FAQ relating to FCPA
Q: What is FCPA?
A: FCPA refers to Foreign Corrupt Practices Act which took effect in 1977 and was modified in 1988. The Foreign Corrupt Practices Act is a federal law that prohibits companies from paying bribes to foreign political figures and government officials for the purpose of obtaining business. It has two sets of provisions: the accounting provisions, which are enforced by the Securities and Exchange Commission (SEC); and the anti-bribery provisions, which are enforced by the U.S. Department of Justice (DOJ). The three types of entities prohibited from making improper payments are issuers, domestic concerns and foreign nationals and businesses. The FCPA has and will continue to have a profound impact on the way US firms undertake business in at home and abroad.
Q: What are the elements of a violation under the FCPA?
A: There are five elements:
1. Who – The FCPA potentially applies to any individual, firm, officer, director, employee, or agent of a firm and any stockholder acting on behalf of a firm.
2. Corrupt intent— The person making or authorizing the payment must have a corrupt intent, and the payment must be intended to induce the recipient to misuse his official position to direct business wrongfully to the payer or to any other person.
3. Payment— The FCPA prohibits paying, offering, promising to pay (or authorizing to pay or offer) money or anything of value.
4. Recipient— The prohibition extends only to corrupt payments to a foreign official, a foreign political party or party official, or any candidate for foreign political office.
5. Business Purpose Test— The FCPA prohibits payments made in order to assist the firm in obtaining or retaining business for or with, or directing business to, any person.
Q: What is the “knowing” for the violation of the FCPA?
A: Under the FCPA, a person’s state of mind is “knowing” with respect to conduct, a circumstance, or a result if the person:
• Is aware that he is engaging in such conduct, that such circumstance exists, or that such result is substantially certain to occur; or
• Has a firm belief that such circumstance exists or that such result is substantially certain to occur.
Thus, a person has the requisite knowledge when he is aware of a high probability of the existence of such circumstance, unless the person actually believes that such circumstance does not exist. As Congress made clear, it meant to impose liability not only on those with actual knowledge of wrongdoing, but also on those who purposefully avoid actual knowledge.
Q: What are “foreign officials” under the FCPA?
A: The term “foreign official” means any officer or employee of a foreign government or any department, agency, or instrumentality thereof, or of a public international organization, or any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality, or for or on behalf of any such public international organization.
Under the FCPA, the meaning of foreign official is broad. For example, an owner of a bank who is also the minister of finance would count as a foreign official according to the U.S. government. Doctors at government-owned or managed hospitals are also considered to be foreign officials under the FCPA, as is anyone working for a government-owned or managed institution or enterprise. Employees of international organizations such as the United Nations are also considered to be foreign officials under the FCPA.
Q: What is the “jurisdiction” of the FCPA？
A: The FCPA applies to any person who has a certain degree of connection to the United States and engages in foreign corrupt practices. The Act also applies to any act by U.S. businesses, foreign corporations trading securities in the United States, American nationals, citizens, and residents acting in furtherance of a foreign corrupt practice whether or not they are physically present in the United States. In the case of foreign natural and legal persons, the Act covers their actions if they are in the United States at the time of the corrupt conduct. Further, the Act governs not only payments to foreign officials, candidates, and parties, but any other recipient if part of the bribe is ultimately attributable to a foreign official, candidate, or party. These payments are not restricted to just monetary forms and may include anything of value.
Foreign companies doing business in China must navigate a business culture in which bribery is widespread, finding ways to remove obstacles to expanding in the world's second-largest economy without running afoul of local or home-country laws.
China does not have a specific law dealing with malpractices or imposing corporate compliance. Reference must be done to the existing pieces of legislation dealing with criminal and corporate issues.
In particular on May 1, 2011, an amendment to China's Criminal Law took effect after passage by the Standing Committee of China's National People's Congress on February 25, 2011. The amendment criminalizes for the first time the bribery of foreign government officials and officials of public international organizations by Chinese companies and individuals. The amendment to Article 164 of the Criminal Law is modeled after Article 16 of the United Nations Convention against Corruption, although there are differences in wording.
