Compliance Officer and Legal Counsel Dual Roles

Compliance Officer and Legal Counsel Relationships

Most organizations have divided their legal counsel office from their compliance office.  This has clearly become best practices in recent years.  In fact, dual role compliance officers can create risks as to whether your compliance program is effective.

There is a current debate within the compliance industry about the relative roles of the Chief Compliance Officer (CCO) and Legal Counsel. More specifically, questions are raised regarding whether the Legal Counsel should serve the dual role of legal counsel and compliance officer and whether the primary compliance officer can report through legal counsel. This is an extremely important issue to many organizations. I will be devoting several articles to the various aspects of this issue over the next several weeks.

In all but the very smallest organizations that clearly cannot absorb the cost of two separate functions, it presents increased compliance risk to the organization for the legal counsel to also be the prime individual responsible for compliance within the organization. Dividing the compliance and legal counsel functions is clearly the “best practice” when it comes to organizational compliance.

This conclusion is supported by comments from the Office of Inspector General (OIG), a consistent reading the the Federal Sentencing Guidelines (FSG), the position taken by the government in Corporate Integrity Agreement fraud and abuse settlements, and by the general ethical standards that apply to the general counsel.

The case for dividing the functions of legal counsel and compliance officer and creating a separate Compliance Office with direct line of authority to the Board or a Committee of the Board is quite compelling. In fact, many organizations who had previously run the compliance role through the office of general counsel are now reviewing that practice and are making changes to their organizational structure and compliance plans.
A study done by the American Health Lawyers Associations and the Office of Inspector General in 2004 found that at that time, only 20% of the health care organizations that were polled had their compliance function under the authority of the Legal Counsel’s office. It is safe to say that in view of more recent pronouncements by the OIG and by comments made in the Supplmental Compliance Guidance for Hospitals that was released in 2005, the percentage of “dual role” organizations is now less than that figure.

The first source to be examined when defining the role of the compliance officer within an organization is the Federal Sentencing Guidelines. The FSG do not specifically mention a compliance officer per se, but require that the compliance and ethics program be assigned to “high-level” peronnel. When organizations first began creating compliance programs in response to the Federal Sentencing Guidelines, oftentimes the responsibility was assigned to the legal counsel. This seemed to be a natural outgrowth of the function of the office of legal counsel. In that regard, it made organizational sense because the office of legal counsel had resources and personnel in place to impliment the compliance program without creating an entire new organizational division.

Over time, the assignment of compliance functions to the legal counsel began to raise questions. Concerns were raised as to whether the legal counsel was in fact a “high level” peronnel. Additionally, questions were raised as to the degree that giving the legal counsel the dual role of compliance officer and legal counsel sufficiently conveyed the appearance of the importance that the organization placed on compliance. As a result, some lawyers and compliance experts began to question whether creating a “dual role” compliance officer put the organization at risk of not receiving the benefits afforded under the Federal Sentencing Guidelines if the organization was ever in a position to need these benefits.

The Office of Inspector General has made its position clear that legal counsel should not exercise a dual role. An examination of many of the recent Corporate Integrity Agreements that have been entered between providers and the OIG clearly demonstrate the OIG’s position on this matter. Most CIAs outline the role and position of the compliance officer in the organization. The standard language being used by the OIG is as follows:

“The Compliance Officer shall be a member of senior management of [Provider], shall make periodic (at least quarterly) reports regarding compliance matters directly to the Board of Directors of [Provider], and shall be authorized to report on such matters to the Board of Directors at any time. The Compliance Officer shall not be or be subordinate to the General Counsel or Chief Financial Officer. [Emphasis Added]

Although the Sentencing Guidelines do not affirmatively address dual role situations, Commentary to the Sentencing Guidelines state that “applicable industry practice or the standards called for by any applicable governmental regulations” are factors to be considered. Failure to follow these standards “weighs against a finding of an effective compliance and ethics program.”

At the same time, both the Sentencing Guidelines and the OIG Compliance Guidance recognize that the size of the organization is a factor in judging the level of compliance. This recognizes that in cases where the organization is small and fewer resources are available, the organization can meet its obligations without necessarily creating a structure that separates the roles between the legal counsel and the compliance office. However, there is no precise definition as to whether an organization is a “small organization” that can fulfill its compliance functions in less formal ways or a “large organization” which will be expected to devote suitable resources to create a completely separate compliance function.

This uncertainty leave an organization’s board of directors without precise guidance concerning an appropriate structure given the size and nature of its organization. At the same time, best practices, given available resources, is to separate the compliance and legal counsel functions. The potential consequences of failing to use an appropriate structure for the size of the organization is increased penalties in the event of an event of organizational criminal misconduct; so the consequences can be quite serious.