My good friend and mentor, Judge Sporkin, is not shy nor bashful about his views on the FCPA. When he heard about DOJ’s undercover sting in the Shot Show case, he scoffed, “What a mistake! The government does not need to manufacture bribery. There is plenty going on and they should prosecute those cases.”
His point was well taken. His point applies equally to the SEC’s settlement with Oracle. For some reason, the Oracle case was only briefly mentioned when the settlement was announced on August 16, 2012, but there was not a lot of discussion about the merits and impact of the case. There should have been. The case sets a dangerous precedent and a real stretch of the FCPA statute.
Oracle agreed to pay a $2 million penalty for violation of the books and records and internal controls requirements by its subsidiary in India. (A copy of the SEC settlement is here). The subsidiary structured transactions with India’s government relating to a contract that enabled the subsidiary to retain about $2 million in “side” funds, meaning unaccounted funds. This money was eventually used to pay phony vendors in India. The transactions were documented with fake invoices. All of this sounds bad, except for one major point: there was no evidence of a bribe being paid to any Indian government official.
There is no question that it is not good for a company to keep inaccurate books and records or to find errors in its internal controls. Unfortunately, no company is perfect and weaknesses in internal controls are a day-to-day problem which company auditors struggle with on a continuing basis.
It is worth remembering that the conduct occurred in India, a country which is notorious for bribery. Nonetheless, the government’s investigation could only cite the “risk” of bribery, not evidence of any payments being made.
Judge Sporkin enjoys explaining the important of the books and records and internal controls provisions of the FCPA. As the SEC enforcement director, Judge Sporkin thought the books and records requirement of the FCPA was the most important enforcement tool because it would prevent companies from engaging in bribery and accurately entering such expenditures on their books.
I do not think Judge Sporkin would agree that the FCPA’s books and records requirement was intended to make sure that companies do not make mistakes on their books. The books and records requirement is inextricable linked to bribery not accurate bookkeeping. In the Oracle case, the government can only cite the increased “risk” of illegal use of the unbooked funds. Is that really enough for a government enforcement action and a $2 million penalty.
The danger of the Oracle precedent is that it gives the government a great bootstrapping argument. In any case where the government finds that a company fails to accurately maintain its books or where unauthorized payments are made, the government can use the FCPA statute to force a company to pay a penalty. That gives too much discretion to the government.
The government can rely on the Oracle precedent as a backstop for every investigation — if the government cannot prove bribery then they need only show that there is a “risk” of bribery.
Judge Sporkin’s admonition on government excess is right – there is plenty of bribery occurring around the world. The government needs to focus on bribes and use its resources wisely.