Prohibition: The new law prohibits the act of giving "money or property" ("财物") to any foreign government official or official of a public international organization to "obtain an improper commercial benefit" ("为谋取不正当商业利益"). The scope of the phrase "to obtain an improper commercial benefit" under Article 164 appears to be as broad as similar terms contained in Article 16.1 of the UN Convention ("to obtain or retain business or other undue advantage in relation to the conduct of international business") and the FCPA ("to assist ... in obtaining business for or with, or directing business to, any person"). Unlike the FCPA, however, the new Chinese law applies only to officials of governments and public international organizations and not to foreign political parties, officials of such parties, or candidates for political office. "Money and property" has previously been construed by the Supreme People's Court in par. 7 of the Opinions on Some Issues Concerning the Application of Law in the Handling of Commercial Bribery Cases (2008) to include property-like interests with a monetary value such as home decoration, membership cards with a monetary value, debit cards, and travel expenses. It is likely that entertainment expenses would also be included although this issue was not specifically addressed by the Supreme People's Court.
Penalties: When the amount paid is relatively large, an offense is to be punished by imprisonment or detention for up to three years. When the amount paid is very large, an offense is to be punished by imprisonment from three to 10 years plus a fine.
Corporate and Individual Liability: Personnel in an entity (including, but not limited to, companies) who are in charge of the offense or bear other direct responsibility are subject to such penalties, and the entity itself is subject to a fine.
Size of Payments that Constitute a Criminal Offense: Although Article 164 does not specify the thresholds for criminality, under the Regulations of the Supreme People's Procuratorate on Criminal Investigation Standards (1999), the criminality thresholds for taking a bribe and offering a bribe are RMB5,000 (approximately $775 US dollars) and RMB10,000 (approximately $1,550 US dollars), respectively, and these thresholds apply to Article 164. As such, payments of less than RMB10,000 would not constitute a criminal offense.
Voluntary Disclosure: Article 164 provides for leniency if the perpetrator voluntarily reports the violation before an investigation has been initiated.
The definition and impact of specific terms awaits the issuance of opinions by the Supreme People's Court and Supreme People's Procuratorate. Nevertheless, Article 164 should contribute to the development of ethical practices in Chinese companies who have been criticized for engaging in corrupt practices overseas, particularly in developing countries. It should also help to level the playing field in overseas markets between Chinese and foreign companies, who have long been subject to similar laws. In these respects it marks a change in longstanding Chinese positions based on non-interference in the affairs of other countries, which among other things, excused cooperation with corrupt regimes. Conversely, the statute may also diminish any reluctance that Chinese authorities may have had in the past to prosecute foreign parties which have engaged in bribery of officials in China, as China has generally not taken action in the past even after investigations by other countries with respect to bribery in China have become public. Both Chinese companies and foreign companies doing business in China should be vigilant about corruption risks in their operations worldwide.
Q: What are the FCPA accounting provisions?
A: The accounting provisions require issuers to make and keep books and records that accurately and fairly reflect transactions and dispositions of the issuer’s assets and to design a system of internal accounting controls reasonably calculated to ensure that the entity’s financial statement are accurately and fairly stated. A company may be liable if its records: fail to identify the improper nature of a recorded transaction or conceal improper activity by disguising records, or omit a transaction, such as a bribe, illegal commission or other improper payment.
Q: What are the “Internal Controls” under the FCPA Accounting Provisions?
A: The accounting provisions also require issuers to maintain a system of internal controls sufficient to provide reasonable assurances that:
(a) transactions are executed in accordance with management’s general or specific authorization; (b) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and to maintain accountability for assets; (c) access to assets is permitted only in accordance with management’s general or specific authorization; and (d) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.
The internal controls provision gives companies the flexibility to develop and maintain a system of controls that is appropriate to their particular needs and circumstances.
