Proskauer Rose International Practice Guide Proskauer Rose LLP |
      Proskauer on International Litigation and Arbitration:
       Managing, Resolving, and Avoiding Cross-Border Business or Regulatory Disputes
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  1. Overview
    1. The FCPA also requires issuers (and issuers only) to maintain specific recordkeeping standards and adequate internal accounting controls. 15 U.S.C. § 78m(b). These provisions are designed to cover broadly all types of business transactions and accounting controls, and is not limited to thwarting slush funds and accounting and financial practices used to hide bribery payments.
    2. Thus, the Government can bring an enforcement action or even a criminal case for books and records or internal controls violations regardless of whether they could bring a bribery action.
    3. As with the anti-bribery provisions, there is no materiality threshold. See SEC v. World-Wide Coin Invs., Ltd., 567 F. Supp. 724, 749 (N.D. Ga. 1983). Nevertheless, these provisions are subject to a standard of reasonableness.
  2. Jurisdiction.
    1. The core accounting provisions are more limited in jurisdiction than the anti-bribery provisions, as they only apply to issuers. 15 U.S.C. § 78m(b); see also Lillian V. Blageff, Int’l Bus. Ethics, 16 Int’l HR J. 2, Spring 2007.
    2. The SEC will also seek to hold officers, directors and other natural persons personally liable for “causing” the misstatement of the company’s books and records. Such persons can be found indirectly liable for “causing” the corporation’s violations, “knowingly” implementing fraudulent procedures, or “controlling” the corporation in a manner that results in an FCPA violation. See SEC v. Pillor, Complaint, Case No. 06-4906 (N.D. Cal. Aug. 15, 2006), (former board member indirectly caused the falsification of the company’s books and records); SEC v. Solucorp Indus. Ltd., 274 F. Supp. 2d 379 (S.D.N.Y. 2003) (president violated FCPA by knowingly falsifying corporation’s books, records, or accounts, or was reckless in preparing or certifying them); In re Gore, No. 3-9262, 1997 WL 94186, at *11 (S.E.C. Feb. 27, 1997) (management of issuer and foreign subsidiary allegedly authorized improper payments and false entries in issuer’s books and records and failed to take any remedial action upon notice of the FCPA violations).
    3. Subsidiaries and Joint Ventures.
      1. Issuers controlling more than 50% of the stock of a foreign subsidiary or joint venture must ensure that the subsidiary or joint venture adheres to the accounting provisions. Id. § 78m(b)(6).
      2. Issuers holding less than 50% of the stock of a foreign subsidiary or joint venture must make a “good faith” effort to ensure that the subsidiary or joint venture maintains adequate internal accounting controls. Id.
  3. Basic Principles.
    1. The accounting provisions of the FCPA “gives the SEC authority over the entire financial management and reporting requirements of publicly held United States corporations” beyond the Commission’s traditional scope of disclosure requirements. World-Wide Coin Invs., 567 F. Supp. at 746.
    2. Record-Keeping
      1. An issuer must maintain books and records that “in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer.” Id. § 78m(b)(2)(A).
      2. This requirement applies to all company transactions, not just improper payments.
      3. The record-keeping requirement has three objectives:
        1. books and records should reflect transactions in conformity with accepted methods of reporting economic events;
        2. misrepresentation, concealment, falsification, circumvention, and other deliberate acts resulting in inaccurate financial books and records are unlawful; and
        3. transactions should be properly reflected on books and records in such a manner as to permit the preparation of financial statements in conformity with generally acceptable accounting practices (“GAAP”) and other criteria applicable to such statements.

          World-Wide Coin Invs., 567 F. Supp. at 748.

      4. This provision is designed primarily to prevent the following types of abuses:

        1. the failure to record improper payments or transactions;
        2. the falsification of records to conceal improper transactions; and
        3. the creation of records that are quantitatively accurate but do not reflect the improper purpose of the transaction.
    3. Internal Controls

      1. Issuers must devise and maintain a system of internal accounting controls that is capable of detecting and preventing improper payments to foreign officials and utilizes accepted methods of accounting. World-Wide Coin Invs., 567 F. Supp. at 745-51; H. Lowell Brown, Bribery in Int’l Commerce § 3:1 (2003).
      2. Specifically, the internal accounting controls must should provide “reasonable assurances” that:
        1. transactions are executed in accordance with the management’s general or specific authorization;
        2. transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain accountability for assets;
        3. access to assets is permitted only in accordance with management’s authorization; and
        4. the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

          § 15 U.S.C. 78m(b)(2).

      3. The district court in World-Wide differentiated between a typical accounting system and the internal accounting controls specific to the FCPA:

        [Whereas] [a]ccounting systems process transactions and recognize, calculate, classify, post, summarize, and report transactions[,] [i]nternal controls safeguard assets and assure the reliability of financial records, one of their main jobs being to prevent and detect errors and irregularities that arise in the accounting systems of the company. Internal accounting controls are basic indicators of the reliability of the financial statements and the accounting system and records from which financial statements are prepared.

        Id. at 750.

      4. While the FCPA internal accounting controls requirements propose no specific standards to evaluate the sufficiency of the controls, the World-Wide court noted that at minimum:
        1. Every company should have reliable personnel, which may require that some be bonded, and all should be supervised.
        2. Management responsible for overseeing and ensuring compliance with the FCPA should be identified in appropriate policies and agreements.
        3. Account functions should be segregated and procedures designed to prevent errors or irregularities. The major functions of recordkeeping, custodianship, authorization, and operation should be performed by different people to avoid the temptation for abuse of these incompatible functions.
        4. Reasonable assurances should be maintained that transactions are executed as authorized.
        5. Transactions should be properly recorded in the firm's accounting records to facilitate control, which would also require standardized procedures for making accounting entries. Exceptional entries should be investigated regularly.
        6. Access to assets of the company should be limited to authorized personnel.
        7. At reasonable intervals, there should be a comparison of the accounting records with the actual inventory of assets, which would usually involve the physical taking of inventory, the counting of cash, and the reconciliation of accounting records with the actual physical assets. The frequency of these comparisons will usually depend on the cost of the process and upon the materiality of the assets involved.

        Id. at 750-51. Thus, corporate executives must always bear in mind these FCPA objectives when implementing the company’s internal accounting controls system.

      5. Practice Tip: Importantly, the implementation of a proper FCPA compliance program may mitigate potential criminal punishment and monetary penalties for a company facing an enforcement action.
    4. Knowledge Requirement for Criminal Liability.
      1. Under the FCPA’s accounting provisions, a person may be held criminally liable for “knowingly” falsifying any book, records, or account, or circumventing or failing to implement a system of internal accounting controls. 15 U.S.C. § 78m(b)(5).
      2. As with the anti-bribery provision, knowledge may be established by willful blindness or conscious disregard.
      3. Technical or insignificant accounting errors would not give rise to criminal liability.
    5. Unlike the anti-bribery provisions, which require a finding of “corrupt” intent, there is no scienter requirement for the accounting provisions. See World-Wide Coin Invs., 567 F. Supp. at 749.

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