The next area I want to explore in the RESOURCE GUIDE TO THE U.S. FOREIGN CORRUPT PRACTICES ACT, SECOND EDITION is around the information found in the chapter on Accounting Provisions, including both books and records and internal controls. Here the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) put forward the following statement, “Bribes, both foreign and domestic, are often mischaracterized in companies’ books and records. Section 13(b)(2)(A) of the Exchange Act (15 U.S.C. § 78m(b)(2)(A)), commonly called the “books and records” provision, 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.” This language comes directly from the Foreign Corrupt Practices Act (FCPA).
For most companies the most serious test has been around “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 Resource Guide goes on to state, “The term “reasonable detail” is defined in the statute as the level of detail that would “satisfy prudent officials in the conduct of their own affairs.” Thus, as Congress noted when it adopted this definition, “[t]he concept of reasonableness of necessity contemplates the weighing of a number of relevant factors, including the costs of compliance.”
Yet here is the kicker, there can be no recordation of ill-gotten gains or mischaracterized payments which can be reasonable. Put another way, a company can never negligently record a bribery payment as something as mundane (and legal) as a “Commissions or Royalties, Consulting Fees, Sales and Marketing Expenses, Scientific Incentives or Studies, Travel and Entertainment Expenses, Rebates or Discounts, After Sales Service Fees, Miscellaneous Expenses, Petty Cash Withdrawals, Free Goods, Intercompany Accounts, Supplier / Vendor Payments, Write-offs or “Customs Intervention” Payments.” Simply put, any recordation of a bribe payment as anything other than a bribe payment is a FCPA violation. Every practitioner should always remember there is not materiality level to the books and records provisions.
This leads to the Internal Controls provisions requirement, in combination with the books and records provision, that issuers maintain books and records that accurately and fairly reflect the corporation’s transactions to “assure[s], among other things, that the assets of the issuer are used for proper corporate purpose[s].” The Resource Guide went on to state, “Although a company’s internal accounting controls are not synonymous with a company’s compliance program, an effective compliance program contains a number of components that may overlap with a critical component of an issuer’s internal accounting controls. Fundamentally, the design of a company’s internal controls must take into account the operational realities and risks attendant to the company’s business, such as: 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.” This language makes stronger the relationship between compliance controls and financial controls; indeed, demonstrating them to be inter-related. This is a key insight for many compliance professionals particularly those with legal background or those who only focus on the text of the FCPA. Moreover, just as financial controls can and do make a company run more efficiently, and at the end of the day more profitably, compliance controls fulfill the same function.
The Resource Guide goes on to state, “Just as a company’s internal accounting controls are tailored to its operations, its compliance program needs to be tailored to the risks specific to its operations. Businesses whose operations expose them to a high risk of corruption will necessarily devise and employ different compliance programs than businesses that have a lesser exposure to corruption, just as a financial services company would be expected to devise and employ different internal accounting controls than a manufacturer.” All of this means a compliance professional needs to tailor their compliance controls based upon a risk assessment to identify key risks and then a gap assessment to determine what controls are lacking or are insufficient.
Gibson, Dunn & Crutcher LLP, in its Client Alert, noted, “The Second Edition includes two key clarifications regarding the application of the books-and-records and internal controls provisions of the FCPA, which have grown in prominence in recent years, particularly in SEC matters, as a powerful tool to bring enforcement actions absent direct allegations of bribery. First, the Second Edition states the government’s view that in the absence of a statute of limitations in the FCPA itself, substantive violations of the anti-bribery provisions are subject to a five-year statute of limitations under 18 U.S.C. § 3282, whereas criminal violations of the FCPA accounting provisions are considered “securities fraud offenses” subject to the six-year statute of limitations provided for in 18 U.S.C. § 3301. Second, the Second Edition clarifies that criminal penalties for violations of the FCPA accounting provisions are imposed only where the defendant knowingly and willfully failed to maintain accurate books and records or implement an adequate system of internal accounting controls.”
Please join me again tomorrow as I continue my exploration of the A RESOURCE GUIDE TO THE U.S. FOREIGN CORRUPT PRACTICES ACT SECOND EDITION.
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, 2020