Q: What are the “Penalties for Violations” of the FCPA? A: The FCPA provides for different criminal and civil penalties for companies and individuals. Criminal penalties: For each violation of the anti-bribery provision, the FCPA provides that corporations and other business entities are subject to a fine of up to $2,000,000; Individuals, including officers, directors, stockholders, and agents of companies are subject to a fine of up to $100,000 and imprisonment for up to five years. For each violation of the accounting provisions, the FCPA provides that corporations and other business entities are subject to a fine of up to $25 million. Individuals are subject to a fine of up to $5 million and imprisonment for up to 20 years. Civil penalties: For violations of the anti-bribery provision, corporations and other business entities are subject to a civil penalty of up to $16,000 per violation; Individuals, including officers, directors, stockholders, and agents of companies, are similarly subject to a civil penalty of up to $16,000 per violation. For violations of the accounting provisions, SEC may obtain a civil penalty not to exceed the greater of 1) the gross amount of the pecuniary gain to the defendant as a result of the violations or 2) a specified dollar limitation. In addition to the criminal and civil penalties described above, individuals and companies who violate the FCPA may face significant collateral consequences, including suspension or debarment from contracting with the federal government, cross-debarment by multilateral development banks, and the suspension or revocation of certain export privileges. Q: What is “Facilitating Payments Exception” ? A: There is an exception to the anti-bribery prohibition for payments to facilitate or expedite performance of a “routine governmental action.” The statute lists the following examples: obtaining permits, licenses, or other official documents; processing governmental papers, such as visas and work orders; providing police protection, mail pick-up and delivery; providing phone service, power and water supply, loading and unloading cargo, or protecting perishable products, and scheduling inspections associated with contract performance or transit of goods across country. Q: What are “Affirmative Defenses to FCPA Charges”? A: The FCPA’s anti-bribery provisions contain two affirmative defenses: 1) that the payment was lawful under the written laws of the foreign country (the “local law” defense) and 2) that the money was spent as part of demonstrating a product or performing a contractual obligation (the “reasonable and bona fide business expenditure” defense). For the local law defense to apply, a defendant must establish that “the payment, gift, offer, or promise of anything of value that was made, was lawful under the written laws and regulations of the foreign official’s, political party’s, party official’s, or candidate’s country.” Moreover, the FCPA allows companies to provide reasonable and bona fide travel and lodging expenses to a foreign official and it is an affirmative defense where expenses are directly related to the promotion, demonstration, or explanation of a company’s products or services, or are related to a company’s products or services, or are related to a company’s execution or performance of a contract with a foreign government or agency. Q: How do FCPA investigations get started?
A: In determining whether to open a FCPA investigation, SEC staff will considers a number of factors, including: the statutes or rules potentially violated; the egregiousness of the potential violation; the potential magnitude of the violation; whether the potentially harmed group is particularly vulnerable or at risk; whether the conduct is ongoing; whether the conduct can be investigated efficiently and within the statute of limitations period; and whether other authorities, including federal or state agencies or regulators, might be better suited to investigate the conduct. SEC staff also may consider whether the case involves a possibly widespread industry practice that should be addressed, whether the case involved a recidivist, and whether the matter gives SEC an opportunity to be visible in a community that might not otherwise be familiar with SEC or the protections afforded by the securities laws.
Q: What is the enforcement trend under the FCPA?
A: 1) Trend on Charge on Individuals
The U.S. authorities have repeatedly stated that individuals need to be held accountable, according to the record by the DOJ and the SEC, the number of individuals charged in 2011of violated the FCPA reached to 24. The number of Targeted enforcement against individuals and the number of indictments against individuals will certainly grow as the DOJ has emphasized individual accountability. Thus, over the next few years, we will have to see more and more individuals to stand trial in the U.S. and bring enforcement actions against them.
2) Priority on the Enforcement of FCPA
The priority on the enforcement of FCPA is investigations, and during the investigation the Justice Department would not credit “paper” programs only but would evaluate programs based on the level of follow-though, commitment and attention shown. According to relevant record, it is can be predicted that joint investigations and prosecutions will increase to enforce the FCPA.
