When Judge Sporkin, the father of the FCPA, assisted Senator William Proxmire in the drafting of the FCPA, he advised Senator Proxmire that a “books and records” provision was all that was needed to address the problem of foreign bribery. As Judge Sporkin has stated publicly, he thought a bribery prohibition would be hard to prove.
Judge Sporkin’s view of the matter was especially prescient. Bribery violations are difficult to prove. In fact, bribery violations are usually discovered through the self-reporting and voluntary disclosure process.
The SEC is increasing its enforcement focus on books and records and internal controls violations. The SEC is following Judge Sporkin’s advice – it is a much easier violation to prove. Companies need to consider this trend when conducting risk assessments, and need to increase focus on accounting and internal controls.
It is easier to prove violations of the accurate books and records requirement than bribery. Significantly, a violation of the books and records requirement extends beyond foreign bribery and includes book entries related to commercial bribery, extortion, export controls and sanctions, fraud, theft and other financial offenses.
A review of the SEC’s eight FCPA enforcement actions in 2012 reveals that four of the actions involved violations of the books and records and internal controls requirement (Allianz, Oracle, Pfizer, and Orthofix). If a bribery violation occurs, there is no doubt that a books and records violation also has occurred.
The books and records requirement gives the SEC an important prosecution tool when a bribe does not violate the FCPA’s anti-bribery prohibition (e.g. no jurisdictional nexus). Most significantly, there is no materiality requirement for a company to violate the “books and records” requirement.
The FCPA Guidance lists common mischaracterizations of bribes on company’s books and records, including: commissions, royalties, consulting fees, sales and marketing expenses, scientific incentives or studies, travel and entertainment expense, rebates or discounts, petty cash, free goods, intercompany transfers, supplier/vendor payments, write offs and customs intervention payments.
The FCPA Guidance reiterates that the FCPA’s accounting requirements apply to “issuers” and to an issuer’s consolidated subsidiaries and affiliates. If a subsidiary or affiliate includes an inaccurate entry on its books and records, which is then reported up within the company to its parent for purposes of consolidated financials, the parent company as well as its subsidiary have violated the accounting provisions.
In addition, the FCPA Guidance reminds companies that an anti-corruption compliance program and required controls is only one part of a company’s overall set of internal controls. Sarbanes-Oxley transformed company internal accounting and controls.
Anti-corruption controls need to be coordinated and integrated into a company’s overall compliance controls. A company’s anti-corruption program must reflect its unique risks. Similarly, a company’s internal controls need to reflect the company’s overall set of risks, not just limited to anti-corruption compliance.