Ask a corporate executive to define the Foreign Corrupt Practices Act, and most will state the obvious: it outlaws bribery to foreign officials when doing business overseas.
In reality, thanks to some uncompromising provisions of the FCPA, mundane books-and-records mistakes are much more likely to put a company in the crosshairs of an enforcement action.
“These cases usually have nothing to do with anything foreign or corrupt,” says Matt Morley, head of the corporate practice at law firm Fried, Frank, Harris, Shriver & Jacobson. “It’s just that books and records were not kept properly, that the accounting is not up to snuff.”
Morley
Morley says it’s “very easy to run afoul of the statute,” partly because the FCPA covers all accounting errors, even if they’re not material. “Books and records have to be accurate in such a way as to be ‘reasonably accurate.’ That means transactions need to be recorded properly—every transaction,” Morley says.
Lucinda Low, a partner with Steptoe & Johnson, says strict liability was not intended under the accounting provisions of the FCPA. But because the accounting provisions of the law don’t require intent (unlike the FCPA’s bribery provisions), “as interpreted by the SEC, it’s very close to strict liability.”
Low
If the Securities and Exchange Commission has a reason to investigate possible FCPA accounting violations, it’s “absolutely highly probable” that the agency will find one, Low continues. “If you think about the sweep of these things, it’s very rare that you’re going to shine a spotlight and not see something that someone can’t quarrel over the accuracy of.”
Foreign Subsidiaries, Partners
The accounting provisions of the FCPA require public companies to keep books and records in reasonable detail to reflect transactions and dispositions of assets fairly and accurately. The statute also requires companies to have a system of internal accounting controls that:
provides reasonable assurances that transactions are executed in accordance with management’s authorization;
ensures that assets are recorded as necessary to permit preparation of financial statements and to maintain accountability for assets;
limits access to assets to management’s authorization; and
makes certain that recorded accountability for assets is compared with the existing assets at reasonable intervals, and that appropriate action is taken about any differences.
These provisions apply to U.S. companies and all of their majority-owned subsidiaries, including foreign subsidiaries. If a U.S. company owns 50 percent or less of another company, the FCPA requires that a company make “best efforts” to ensure compliance with the statute’s accounting requirements.
“There’s a lot of difference of opinion as to what ‘best efforts’ requires,” Morley says. “Some would say that best efforts merely require that you bring the issue up with your joint venture partners—you try to get adequate internal controls put in place. If that doesn’t happen, you did the best you could. But some SEC enforcement officials have suggested that ‘best efforts’ require that you walk away from the investment if there are inadequate internal controls. That’s an area many companies find troubling.”
Cook
Christopher Cook, a partner with law firm Jones Day, notes that the internal controls provisions of Section 404 of the Sarbanes-Oxley Act don’t distinguish between majority- and minority-owned interests. “Therefore, businesses without voting control of foreign subsidiaries still are required to report on the adequacy of the fraud-related internal controls of their subsidiaries,” he says, “even when the issuer’s control is so tenuous as to render an assessment of such controls difficult or impossible.”
Heightened Criminal Interest?
Peter Clark, a partner with the Cadwalader, Wickersham & Taft law firm, says companies should beware more about the prospect of criminal prosecutors looking to the accounting portions of the FCPA, instead of the anti-bribery provisions. The total number of criminal cases stemming from the FCPA runs “just short of 100,” he says including only two that involve accounting violations. The SEC, on the other hand, “has brought literally hundreds and hundreds of cases” where accounting violations of the FCPA were one of the charges. “I lost count years ago,” he says.
Clark
Clark believes the Justice Department is increasingly concerned about the number of public companies that lack internal controls or compliance procedures for the FCPA, nearly 30 years after the law was passed. “I think the Department may well be looking for a case in which it could bring a criminal action based upon a failure of a company to devise and maintain those accounting controls sufficient to provide reasonable assurances,” says Clark, a former anti-fraud lawyer at the Justice Department and ex-special counsel at the SEC. “There never has been such a case. The two [previous criminal FCPA accounting cases] were essentially false books-and-records cases.”
Low says the Justice Department “is always on the lookout” for cases that can send Corporate America lessons about proper behavior. “If they think there’s a good case that will help them bring the point home in that regard, they will certainly bring it,” she says.
‘Tag-Along Charge’
If there is good news on the FCPA front, it’s that the SEC rarely targets accounting violations unto themselves under the statute.
McGuire
“It’s been my experience that they very seldom will they bring just an accounting case,” says James McGuire, a partner with the law firm Sheppard, Mullin, Richter & Hampton. “It’s almost always part of something else. Very often the accounting stuff will be the tail wagging the dog. You start off with case involving alleged market manipulation, or insider trading, and the resolution of a matter will involve some issue with respect to keeping of books or records.”
Morley describes accounting charges as “almost like a tag-along charge,” he says. “Whenever there’s another type of violation, this is another charge that appears on the list of charges … What gets the attention of regulators is when something else has happened because a failure of internal controls or books and records.”
Morley says one point where companies should focus “is that there are certain countries where there is a much higher risk of FCPA-type problems involving foreign bribery, and you need to be careful not only with respect to the foreign bribery angle, and but in terms of making sure the books and records accurately reflect payments.”
Cook cites the expansive reach of the FCPA accounting provisions, coupled with new Sarbanes-Oxley requirements concerning accounting practices and internal controls, as presenting “unique and formidable challenges to businesses with operations outside the U.S.” It’s imperative, he says, that businesses “educate their employees on the importance of sound financial processes and internal controls, and engender a culture of FCPA compliance in their workforce.”
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