3) DOJ/SEC Increases Its Investigative Resources
Firstly, the FCPA Unit will likely use a more proactive risk-based approach to target certain perceived high-risk industries and companies operating in perceived high-risk locations, companies involved in perceived high-risk industries or countries should expect to receive an increase in information requests from the SEC.
Secondly, find new ways to encourage individuals to cooperate with investigations. For example, the Division of Enforcement will utilize cooperation agreements, deferred prosecution agreements and non-prosecution agreements—tools similar to those of criminal prosecutors—as incentives for individuals to assist SEC investigations and enforcement actions.
Thirdly, DOJ work more closely with the SEC and employ undercover tactics. Currently, a team of eight Federal Bureau of Investigation (FBI) agents and approximately 20 lawyers are dedicated to FCPA investigations. More agents and prosecutors are likely to be added.
4) High-risk Industries from the Perspective of DOJ/SEC
FCPA risk exists for all companies conducting business abroad. However, companies in certain industries with more significant interactions with government officials may prove more vulnerable to FCPA liability than others high-risk industries including oil & gas companies dealing with freight forwarders and customs brokers, targeting medical device companies and the pharmaceutical industries. Due in part to the distinct nature of these industries and the countries in which they operate – have received intense scrutiny from investigators in recent years. Companies operating in these industries, and others with similar characteristics should be particularly vigilant about their FCPA compliance efforts and closely monitor the activities of their competitors.
5) Red Flag Conducts from the Perspective of DOJ/SEC
From the perspective of DOJ/SEC the following activities shall be regarded as red flag conduct:
Compensation to third parties without sufficient supporting detail;
Lack of written agreements with consultants, agents or business partners;
Close relationships with government officials or payments to entities run by former government officials;
Use of shell or nominee companies;
Payments to third parties outside the country where the goods or services were provided, or to tax havens such as Switzerland;
Unusual rebate or discount pricing;
Large dollar travel, gifts or gratuities.
6) High-risk Countries from the Perspective of DOJ/SEC
When considering risk for FCPA violations in the conduct of business overseas, the disposition of individual countries and cultures plays a critical role. There is no single, unimpeachable source for determining a country's risk profile. Corruption and bribery are more endemic to some regions or nations than others, but DOJ and SEC investigations net violations globally, and the most advanced and mature business markets are by no means immune. From the perspective of DOJ/SEC, for those countries whose relevant systems are regulated, operated, and financed by government entities are tender be regarded as high risk countries such as China, Russia. Additionally, energy companies do much of their business in resource-rich countries throughout Africa, Latin America, and the Middle East that are seen as high risk areas for bribery and corruption.
7) Trend on Punishment on Individuals
According to relevant record the DOJ has indicated that it believes putting executives in prison would be an effective means of curbing FCPA violations and they warned that DOJ will impose significant prison sentences on individuals for FCPA violations they participated in or oversaw. Additionally, in line with recent cases, prosecution of individual corporate executives and the imposition of hefty prison sentences are cornerstones of the DOJ’s multi-pronged FCPA enforcement strategy. Regardless, the U.S. government’s increased focus on individual prosecutions means that companies and individual executives can no longer view monetary fines imposed for FCPA violations as just another cost of doing business. The threat that individual executives may be deprived of their liberty for violating the FCPA may deter violations in a way that even astronomical fines cannot
Q: Why China becomes a focus of DOJ/SEC in its FCPA enforcement?
A: As China continues its ascent as a global economic power, issues involving China under the FCPA have emerged as major business problems for multinational companies (MNCs). There were a lot of bribery crimes committed by multinational companies in the last couple of years in China, such as Lucent, DPC, Wal-Mart, Nippon, Daimler AG, Carrefour, Siemens, Avery Dennison, Avon, Morgan Stanley, Pfizer and so on.
The FCPA prohibits the giving of anything of value, e.g. the payment of bribes, to foreign officials for the purpose of obtaining or retaining business. However, most people in China view kickbacks as a common way of doing business. The kickback scheme and many different variations, occurs countless times every day in China. The U.S. Department of Justice (DOJ) has adopted aggressive interpretations of the statute that apply with particular force to China. There are three significant issues: (1) the meaning of “foreign official”; (2) the meaning of “anything of value”; and (3) the use of third parties that make pass through payments to Chinese officials.
