Books and Records Control Person and FCPA Enforcement


I’ve recently been looking more closely at the Foreign Corrupt Practices Act (FCPA) as I consider the types of services companies will need from independent forensic accountants. This is an area in which government enforcement is skyrocketing, and so there are lots of opportunities for me to work with companies that need investigations or ongoing compliance work.

There are significant problems with FCPA enforcement, and Mike Koehler does an excellent job of discussing the issues in his paper, The Facade of FCPA Enforcement. He makes the case that the enforcement activities are not transparent and not tested legally. He says:

Because of the “carrots” and “sticks” relevant to resolving a government enforcement action, FCPA defendants are nudged to accept resolution vehicles notwithstanding the enforcement agencies’ untested and dubious enforcement theories or the existence of valid and legitimate defenses. The end result is often the facade of FCPA enforcement.

In particular, Koehler says that the government’s charges related to FCPA books and records and internal control violations are based on questionable legal theories. Koehler cites the Nature’s Sunshine Products case as an example. The FCPA requires at least some level of knowledge or willfulness, yet in this case, the SEC charged executives “… without pleading any evidence to suggest that the executives knew of or participated in the conduct giving rise to the FCPA violations.”

The SEC charged the company for bribes payed to customs agents in Brazil, which were booked improperly in the accounting records (which gave rise to the books and records and internal control violations). Two executives were also charged because they were “control persons” in the company. But it was not alleged that the two knew (directly or indirectly) about the payments. And the company stated in its press release regarding the settlement of this issue with the executives that there was no participation in or knowledge of the improper conduct by them.

Prior to this, individuals had only been charged with such violations when they had some direct knowledge or participation. (Hence the term “control person” ???) Koehler says that the actions of the SEC in the Nature’s Sunshine Products case are in direct conflict with the FCPA’s statutory provisions.

This is obviously a problem, and Koehler says such things routinely happen in FCPA enforcement. The FCPA rules state that a parent company with 50% or less of voting power in in a foreign subsidiary must only “…  proceed in good faith to use its influence, to the extent reasonable under the issuer’s circumstances, to cause a domestic or foreign firm to devise and maintain a system of internal accounting controls consistent” with the FCPA rules. If that good faith effort has been made, then the parent company “…  shall be conclusively presumed to have complied with the requirements.”

Koehler goes on to discuss two cases in which the SEC charged companies with books and records violations, yet made no allegations that the companies hadn’t acted in good faith with respect to their foreign subsidiaries as described above.

What is the problem with this? Enforcement actions are being brought and settled in a way which appears to directly conflict with the law. Yet there has been no “judicial scrutiny” of these cases, and so the government is essentially proceeding to enforce FCPA in a haphazard manner. Companies are at a distinct disadvantage, in that they cannot possibly predict how FCPA cases against them will be handled.

One thought on “Books and Records Control Person and FCPA Enforcement

  1. Aaron Schuster

    Good faith only applies when parent owns less than 50% of the subsidiary. All three cases discussed in “Facade of FCPA…” involve 100% ownership of the subsidiary. Therefore, good faith will not provide a conclusive presumption of compliance, and in actuality will provide little defense for the accused directors

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