To the extent most people have heard of the Foreign Corrupt Practices Act, it’s like the FCPA’s anti-bribery provisions which generally prohibit the offering or promising of things of value to foreign officials to obtain or retain business.
However, FCPA compliance has always been much broader than its name suggests because of its books and records and internal controls provisions (collectively referred to as the accounting provisions). These provisions operate independently of the anti-bribery provisions and are among the most generic and flexible legal provisions one can possibly find.
FCPA Internal Controls Provision Requires Internal Accounting Controls
Indeed, the books and records provisions merely state that issuers (that is publicly-traded companies or those with reporting obligations to the Securities and Exchange Commission) shall “make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuers.” The FCPA internal controls provisions generally require that issuers shall “devise and maintain a system of internal controls in accounting sufficient to provide reasonable assurances” that certain financial objectives are met such as access to assets is permitted only pursuant to management authorization.
While making for a dull read, the accounting provisions as currently enforced are a potent supplement to the FCPA’s more glamorous anti-bribery provisions. This is particularly true when it comes to client entertainment and related expenditures.
For instance, in an enforcement action against SciClone Pharmaceuticals involving meals and entertainment provided to alleged Chinese officials including “golf in the morning and beer-drinking in the evening”, the company was dinged not only for anti-bribery violations, but also books and records violations (because the things of value were improperly recorded “as sales, marketing, and promotion expenses”) and internal control violations (because the company failed to “maintain a sufficient system of internal controls in accounting to detect and prevent the making of improper payments to foreign officials.”).
Likewise, in an enforcement action against Qualcomm focused in part on “frequent meals, gifts and entertainment” to alleged foreign officials the SEC dinged the company under the books and records provisions because “meals, gifts and entertainment were repeatedly noted as missing from Qualcomm’s gift logs” and “there were also incorrect inputs into Qualcomm’s expense report system.” From an internal controls perspective, the SEC dinged Qualcomm because the company had an inadequate “process of oversight” concerning the things of value including employees failing to request pre-approvals and the company further “failed to provide regular substantive or information” to its employees and “several important business functions such as human resources and hospitality planning were not considered in Qualcomm’s FCPA compliance program.”
Numerous other examples could also be cited, but the take-away point is clear: FCPA compliance involves more than just the anti-bribery provisions. Although the FCPA’s accounting provisions technically only apply to issuers (whereas the anti-bribery provisions apply to all forms of U.S. business organizations), all companies should act as if they are subject to the accounting provisions. As the DOJ/SEC rightly state in the FCPA Guidance: “Good internal controls can prevent not only violations of the FCPA’s anti-bribery provisions … but also other illegal or unethical conduct by the company, its subsidiaries, and its employees.”
To learn more about how you can minimize your FCPA risk through invoice and contract monitoring, watch the on-demand webinar.