Q: What are the aggressive investigative techniques of SEC/DOJ ?
A: SEC/DOJ uses various investigative techniques in FCPA investigation, including subpoenas compelling the production of documents and the testimony of witnesses, telephone interviews, and chronologies. In recent years though, SEC/DOJ has become much more proactive in its investigations. The new Whistleblower Law is significant because SEC whistleblowers are given an incentive to report corporate fraud and securities fraud. Specially, an SEC whistleblower can earn substantial whistleblower rewards if he or she voluntarily provides information to the SEC leading to the successful prosecution of securities law violations.
Q: What are the “New Legal Theories” by SEC in FCPA cases?
A: SEC adopts the control person liability provision of the Exchange Act which provides that “every person who, directly or indirectly, controls any person liable under any provision of this chapter or any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.”
In a recent enforcement action, U.S. SEC charged a parent corporation with violating the FCPA’s anti-bribery, books and records, and internal controls provisions as well as other securities law violations based on payments allegedly paid by its foreign subsidiary to customs brokers to facilitate the importation of unregistered products. Significantly, the SEC also charged two of the company’s executives with violating the FCPA’s books and records and internal controls provisions based on their positions as “control persons,” even though the SEC did not allege that the executives had personal knowledge of the payments. Thus, the case may presage a broader enforcement effort against executives who fail to adequately supervise employees responsible for maintaining the company’s books and records and system of internal controls.
Q: What are the elements of an “Effective Compliance Program” ?
A: An effective compliance program is a critical component of an issuer’s internal controls. In accordance with Sentencing Guidelines, an effective compliance program should include the following elements:
1. Compliance Standards “The organization must have established compliance standards and procedures to be followed by its employees and other agents that are reasonably capable of reducing the prospect of criminal conduct.”
2. High Level Responsibility “Specific individual within high level personnel of the organization must have been assigned overall responsibility to oversee compliance with such standards and procedures.”
3. Trustworthy Individuals “The organization must have used due care not to delegate substantial discretionary authority to individuals whom the organization knew, or should have known through the exercise of due diligence, had a propensity to engage in illegal activities.”
4. Education “The organization must have taken steps to communicate effectively its standards and procedures to all employees and other agents, by requiring participation in training programs or by disseminating publications that explain in a practical manner what is required.”
5. Monitoring and Auditing “The organization must have taken reasonable steps to achieve compliance with the standard, by utilizing monitoring and auditing systems reasonably designed to detect criminal conduct by its employees and other agents and by having in place and publicizing a reporting system whereby employees and other agents could report criminal conduct by others within the organization without fear of retribution.”
6. Enforcement and Discipline “The standard must have been consistently enforced through appropriate disciplinary mechanisms, including, as appropriate, discipline of individuals responsible for the failure to detect an offense. Adequate discipline of individuals responsible for an offense is a necessary component of enforcement; however, the form of discipline that will be appropriate will be case specific.”
7. Response and Prevention “After an offense has been detected, the organization must have taken all reasonable steps to respond appropriately to the offense and to prevent further similar offenses-including any necessary modifications to its program to prevent and detect violations of law.”
Q: How to prepare for being audited?
All public companies in the United States must file annual financial statements that have been prepared in conformity with U.S. Generally Accepted Accounting Principles (U.S. GAAP). These accounting principles are among the most comprehensive in the world. U.S. GAAP requires an accounting of all assets, liabilities, revenue, and expenses as well as extensive disclosures concerning the company’s operations and financial condition. A company’s financial statements should be complete and fairly represent the company’s financial condition.272 Thus, under U.S. GAAP, any payments to foreign government officials must be properly accounted for in a company’s books, records, and financial statements.
