* * *
Abe said where you want this killin’ done,
God said out on Highway 61!
One of the most difficult stories of the Bible for me was always that of God and Abraham. But somehow this song explained it for me as it deals with some unusual problems that can be solved out on Highway 61, which is a highway running from the deep South up north to Duluth, Minnesota, near where Dylan was raised. I think the song encompasses the depth of that geographic and cultural experience. In a very obscure manner, after hearing that open stanza of this song many times, the story of Abraham and his son all made sense to me.
Another thing that became clearer to me after reading about the recent Foreign Corrupt Practices Act (FCPA) criminal enforcement action of Vicente Eduardo Garcia was the involvement of the Internal Revenue Service – Criminal Investigation (IRS-CI) in the investigation. In a FBI Press Release it stated, “The investigation is being conducted by FBI and the IRS-CI. The Criminal Division’s Office of International Affairs and the Securities and Exchange Commission’s Division of Enforcement, which separately announced civil charges against Garcia, provided assistance.” In the Criminal Information filed against Garcia, one of the two complaintant agencies was listed as the “Internal Revenue Service.”
As noted recent Morrison & Foerster LLP White Paper on the case, entitled “5 Takeaways From Former SAP Exec’s FCPA Case”, by Chuck Duross, Stacey Sprenkel and Ian Bausback, stated that while the FBI is usually the Department of Justice’s (DOJ’s) investigative arm, so too is the IRS-CI. They said, “Many people do not realize the role played by the IRS-CI in FCPA cases, but IRS-CI agents have played major roles in many of the prominent FCPA cases in the past few years.”
This led me to consider what does the IRS-CI bring to a FCPA investigation? I recently posed that question to well known FCPA and white-collar defense expert Mike Volkov. Volkov related that the IRS-CI has skills and experience in looking at financial patterns and tracing money. He noted that usually FCPA violations are tied to other illegal violations, for example money laundering or fraud, and that the IRS-CI can comb through financial records to find patterns in payments. He also stated that the IRS-CI has significant experience in investigating corporate shell structures that can be part of an ongoing criminal attempt to obtain bribes and then conceal the location of the money.
It is always clear that the IRS could 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. This same type of analysis would be applied to any monies that were initially mis-characterized on a company’s books and records, such as gifts, travel, entertainment or charitable contributions.
In a presentation at an ACI FCPA Bootcamp conference in Houston, IRS-CI Special Agent Clarissa M. Balmaseda discussed some of the red flags the IRS-CI will be looking for in any FCPA investigation in which their assistance is requested. These red flags may include the following:
- 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.
- Amount of contract – Check if contract is increased during its term. If there is no corresponding business justification, this may be evidence of corruption.
- How was a payment made and to whom? – This analysis will look at the methods of payment and delivery.
- 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.
- The importance of a strong company Internal Audit investigative team – Special 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-CI 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 that now perform an internal investigation but do not self-report may find themselves in deeper trouble.
Moreover, the involvement of the IRS-CI should point towards the use of continuous monitoring in your compliance program. The expertise of the IRS-CI in looking at large amounts of data and spotting trends gives the government another manner to assess not only potential violations but also compliance program effectiveness. For a Chief Compliance Officer (CCO) or compliance practitioner, I think it also points to the need for ongoing monitoring in a best practices compliance regime. Certainly for Points 1-4 above from IRS-CI Special Agent Balmaseda, continuous monitoring can lend itself to a quick and cost effective review of large amounts of data which can provide sufficient data points for further and more extensive research, review and investigation. Finally, all of this can be done in the context of the COSO 2013 Framework requirement of testing the effectiveness of your internal controls.
Just as Highway 61 provides a metaphorical, panoramic sweep of American geography and culture, the Garcia FCPA enforcement action also shows the government will use a wide variety of tools available to it to investigate and enforcement the FCPA. Certainly you can enjoy the Dylan version of Highway 61 from the album but I would suggest you put some of the lessons learned from the Garcia FCPA enforcement action into practice for your compliance program going forward.
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 firstname.lastname@example.org.
© Thomas R. Fox, 2015