Recent U.S. Securities and Exchange Commission (“SEC”) enforcement actions and related commentary from Commission leadership demonstrate the SEC’s intent to penalize companies paying commercial bribes for violations of the accounting provisions of the U.S. Foreign Corrupt Practices Act (“FCPA”). This trend belies a commonly held misconception that the FCPA pertains only to bribes and accounting improprieties involving foreign public officials. It also demonstrates the SEC’s increasingly expansive enforcement of the FCPA. In light of this development, companies should take steps to ensure that their compliance programs and internal controls adequately address commercial bribery and prioritize accuracy in bookkeeping. The accounting provisions of the FCPA constitute the lesser known of the two prongs of the statute, and apply only to companies that qualify as U.S. “issuers” (i.e., with listed securities on a U.S. stock exchange or that are otherwise required to file reports with the SEC). The accounting provisions make two distinct requirements of issuers: first, under the “books and records” provision, issuers must make and keep books, records, and accounts that, in reasonable detail, accurately and fairly reflect an issuer’s transactions and dispositions of an issuer’s assets; second, under the “internal controls” provision, issuers must devise and maintain a system of internal accounting controls sufficient to assure management’s control, authority, and responsibility over the firm’s assets. The other prong of the FCPA, the “anti-bribery provision”, basically prohibits companies and individuals from paying or offering bribes to foreign public officials in order to obtain (or retain) a benefit in the conduct of their business. In contrast to cases brought under the anti-bribery provision, there is no requirement in the FCPA accounting provisions to show that the relevant transactions represent payments to foreign public officials or that there was anything promised or received in return for such payments. It is sufficient that the transactions were either improperly recorded or lacked sufficient controls. Essentially, the accounting provisions cover all transactions, not just those that may violate the anti-bribery provisions. In light of this fact, commercial bribes can run afoul of the accounting provisions in the same way as bribes paid to foreign officials – i.e., both are likely to be improperly recorded in the paying company’s books as, for example, “legitimate” promotional and sales expenses or “appropriate” commission payments. As such, for issuers, the FCPA accounting provisions have a broader enforcement scope than the anti-bribery provision. In complex cases of international corruption, therefore, where the elements of an anti-bribery violation are often difficult to prove, a violation of the accounting provisions will often be less burdensome for the government to establish. Indeed, while in the past, violations of the FCPA accounting provisions were typically charged in conjunction with breaches of the anti-bribery provision (or at least in matters when the operative fact pattern involved foreign public bribery), the SEC has recently resolved several cases arising from violations of the accounting provisions without a parallel anti-bribery enforcement action, either by the SEC or the U.S. Department of Justice (“DOJ”). Nevertheless, the SEC has yet to bring an FCPA accounting case based exclusively on commercial bribes; each of the recent SEC resolutions involving commercial bribery-related accounting violations have also involved allegations of bribes intended for public officials (all of which had ultimately been improperly booked). While this angle of FCPA enforcement is relatively novel, the trend should not come as a surprise to U.S. issuers and compliance professionals. Authorities in the United States have long emphasized the breadth of the FCPA’s accounting provisions and their intention to enforce them expansively. For example, in the Resource Guide to the U.S. Foreign Corrupt Practices Act, issued in November 2012, the DOJ and SEC point out that “[c]ompanies and individuals should . . . remember that, whether an entity is an instrumentality of a foreign government or a private entity, commercial (i.e., private-to-private) bribery may still violate the FCPA’s accounting provisions.” Ultimately, the SEC’s enforcement of the accounting provisions to include charges involving commercial bribery reinforces the need for companies (particularly issuers) to properly consider the application of their internal controls and accounting policies to commercial relationships, as well as government interactions. For multinational companies, this more comprehensive compliance approach acknowledges the move by the SEC to address commercial bribery via the accounting provisions as a natural progression in FCPA enforcement, bringing it more into line with the anti-corruption laws of other countries (such as the Bribery Act in the U.K.) that expressly forbid commercial bribery.
John Cunningham is a partner of Baker McKenzie’s North America Litigation & Government Enforcement Practice Group. Previously, he was a senior trial attorney with the US Department of Justice, where he investigated and prosecuted criminal and employment law matters. Before his tenure with the Justice Department, he practiced white collar criminal defense at a firm in Washington, DC, focusing on money laundering, counterfeiting, espionage, and asset forfeiture cases. He also served as a law clerk to the Honorable Gerald B. Lee in the Eastern District of Virginia and worked as an investigative analyst for the criminal division of the FBI. With the FBI, he prepared fraud, money laundering, and forfeiture matters for consideration by the Department of Justice and received formal commendations from the FBI, Justice Department, and IRS. He was editor-in-chief of the University of Richmond Law Review.
Geoff Martin is a Senior Associate at Baker McKenzie's Litigation and Government Enforcement practice group in Washington, DC. Geoff started his career in Baker McKenzie's London office in 2007 and moved to Washington DC in 2012. Geoff represents clients in matters before the federal government arising out of anti-corruption, trade sanctions, fraud, anti-money laundering, national security, and related enforcement actions. He also represents clients in civil and criminal matters in federal court. Geoff has extensive experience conducting internal investigations relating to such matters around the world.