U.S. laws, including SEC Rules, require issuers to undergo an annual external audit of their financial statements and to make those audited financial statements available to the public by filing them with SEC. SEC Rules and the rules and standards issued by the Public Company Accounting Oversight Board (PCAOB) under SEC oversight, require external auditors to be independent of the companies that they audit. Independent auditors must comply with the rules and standards set forth by the PCAOB when they perform an audit of a public company. These audit standards govern, for example, the auditor’s responsibility concerning material errors, irregularities, or illegal acts by a client and its officers, directors, and employees. Additionally, the auditor has a responsibility to obtain an understanding of an entity’s internal controls over financial reporting as part of its audit and must communicate all significant deficiencies and material weaknesses identified during the audit to management and the audit committee.273
Under Section 10A of the Exchange Act, independent auditors who discover an illegal act, such as the payment of bribes to domestic or foreign government officials, have certain obligations in connection with their audits of public companies. 274 Generally, Section 10A requires auditors who become aware of illegal acts to report such acts to appropriate levels within the company and, if the company fails to take appropriate action, to notify SEC And what Is Covered by the Accounting Provisions?
Books and Records Provision
Bribes, both foreign and domestic, are often mischaracterized in companies’ books and records. Section 13(b)(2)(A) of the Exchange Act (15 U.S.C. § 78m(b)(2)(A)), commonly called the “books and records” provision, requires 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.” The “in reasonable detail” qualification was adopted by Congress “in light of the concern that such a standard, if unqualified, might connote a degree of exactitude and precision which is unrealistic.” The addition of this phrase was intended to make clear “that the issuer’s records should reflect transactions in conformity with accepted methods of recording economic events and effectively prevent off-the-books slush funds and payments of bribes.”
The term “reasonable detail” is defined in the statute as the level of detail that would “satisfy prudent officials in the conduct of their own affairs.” Thus, as Congress noted when it adopted this definition, “[t]he concept of reasonableness of necessity contemplates the weighing of a number of relevant factors, including the costs of compliance.”
Although the standard is one of reasonable detail, it is never appropriate to mischaracterize transactions in a company’s books and records.221 Bribes are often concealed under the guise of legitimate payments, such as commissions or consulting fees.
In instances where all the elements of a violation of the anti-bribery provisions are not met—where, for example, there was no use of interstate commerce—companies nonetheless may be liable if the improper payments are inaccurately recorded. Consistent with the FCPA’s approach to prohibiting payments of any value that are made with a corrupt purpose, there is no materiality threshold under the books and records provision. In combination with the internal controls provision, the requirement that issuers maintain books and records that accurately and fairly reflect the corporation’s transactions “assure[s], among other things, that the assets of the issuer are used for proper corporate purpose[s].”222 As with the anti-bribery provisions, DOJ’s and SEC’s enforcement of the books and records provision has typically involved misreporting of either large bribe payments or widespread inaccurate recording of smaller payments made as part of a systemic pattern of bribery.
Internal Controls Provision
The payment of bribes often occurs in companies that have weak internal control environments. Internal controls over financial reporting are the processes used by companies to provide reasonable assurances regarding the reliability of financial reporting and the preparation of financial statements. They include various components, such as: a control environment that covers the tone set by the organization regarding integrity and ethics; risk assessments; control activities that cover policies and procedures designed to ensure that management directives are carried out (e.g., approvals, authorizations, reconciliations, and segregation of duties); information and communication; and monitoring. Section 13(b)(2)(B) of the Exchange Act (15 U.S.C. § 78m(b)(2)(B)), commonly called the “internal controls” provision, requires issuers to:
devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that—
(i) transactions are executed in accordance with management’s general or specific authorization;
(ii) transactions are recorded as necessary (I) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (II) to maintain accountability for assets;
(iii) access to assets is permitted only in accordance with management’s general or specific authorization; and
(iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences ….223
Like the “reasonable detail” requirement in the books and records provision, the Act defines “reasonable assurances” as “such level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own affairs.”224
The Act does not specify a particular set of controls that companies are required to implement. Rather, the internal controls provision gives companies the flexibility to develop and maintain a system of controls that is appropriate to their particular needs and circumstances.
