I am a huge Agatha Christie fan. I have read most of the Poriot novels and many of the Jane Marple novels as well. However, I was not aware of Christie’s work in the short story format until I recently read a volume entitled Miss Marple Short Stories. This volume included 13 short stories first published in 1932. In many ways reading them was like revisiting an old friend, who had new stories to tell me that I had not previously heard. So in honor of my love of Agatha Christie and her short stories, I will theme my blog posts this week around one of her original short stories, published as The Thirteen Problems.
The first story was called The Tuesday Night Club and introduced Miss Marple and her cast of characters around these stories. Each was asked to relate some mystery and the others would try and solve the mystery. As with most of Christie’s writing, there were the stories and the characters who were, in many ways, stories themselves so there was a double layer of intersection. In this story a wife died of poisoning and her husband was the prime suspect. However Miss Marple deduced that the couple’s longtime housekeeper who has gotten “into trouble” through a liaison with the husband had poisoned the wife in hope’s of marrying the now widow. The group around Miss Marple was astounded when her deduction was confirmed by the storyteller when he related the housekeeper’s own deathbed confession.
Just as many readers may not have focused on Agatha Christie’s work in the short story format, many Foreign Corrupt Practices Act (FCPA) practitioners tend to focus on Department of Justice (DOJ) FCPA enforcement actions. However, just as Christie aficionados who did not focus on her short stories, many FPCA compliance practitioners do not tend to focus on FCPA enforcement by the Securities and Exchange Commission (SEC). To help address this, over the next week I will discuss issues relating to SEC enforcements.
Today, I begin with reviewing some jurisdictional issues unique to the SEC; commonly referred to as the FCPA accounting provisions, they consist of the books and records provisions which, as set out in the FCPA Guidance, requires that “issuers must make and keep books, records, and accounts that, in reasonable detail, accurately and fairly reflect an issuer’s transactions and dispositions of an issuer’s assets and internal controls requirements.” Under the internal controls provisions, “issuers must devise and maintain a system of internal accounting controls sufficient to assure management’s control, authority, and responsibility over the firm’s assets.”
Perhaps the most interesting thing about the ‘accounting provisions’ under the FCPA as stated in the FCPA Guidance, is as follows: , “Although the accounting provisions were originally enacted as part of the FCPA, they do not apply only to bribery-related violations. Rather, the accounting provisions ensure that all public companies account for all of their assets and liabilities accurately and in reasonable detail”. [emphasis supplied] This means there can be strict liability for stand alone violations of these provisions, with no ties back to the corrupt intent or elements of a FCPA violation are present.
Who is covered under SEC enforcement of the FCPA?
The SEC prosecutes ‘issuers’ who are defined as a company “that has a class of securities registered pursuant to Section 12 of the Exchange Act or that is required to file annual or other period reports pursuant to Section 15(d) of the Exchange Act.” The SEC also enforces the FCPA against companies “whose securities trade on a national securities exchange in the United States, including foreign issuers with exchange traded American Depository Receipts” and trade in over-the counter markets. While the SEC does not bring enforcement actions against private companies, private companies are also subject to the FCPA, just as public companies for bribing a foreign government official, in violation of the FCPA.
Consistent with the concern that bribe payments are often disguised as other types of payments in a company’s books and records, “requires issuers to “make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer.”” The “in reasonable detail” qualification was adopted by Congress “in light of the concern that such a standard, if unqualified, might connote a degree of exactitude and precision which is unrealistic.” The addition of this phrase was intended to make clear “that the issuer’s records should reflect transactions in conformity with accepted methods of recording economic events and effectively prevent off-the-books slush funds and payments of bribes.”
The Guidance goes on to give several examples of SEC enforcement actions of the books and record provisions where bribes were mischaracterized in a company’s books and records. Such examples include bribes paid out in the guise of commissions, royalties or consulting fees. Another prominent example includes reimbursement for sales and marketing or miscellaneous expenses where no such activity occurred. A favorite has been mischaracterized travel and entertainment expenses. Finally, a large group of often over-looked expenses include free goods for demonstration products, intercompany accounts, vendor payments and customer write-offs.
A key distinction of FCPA enforcement by the SEC from other types of accounting fraud is that there is no materiality requirement under the FCPA. Typically, internal audit, external audit or even forensic accounting, only review material transactions. Obviously for a large multi-national company subject to the FCPA, materiality could be millions of dollars or multiplies thereof. However we have seen FCPA enforcement actions with corrupt payments made in the low thousands of dollars.
Internal Controls Provisions
The FCPA says that internal controls requires issuers to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that—
(i) transactions are executed in accordance with management’s general or specific authorization;
(ii) transactions are recorded as necessary (I) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (II) to maintain accountability for assets;
(iii) access to assets is permitted only in accordance with management’s general or specific authorization; and
(iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.
As further explained in the FCPA Guidance, “the Act defines “reasonable assurances” as “such level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own affairs.” Neither the FCPA nor the FCPA Guidance specifies a particular set of controls that companies are required to implement. However the FCPA Guidance does note, “the internal controls provision gives companies the flexibility to develop and maintain a system of controls that is appropriate to their particular needs and circumstances.”
Moreover, the FCPA Guidance recognizes that “An effective compliance program is a critical component of an issuer’s internal controls.” To do so, a company needs to access its risk and then design and implement a system of internal controls to “account the operational realities and risks attendant to the company’s business.” The FCPA Guidance suggests some of these areas should include “the nature of its products or services; how the products or services get to market; the nature of its work force; the degree of regulation; the extent of its government interaction; and the degree to which it has operations in countries with a high risk of corruption”. But the over-riding key is to assess your company’s FCPA compliance risks and set up a set of internal controls to help manage those risks effectively.
Other SEC Enforcement Areas Relating to FCPA Compliance
In addition to the accounting provisions there are other laws and regulations that the SEC enforces and ties into FCPA enforcement. As noted in the FCPA Guidance, “Issuers have reporting obligations under Section 13(a) of the Exchange Act, which requires issuers to file an annual report that contains comprehensive information about the issuer. Failure to properly disclose material information about the issuer’s business, including material revenue, expenses, profits, assets, or liabilities related to bribery of foreign government officials, may give rise to anti-fraud and reporting violations under Sections 10(b) and 13(a) of the Exchange Act.”
There are also several sections under the Sarbanes-Oxley Act (SOX) that have FCPA implications. These include SOX §302 that requires the principle officers of a company “take responsibility for and certify the integrity of these company’s financial reports on a quarterly basis.” Under SOX §404 companies must present annually their conclusion “regarding the effectiveness of the company’s internal controls over accounting.” Finally, SOX §802 prohibits “altering, destroying, mutilating, concealing or falsifying records, documents or tangible objects” with the intent to obstruct or influence a federal investigation, such as the FCPA.
The remainder of this week I will tie another Miss Marple short story to another SEC FCPA enforcement issue. I hope that you will tune in for the next installment.
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 email@example.com.
© Thomas R. Fox, 2015