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The FCPA’s Accounting Provisions Get a Fresh Look from the SEC

Posted  August 13, 2020

In the New York Law Journal this week, we published an article discussing a heartening trend in the SEC’s enforcement of the Foreign Corrupt Practices Act, a law that has yielded some of the largest SEC fines and recoveries: an increased willingness to ground enforcement actions in the accounting provisions of the FCPA.

The FCPA broadly prohibits two different kinds of conduct.  First, businesses may not bribe foreign officials to achieve business purposes.  Second, businesses must maintain books and records that adhere to accounting standards and allow auditors and other parties to verify that no such bribes were paid.  Violating the so-called accounting provisions may not get press of flagrant bribery schemes, but these violations are no less important.  In fact, as we argue in the NYLJ, the SEC is increasingly using these violations to get at companies that are operating bribery schemes that are so subtle or complex they are difficult to prove without the accounting provisions.  The SEC relies heavily on whistleblowers to help them ferret out these sorts of schemes, as the money trail in FCPA cases is necessarily in foreign countries, far away and difficult to trace.  Without an insider, the SEC often does not know where to look.  Whistleblowers who help the SEC successfully bring FCPA enforcement actions may be entitled to a whistleblower reward.  If you have any information about bribery of foreign officials, please contact us.

The full text of our article appears below and at the NYLJ site.

SEC Examines Relationship Between Bad Books and Bribery Schemes

Recent SEC and DOJ enforcement actions show a new attention to less used provisions of the Foreign Corrupt Practices Act that help prevent bribes by requiring good recordkeeping.

Bags of cash.  Luxury vehicles.  Exotic travel.  When we think of foreign bribery, and the prosecutions under the Foreign Corrupt Practices Act that attempt to control it, this is what comes to mind.  But how does a U.S. enforcement agency ferret out evidence of these quintessential bribes when they take place across the world, buried in a web of subsidiaries and subcontractors, especially with a global pandemic curtailing investigative resources and abilities?

The answer is within the FCPA itself, as recent enforcement actions have highlighted.  The best-known sections of the law concern these overt value transfers to government officials in exchange for a permit, construction green light, or other government benefit.  But there are other, long less used, parts of the FCPA that bolster the government’s ability to control illegal payments.  They are now getting the spotlight, thanks to some recent SEC and DOJ enforcement actions.

The books and records provision, Section 13(b)(2)(A) of the Exchange Act (15 U.S.C. § 78m(b)(2)(A)), requires companies 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.”  The internal controls provision, Section 13(b)(2)(B) (15 U.S.C. § 78m(b)(2)(B)), requires companies to maintain adequate controls to provide “reasonable assurances” that transactions are authorized, that all transactions are recorded under GAAP standards, and that recorded assets are regularly accounted for to confirm no funds are not included.

Together, these provisions make it illegal to create the kind of accounting swamp that can conceal, even foster, bribery.  Punishing companies for failing to meet these standards can be a critical tool in combatting bribery.  Instead of a company being incentivized to obfuscate its behavior, it faces liability for doing exactly that.

Recently, the SEC in particular has been increasingly willing to use these FCPA provisions to go after bad behavior—even where clear evidence of actual bribes may have proven elusive.  On June 25, 2020, the SEC announced settlement with drug company Novartis AG and its subsidiary Alcon Pte Ltd related to payments made by third parties in Asia and Europe to get doctors (including at state-owned hospitals) to prescribe Novartis drugs.  The SEC’s $112 million settlement solely addresses dodgy book-keeping, without any charges under the bribery provisions.

In announcing the settlement, the SEC’s Chief of the FCPA Enforcement Unit, Charles Cain, commented that “Poor control environments are fertile soil for malfeasance” as “weaknesses in one part of the business can often serve as a harbinger of larger unaddressed problems.”

This appears to mark the SEC’s new approach to FCPA enforcement.  As the latest SEC enforcement action to prioritize the books and records and internal controls provisions, Novartis reflects a growing trend.  For example, in an enforcement action against Cognizant Technology Solutions Corporation in 2019 for its actions in India, the SEC found the company violated the provisions by “failing to devise and maintain a sufficient system of internal accounting controls,” which “permitted managers to conceal bribe payments through the manipulation of bogus construction charges” and prevented the “effective review of the application or renewal of facility permits and licenses.”  As a result, the company was forced to pay approximately $25 million in disgorgement and fines.  While DOJ’s parallel enforcement action also included evidence of actual bribes, the SEC chose to focus its enforcement solely on the accounting provisions.

Similarly, in another 2019 settlement with Jupiter Networks, the SEC charged the technology company with violating the books and records and internal controls provisions.  Jupiter knowingly kept discounts and lavish travel expenses off the books, allowing its subsidiaries to use these common bribery tools to earn benefits from Chinese and Russian officials.

Why does this matter?  Just as accounting standards exist to protect investors and the public from companies making misleading claims on their balance sheets, the FCPA’s accounting provisions help protect the public from a company hiding known malfeasance in ill-defined “common funds” or “slush funds.”  They also help put the burden of compliance on the party best positioned to bear it—the multinational corporation doing business around the globe—not their smaller partner companies that may not have any experience with SEC compliance standards.

Furthermore, this shift in emphasis marks a ratcheting up of the SEC’s enforcement power.  Faced with an arsenal of tricks shielding payment information, the SEC may find it easier to build an accounting case than a straight bribery claim.  Often, it can be hard to find the necessary evidence to prove the actual payment of bribes, even while every aspect of the facts points to their existence.

Not only do FCPA cases often involve conduct in remote regions, far from SEC offices, they usually involve complicated contractual arrangements that span years if not decades.  The SEC often needs a whistleblower both to alert them to a violation and to point them to the correct evidence of a bribe.  Under the agency’s whistleblower program, an FCPA whistleblower (like any other SEC tipster) may ultimately be entitled to share in the recovery.

But even with a whistleblower’s help, actual evidence of bribes is hard to come by.  Instead, companies may purposefully fail to meet their accounting obligations under GAAP and similar provisions to obscure the slush funds used to pay government officials.  Similarly, they may purposefully fail to ask the required compliance questions that are designed to ensure their agents are not paying bribes, preferring instead to reap any potential benefits for the company.

With its recent spate of actions targeting this accounting swamp, the SEC is effectively telling companies that don’t ask, don’t tell is not a strategy to avoid FCPA liability.


Reprinted with permission from the August 11, 2020 edition of the New York Law Journal © 2020 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or [email protected].


Tagged in: FCPA, Importance of Whistleblowers, SEC Whistleblower Reward Program, Whistleblower Eligibility, Whistleblower Protection Laws, Whistleblower Rewards,