An effective compliance program is a critical component of an issuer’s internal controls. Fundamentally, the design of a company’s internal controls must take into account the operational realities and risks attendant to the company’s business, such as: the nature of its products or services; how the products or services get to market; the nature of its work force; the degree of regulation; the extent of its government interaction; and the degree to which it has operations in countries with a high risk of corruption. A company’s compliance program should be tailored to these differences. Businesses whose operations expose them to a high risk of corruption will necessarily devise and employ different internal controls than businesses that have a lesser exposure to corruption, just as a financial services company would be expected to devise and employ different internal controls than a manufacturer.
A 2008 case against a German manufacturer of industrial and consumer products illustrates a systemic internal controls problem involving bribery that was unprecedented in scale and geographic reach. From 2001 to 2007, the company created elaborate payment schemes—including slush funds, off-the-books accounts, and systematic payments to business consultants and other intermediaries—to facilitate bribery. Payments were made in ways that obscured their purpose and the ultimate recipients of the money. In some cases, employees obtained large amounts of cash from cash desks and then transported the cash in suitcases across international borders. Authorizations for some payments were placed on sticky notes and later removed to avoid any permanent record. The company made payments totaling approximately $1.36 billion through various mechanisms, including $805.5 million as bribes and $554.5 million for unknown purposes.225 The company was charged with internal controls and books and records violations, along with anti-bribery violations, and paid over $1.6 billion to resolve the case with authorities in the United States and Germany.226
The types of internal control failures identified in the above example exist in many other cases where companies were charged with internal controls violations.227 A 2010 case against a multi-national automobile manufacturer involved bribery that occurred over a long period of time in multiple countries.228 In that case, the company used dozens of ledger accounts, known internally as “internal third party accounts,” to maintain credit balances for the benefit of government officials.229 The accounts were funded through several bogus pricing mechanisms, such as “price surcharges,” “price inclusions,” or excessive commissions.230 The company also used artificial discounts or rebates on sales contracts to generate the money to pay the bribes.231 The bribes also were made through phony sales intermediaries and corrupt business partners, as well as through the use of cash desks.232 Sales executives would obtain cash from the company in amounts as high as hundreds of thousands of dollars, enabling the company to obscure the purpose and recipients of the money paid to government officials.233 In addition to bribery charges, the company was charged with internal controls and books and records violations.
Good internal controls can prevent not only FCPA violations, but also other illegal or unethical conduct by the company, its subsidiaries, and its employees. DOJ and SEC have repeatedly brought FCPA cases that also involved other types of misconduct, such as financial fraud,234 commercial bribery,235 export controls violations,236 and embezzlement or self-dealing by company employees.237
Potential Reporting and Anti-Fraud Violations
Issuers have reporting obligations under Section 13(a) of the Exchange Act, which requires issuers to file an annual report that contains comprehensive information about the issuer. Failure to properly disclose material information about the issuer’s business, including material revenue, expenses, profits, assets, or liabilities related to bribery of foreign government officials, may give rise to anti-fraud and reporting violations under Sections 10(b) and 13(a) of the Exchange Act.
For example, a California-based technology company was charged with reporting violations, in addition to violations of the FCPA’s anti-bribery and accounting provisions, when its bribery scheme led to material misstatements in its SEC filings.238 The company was awarded contracts procured through bribery of Chinese officials that generated material revenue and profits. The revenue and profits helped the company offset losses incurred to develop new products expected to become the company’s future source of revenue growth. The company improperly recorded the bribe payments as sales commission expenses in its books and records.
Companies engaged in bribery may also be engaged in activity that violates the anti-fraud and reporting provisions. For example, an oil and gas pipeline company and its employees engaged in a long-running scheme to use the company’s petty cash accounts in Nigeria to make a variety of corrupt payments to Nigerian tax and court officials using false invoices.239 The company and its employees also engaged in a fraudulent scheme to minimize the company’s tax obligations in Bolivia by using false invoices to claim false offsets to its value-added tax obligations. The scheme resulted in material overstatements of the company’s net income in the company’s financial statements, which violated the Exchange Act’s anti-fraud and reporting provisions. Both schemes also violated the books and records and internal controls provisions.