![handle is hein.journals/busiltom2010 and id is 1 raw text is: Business Law TODAY August 2, 2010
BUSINESS LAW TODAY
The ABA Business Law Section's Online Resource
FCPA Prosecutions
The Critical Role of the Accounting and Recordkeeping Provisions
By Stuart H. Deming
As part of the expanding enforcement of
the FCPA, the Justice Department and
SEC are increasingly using the FCPA's
internal controls and recordkeeping
provisions to prosecute improper
payments that may otherwise be beyond
the reach of the antibribery provisions.
Often overlooked in the dramatic increase
in enforcement of the Foreign Corrupt
Practices Act (FCPA) is the critical role of
the FCPA's accounting and recordkeeping
provisions. One of the lesser-known
problems disclosed by the revelations of
the Watergate era in the United States was
the accounting and recordkeeping
practices that made improper payments
possible. To address these practices, in
addition to prohibiting improper
inducements to foreign officials, the FCPA
placed new and significant obligations on
issuers to make and keep accurate records
and to maintain a system of internal
accounting controls.
Known as the accounting and
recordkeeping provisions, these new
obligations constituted the second and
less-well-known mechanism to deter
improper inducements to foreign officials.
Compared to the antibribery provisions,
which prohibit improper inducements to
foreign officials, the accounting and
recordkeeping provisions, in many
respects, constitute a more potent
mechanism in deterring improper
inducements to foreign officials. They
provide a completely independent basis for
prosecuting issuers or those acting on their
behalf for making improper inducements.
Unlike the antibribery provisions, which
apply only to improper inducements to
foreign officials, the accounting and
recordkeeping provisions apply to an
issuer's domestic and foreign operations,
including domestic reporting and
disclosure practices as well as practices
involving foreign payments. They create
affirmative duties on the part of issuers
and officers, directors, employees, agents,
and stockholders acting on behalf of an
issuer.
As opposed to the antibribery provisions,
no proof of intent is required to establish a
civil violation under the accounting and
recordkeeping provisions. A criminal
violation can lead to a 20-year term of
imprisonment instead of a five-year term
under the antibribery provisions.
Moreover, critical evidence of a violation
of the accounting and recordkeeping
provisions in a foreign setting is more
likely to be under the control of an issuer
and subject to compulsion by U.S.
enforcement authorities.
Broad Reach
Seemingly, the application of the
accounting and recordkeeping provisions
is more limited than the antibribery
provisions. They apply to foreign and
domestic issuers of securities as defined by
section 3 of the Securities Exchange Act of
1934 (Exchange Act) as entities required to
register under section 12 or file reports
under section 15(d). Issuers can include
foreign entities with American depository
receipts (ADRs).
Unlike the antibribery provisions, the
accounting and recordkeeping provisions
extend to majority-owned foreign
subsidiaries of an issuer. In addition, for
an issuer to be held civilly liable, it makes
no difference whether the controlling
entity lacks knowledge of the conduct of
the subsidiary that serves as a basis for a
violation. Criminal liability may be
established where an individual or entity
subject to the accounting and
recordkeeping provisions knowingly
circumvents or fails to implement a system
of internal controls or knowingly falsifies
any book, record, or account.
Even when an issuer holds an interest of
50 percent or less, the FCPA requires it to
proceed in good faith to use its influence
to the extent reasonable under the
circumstances to cause [the subsidiary] to
devise and maintain a system of internal
accounting controls consistent with the
accounting and recordkeeping provisions.
In such circumstances, an issuer will be
conclusively presumed to have complied
when it can demonstrate its good-faith
efforts to influence its subsidiary. An
issuer's duty to influence a subsidiary's
behavior increases directly with the degree
to which it can exercise control over the
subsidiary.
In terms of individuals, while acting
within the scope of their duties on behalf
of an issuer, individuals, and, in particular,
officers, directors, employees,
stockholders, and agents of an issuer, can
be subject to the terms of the accounting
and recordkeeping provisions. The
accounting and recordkeeping provisions
also extend to individuals who, while
acting within the scope of their duties, are
officers, directors, employees, or agents of
a foreign subsidiary where the issuer has
an interest greater than 50 percent.
Except for violations relating to
disclosures to auditors, the recordkeeping
provisions apply to any person and not
just to officers and directors. Though proof
As part of the United Nations Food
for Oil investigations involving Fiat
and York International, the
recordkeeping provisions were used
as the basis for charging foreign
subsidiaries for improper payments
to foreign officials. In each instance,
the subsidiaries were subject to
accounting and recordkeeping
provisions but not the antibribery
provisions. And, in each instance, an
inaccurate description formed the
underlying basis for the charges.
Kickbacks were incorrectly
recorded as a commission,1
service fee, or consultancy
paymient.
Published in Business Law Today, August 2, 2010. @2010 by the American Bar Association. Reproduced with permission. All rights reserved. This information or
any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express
written consent of the American Bar Association.
August 2, 2010
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