Several recent multi-million dollar settlements with companies to resolve bribery violations illustrate how the Securities and Exchange Commission (SEC) is keeping its focus on internal controls and the accounting provisions of the Foreign Corrupt Practices Act (FCPA) to police behavior and levy heavy fines and penalties. Using its authority to enforce regulations concerning company books, records and other "internal controls" means companies may find themselves in trouble not only for criminal conduct — such as paying bribes — but for failing to detect illegal activity of their employees and foreign subsidiaries.
The SEC and U.S. Department of Justice are using their authority over internal controls to expand their enforcement measures to include more in-depth inquiries into company operations. Increasingly, even when effective internal controls are in place, the misconduct of one employee can lead to liability. Thus, often the parent company is charged for internal control violations of their subsidiaries and affiliates, even though there is no evidence that the parent company lacked good faith, participated in or had knowledge of the improper conduct.
Internal controls — in the FCPA context — are used to protect against the improper use of money for bribery purposes. The Securities Exchange Act of 1934 requires that issuers of securities keep books, records and accounts that are reasonably detailed and correctly reflect the respective transactions and dispositions of assets. Companies are also required to develop, implement and maintain a system of internal accounting controls to ensure transactions are accurately recorded across their entire business operation.
Failure to adopt such internal controls violates the law. A company may also be liable if its records omit a transaction — such as a bribe, illegal commission or other improper payment — or if it alters its records to conceal improper activity or otherwise fails to identify the improper nature of a recorded transaction. Issuers can also be held liable for improper conduct of their foreign subsidiaries that occurs outside the U.S.
This enforcement atmosphere means companies need to implement the appropriate accounting systems and anti-corruption policies, procedures and processes. Furthermore, they need to ensure that agents conducting business on their behalf also have measures in place to prevent criminal activity from circumventing their own controls. At a minimum, accounting controls need to provide for the authorization of expenses by independent individuals with the appropriate authority, approvals based on supporting documentation and proper and accurate recording of transactions. These processes should be monitored, audited and tested on a regular basis and personnel must be trained to spot red flags to avoid violations.