egg case or others like it.
Fundamentally, what compliance officers do is prevent and detect corporate misconduct before the public is hurt. That is the mission of the compliance profession: to protect the public from harm. See the discussion in the RAND 2014 report due in September and Murphy’s white paper.
Why is the public at risk in the first place? For purposes of this discussion, it is essentially because companies fall victim to the temptation to put profit over principle and thereby sacrifice their integrity and responsibility for an “organizational culture that encourages ethical conduct and a commitment to compliance with law,” as required by the Sentencing Guidelines. What the public wants, and has every right to expect, is to be protected from companies that, for example, mass market adulterated food or bribe safety inspectors. Prosecutions and fines after the fact are not enough. The public wants companies to accept and address the problems of maintaining integrity and an ethical business culture, for instance, by having ECEPs in order to prevent future harm.
When the business world acknowledges a problem, it adds a senior executive to the C-Suite with the authority and resources to manage the problem. Thirty years ago there were no CFOs, CMOs and other special executives in the C Suite; today no company would be without one or more of these critical executives. The “business-integrity” problem is on the agenda after decades of public outcry over scandals from Enron to the recent GM recall. “Reputational injury” has reached the top of the risks on the minds of board members.
Slowly but surely, many companies, led recently by giants like Walmart, have decided that the answer to the “business-integrity problem” is to add a Chief Compliance and Ethics Officer (CECO) to the C-Suite, reporting to the CEO, with direct access to the Board. It’s the appropriate business solution to a business problem.
There should be a concerted, joint effort to expand ECEP programs to protect the public. U.S. Attorneys and the DOJ can change their policies to require that ECEPs are publicly scrutinized in the settlement phase. The courts, under evolving standards of review for settlements, might more carefully evaluate settlements that unfairly or unreasonably ignore ECEPs in public harm cases.
A possible reason that many U.S. Attorneys offices, DOJ divisions and some courts do not address ECEPs in settlements is that they may not entirely understand them or are skeptical, having dealt primarily with only ineffective, window dressing compliance programs. To correct this and to gain their support for disclosure of ECEPs, an amicus ( friend-of-the-court) brief from the compliance community (including former U.S. Attorneys and DOJ officers) may be critical in the Quality Egg settlement or other cases of corporate misconduct that exposed the public to harm.
Michael Scher is a contributing editor of the FCPA Blog. He has over three decades of experience as a senior compliance officer and attorney for international transactions. He is affiliated with ethiXbase, the owner of the FCPA Blog. He can be contacted here.