FCPA Books and Records Violations: The Government Will Always Win.


The Foreign Corrupt Practices Act (FCPA) is aimed at preventing bribery of foreign officials. One key part of the FCPA is the books and records provision, which includes the following from 15 U.S.C. § 78m:

(2) Every issuer which has a class of securities registered pursuant to section 78l of this title and every issuer which is required to file reports pursuant to section 78o (d) of this title shall—

(A) 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;
(B) 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; and
(C) notwithstanding any other provision of law, pay the allocable share of such issuer of a reasonable annual accounting support fee or fees, determined in accordance with section 7219 of this title.

Aaron Murphy puts this into much better words in his book Foreign Corrupt Practices Act: A Practical Resource for Managers and Executives:

The FCPA requires companies to keep accurate accounting records to prevent the concealment of bribes. That is, the books and records should clearly state what the company’s assets are, and one should easily be able to figure out where and how a company spent its money.

What’s the big deal? I bet your company keeps good accounting records, so this won’t be a problem for you. Right? Wrong. This provision allows the government to “get” companies for a broad range of activities, so it’s somewhat of a catchall.

As seen in the case of NATCO, if a company is paying a bribe or otherwise participating in an extortion scheme, the government requires that the company report such payments as bribes or extortion on their books. Reporting them as any other type of expense is inaccurate, and therefore a violation of the FCPA books and records provision.

But the problems can extend beyond just entering a transaction into the accounting records in the correct account. What if you have a legitimate business expense which is completely unrelated to bribery or corruption, but the underlying documents that support the expense are fake? False documentation can get you slapped with a books and records violation just as easily.

There are many examples of companies charged with books and records violations. For example, in the well-known Siemens bribery case:

Payments to the third parties were accomplished through sham invoices and backdated agreements and were improperly characterized on the books and records of Siemens Argentina (which were incorporated into Siemens’ books and records for purposes of preparing Siemens’ year-end financial statements) as “commissions” or “business consulting fees” even though, in many cases, no legitimate services were actually provided.

Recently, Maxwell Technologies got tagged with a substantial monetary penalty for FCPA violations, including the books and records provision:

On January 31, 2011, the company announced that it had entered into settlement agreements with the U.S. Securities and Exchange Commission (SEC) and the U.S. Department of Justice (DOJ) with respect to charges asserted by the SEC and DOJ relating to the anti-bribery, books and records, internal controls, and disclosure provisions of the Foreign Corrupt Practices Act (the “FCPA”) and other securities law violations.  To settle civil charges with the SEC, the company agreed to an injunction against further violations of the FCPA and paid $3.175 million as the first installment of a total of $6.35 million of profit disgorgement and prejudgment interest. The second installment of $3.175 million is due in the first quarter of 2012. To settle with the DOJ, the company will pay a total of $8.0 million in penalties, $3.5 million of which was paid upon execution of the settlement agreement.  The remaining $4.5 million will be payable in equal $2.25 million installments in the first quarters of 2012 and 2013. As part of the settlement, the company entered into a three-year deferred prosecution agreement (DPA) with the DOJ. If the company remains in compliance with the terms of the DPA, at the conclusion of the term, the charges against the company will be dismissed with prejudice.  The company also agreed to report periodically to the SEC and DOJ on its internal anti-bribery compliance program. The total of these settlement amounts of $14.4 million had been fully accrued by the company as of September 30, 2010.

In the not-so-distant past, Halliburton ran afoul of FCPA and committed books and records violations:

The SEC’s complaint alleges that the internal controls of Halliburton, the parent company of the KBR predecessor entities from 1998 to 2006, failed to detect or prevent the bribery, and that Halliburton records were falsified as a result of the bribery scheme.

Tyson Foods Inc. also got got penalized for FCPA violations in February, not only for paying bribes to government officials, but for also improperly reporting those payments in the company’s books and records:

“Tyson Foods used false books and sham jobs to hide bribe payments made to publicly-employed meat processing plant inspectors in Mexico,” said Assistant Attorney General Breuer. “The penalty and resolution announced today reflect the company’s disclosure of this conduct, its cooperation with the government’s investigation and its commitment to implementing enhanced controls.”

More recently, Las Vegas Sands (NYSE:LVS) finds itself in the middle of an FCPA investigation, with the company under the scrutiny of both the SEC and Department of Justice. You can bet that if any soft of wrongdoing is found in China, then Las Vegas Sands will find a way to be on the wrong side of a books and records violation.

What does all of this mean for companies? It is almost impossible for them to win in cases involving books and records violations. This is a broad part of the FCPA, and it is easy for even the best companies to get “caught” using this provision. Being even slightly imprecise in the recording of transactions could give the government a win.

So how do companies fight back? The first step is having a good corporate compliance program. At least if the company can demonstrate that it was trying (trying hard, mind you, and doing the right things in its trying), then it may help their cause during FCPA investigations.

However, don’t think that the government is going to simply rubber stamp your compliance efforts. A paper entitled Plan Now or Pay Later: The Role of Compliance in Criminal Cases took a look at the Federal Sentencing Guidelines and how compliance programs within companies helped or hurt them at penalty time.

One of the findings was that from 1996 to 2009, only 3 companies out of 1,349 received sentencing credit for having an effective compliance program. 16 companies out of the 1,349 had compliance programs, but the programs did not meet the guidelines to be deemed effective. And all the rest were deemed complete failures in the compliance area.

There are two ways to look at this data. The first and most obvious interpretation is that the government is naturally going to prosecute companies that are engaged in wrongdoing and not complying with the law. Thus, it makes sense that nearly all of the companies prosecuted had no compliance program.

The second possibility is that the government makes it nearly impossible for companies to get credit for their compliance programs. Although the government set forth seven points that make up an effective compliance program in its Organizational Guidelines within the federal sentencing guidelines, those seven points are ultimately so broad and vague that they provide little real guidance to companies.

Which one of these possibilities is the truth? It doesn’t matter. Companies must do their best to create and implement effective compliance programs, because being deemed “ineffective” by the government is too big a risk. Books and records violations are too easy for the government to find and charge. Stronger compliance programs will help companies reduce this risk.

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