FCPA Accounting Provisions
When the Foreign Corrupt Practices Act was initiated in 1977, it was intended to regulate the way businesses conduct themselves in foreign affairs. The anti-bribery and accounting provisions of the act work in tandem to make it unlawful to bribe foreign officials and falsify records to make such payments appear as legitimate business expenses.
Whether a payment is made directly to a foreign official or to a third party or subsidiary, if the intent is to secure an unfair business advantage or to obtain or retain business by inducing the official to use his or her power or influence in favor of the giver, the transaction is in violation of the FCPA anti-bribery provision. When this transaction is recorded in an inaccurate and deceitful manner in the company’s books, the company is additionally in violation of the FCPA accounting provisions.
Violations of the FCPA are rampant, and therefore enforcement by the Securities Exchange Commission (SEC) and United States Department of Justice (DOJ) has strengthened over the years to bring to justice those caught making corrupt business deals with foreign officials. The Enforcement Division of the SEC and the Criminal Division of the DOJ collaborated to produce A Resource Guide to the U.S. FCPA for businesses and individuals.
FCPA Books and Records Provision
In 1977’s Senate Report No. 95-114, it is noted that “corporate bribery [is often] concealed by the falsification of corporate books and records.” It is also acknowledged that the intent behind FCPA accounting provisions was to reduce the frequency of, while striving to eradicate, “this avenue of cover-up.”
In the books and records provision of the FCPA, more officially known as Section 13 (b)(2)(A) of the Exchange Act (15 U.S.C. § 78m(b)(2)(A)), issuers and businesses which are covered under the FCPA are required to maintain accurate books, accounts, and records which honestly and accurately detail the transactions involving the issuer’s funds. The official terminology of this provision requires “reasonable detail” of such transactions and dispositions, allowing for realistic and unintentional human error.
Essentially, the provision adopted by Congress does not place bookkeepers under unrealistic expectations when it comes to the keeping of records. It does, however, require that all transaction records conform to standard and acceptable methods of financial record-keeping, eliminating room for the mischaracterization of bribes and slush funds. Based on the statute’s terminology, the records must be kept in such a way that would be acceptable to “prudent officials” in carrying out their own personal business matters.
Mischaracterization of Bribes as Fees or Expenses
In shady business transactions, a common practice is the mischaracterization of bribes as fees or expenses. Intentional bribery is often recorded as legitimate business costs. Fraudulent characterizations may include a number of bogus claims, yet there are many categorizations which are commonly used:
- Petty Cash Withdrawals
- Travel Expenses
- Sales and Marketing Costs
- Entertainment Expenses
- Consulting Fees
- Vendor or Supplier Payments
- Post-Sale Service Fees
- Discounts or Rebates
- Miscellaneous Expenses
- …and many more.
Many cases of FCPA violations of the books and records provision involve either the mischaracterization and falsification of large-value bribes or consistently fraudulent reporting of a systematic pattern of smaller-value bribes. Even when all the elements are not in place to prosecute corrupt behavior under the anti-bribery provision, the existence of fraudulent book- and record-keeping is evidence of the issuer’s knowledge that his or her transactions were illicit and improper. Proof of corrupt intent through falsified records is often evidence enough to additionally pursue prosecution for an anti-bribery violation, as well.
FCPA Internal Controls Provision
Section 13(b)(2)(B) of the Exchange Act (15 U.S.C. § 78m(b)(2)(B)), more commonly referred to as the internal controls provision, is responsible for the regulation of a system of checks and balances, accountability, and monitoring that reduces the risk of unethical book- and record-keeping within a corporation. Under this statute, issuers are required to take necessary precautions, known as internal accounting controls, to ensure the reliability and accuracy of financial records:
- Transactions should not be made without proper managerial authorization
- Transactions should be recorded in a manner which allows for the accurate preparation of financial statements
- Transactions should be recorded to evaluate/enforce accountability
- Accounts/assets should only be accessible with proper managerial authorization
- Recorded assets should be compared with existing assets periodically to note and address any discrepancies
“Turning a blind eye” is not a viable defense for violations of the FCPA accounting provisions. Those in managerial positions must be proactive in order to prevent and/or detect falsification of transactions, and failure to do so is unacceptable.
Prospective Anti-Fraud and Reporting Violations
Under Section 13(a) of the Exchange Act, issuers are required to submit an annual report giving comprehensive details regarding the issuer itself. Herein must be contained information regarding the issuer’s revenue, profits, assets, and expenses within the business. It must also include any liability in relation to the bribery of foreign officials. Failure to file an accurate and thorough report may result in violations of the anti-fraud and reporting provisions. It is not uncommon for an issuer that is involved in the bribery of a foreign government official to additionally be involved in anti-fraud and reporting violations in an effort to cover unethical financial transactions.
Legal Representation for FCPA Violations
Being involved in the bribery of a foreign government official and the fraudulent cover-ups that often take place to conceal such acts are serious violations of the FCPA. Under U.S. law, those guilty of participating in such corrupt foreign business affairs are subject not only to fines and fees through civil penalties, but also may face additional fines and imprisonment as the result of criminal penalties. For further information regarding violations of accounting or anti-bribery provisions, contact the firm for a free, initial consultation.