Books And Records Flexes Its Muscles

by Michael Volkov

books4FCPA practitioners pick through the pages and words underlying FCPA enforcement actions to look for clues, for new policies and government strategies.  It is a worthwhile process – the government sends important messages in its enforcement actions, ranging from cooperation credit, all the way to state-of-art compliance policies and procedures.  In many cases, a new trend can turn into an established practice in the matter of months.

In the details of Weatherford and the Diebold enforcement actions, the SEC sent an important message.  The SEC has reinvigorated the “books and records” provision.  As a former prosecutor, and from the SEC’s perspective, this is an important tool which the SEC plans to use as a backstop to cover non-traditional expenditures which may violate the books and records requirement.

In the Weatherford case, the SEC employed the books and records provision to apply to Weatherford’s bookkeeping relating to export control violations for transactions involving sanctioned countries.  More specifically, Weatherford used false entries to codes to cover prohibited deals with Iran businesses.

In the Diebold case, the SEC relied on the books and records provision to apply to commercial bribery involving private banks in Russia in order to seek ATM contracts with the bank.  The false record entries were used to disguise bribes to private banking officials.

The SEC recognizes that the books and records provision is a very powerful weapon.  It has not used the provision to apply to a case based solely on export violations or commercial bribery but the potential is there.  Just as important, however, the SEC can use the broad sweep of the books and records statute to expand the scope of any investigation and a company’s potential exposure.books2

The “books and records” component of the FCPA requires all issuers 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.”  Although the accounting provisions were originally enacted as part of the FCPA, they do not apply only to brib­ery-related violations. Rather, the accounting provisions ensure that all public companies account for all of their assets and liabilities accurately and in reasonable detail, and they form the backbone for most accounting fraud and issuer disclosure cases brought by DOJ and SEC.  Most significantly, there is no materiality threshold under the books and records provision.

As noted in the FCPA Guidance, bribes have been disguised on corporate books and records using a variety of terms, including commissions or royalties, consulting fees, sales and marketing expenses, insurance costs, scientific incentives or studies, travel and entertainment expenses, rebates or discounts, after sales fees, miscellaneous expenses, landscaping expenses, petty cash withdrawals, intercompany accounts, free goods, supplier/vendor payments, write offs and customer intervention payments.

The books and records provision does not apply to private companies.  Nor does it apply to minority-owned related companies.  A company has to have a controlling interest in a subsidiary or other joint venture for the provision to apply to that business.

Companies and individuals face criminal liability for books and records violations.  Criminal liability can be imposed on companies and individuals for knowingly failing to comply with the books and records provisions.  In the case of an individual, the government must prove books5that the defendant acted “willfully.”  The SEC also has broadly used the books and records provision in a variety of civil contexts, including FCPA prosecutions.

The past year was an important reminder for companies that the SEC’s toolbox includes a number of powerful weapons which can have a dramatic impact to cover a range of conduct beyond just FCPA bribery violations.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Michael Volkov, The Volkov Law Group | Attorney Advertising

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Michael Volkov

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