At the recent ACI FCPA Boot camp, held in Houston, there was an interesting new angle presented in the enforcement panel. Clarissa Balmaseda, a special agent in charge of Internal Revenue Service (IRS) criminal investigation, joined Nathaniel B. Edmonds, Assistant Chief from the US Department of Justice’s (DOJ) Fraud Section – Criminal Division, and Jason Rose, Senior Attorney, FCPA Specialization Unit, a representative from the Securities and Exchange Commission (SEC), in discussing the most current Foreign Corrupt Practices Act (FCPA) enforcement trends. This was the first time I had seen an IRS agent participate in a FCPA conference on behalf of the US government.

So what does the IRS bring to a FCPA investigation? Edmonds stated that the IRS has skills and experience in looking at financial patterns and tracing money. He noted that usually FCPA violations are tied to other legal violations, for example money-laundering or fraud, and that the IRS can comb through financial records to find patterns in payments. He also stated that the IRS has significant experience in investigating corporate shell structures which can be part of an ongoing criminal attempt to obtain bribes and then conceal the location of the money.

Agent Balmaseda stated that the IRS would be looking into financial statements for mis-characterization of bribe payments, specifically focusing on tax returns. Similarly, the IRS would also investigate to determine if companies were amending their financial statement filings, including tax returns, to correct such mis-characterizations after disclosure of any such payments. She later added that the same type of analysis would be applied to any monies which were initially mis-characterized on a company’s books and records, such as gifts, travel, entertainment or charitable contributions.

Agent Balmaseda also discussed some of the red flags the IRS will be looking for in any FCPA investigation in which their assistance is requested. These red flags may include the following:

  1. Timing of contract award – Vis-à-vis payment to an agent at, or near, the award of a contract may indicate that monies paid to an agent are being used to pay a bribe.
  2. Amount of contract – Check if contract is increased during its term. If there is no corresponding business justification, this may be evidence of corruption.
  3. How was a payment made and to whom? – This analysis will look that the methods of payment and delivery.
  4. Employee expense reports – While most investigations focus on payments to agents, the IRS may well look more closely at employee expense reports to see if any overall patterns are developing which might indicate corrupt payments are being made elsewhere.
  5. The importance of a strong company Internal Audit investigative team – Here Agent Balmaseda emphasized that during a company’s internal investigation it is important to speak with the business unit controller because they decide how payments are categorized. She also emphasized that tax filings and their amendments are important.

The addition of the IRS to any FCPA investigation brings additional specialization and sophistication to the government’s effort. Agent Balmaseda’s remarks provide a company with clear guidance on the types of analysis that the IRS can, and will, perform. Companies should use this information and begin to perform these types of investigations internally before the government comes knocking. Lastly, a corporate tax return may provide fertile grounds for an investigation. Companies which now perform an internal investigation but do not self-report may find themselves in deeper trouble.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2012

2 comments
Asa Schoenbeck
Asa Schoenbeck

A thoughtful opinion and guidelines I’ll use on my web page. Youve obviously spent some time on this. Properly carried out!

Sunny McCall
Sunny McCall

Yes, it is true that the inclusion of the IRS angle on the Enforcement panel at the ACI FCPA Houston event this year was a bit of a "new" twist. Providing an elightening and fresh perspective on how companies and individuals can be exposed to additional criminal liability grounded in violations of tax law, I think it was clear from Agent Balmaseda's comments in Houston that IRS Criminal Investigations is working collaboratively behind the scences with the DOJ and SEC in the context of FCPA investigations. Possibly something we can expect to see more of in the future? Agent Balmaseda will also be presenting at ACI's upcoming FCPA & Anti-Corruption Event for the Life Sciences Industry taking place on May 8-9 in NY. At that event Agent Balmaseda will deliver a Spotlight Address on IRS' Role in FCPA Enforcement. Time will be provided for Q&A with Agent Balmaseda as well.