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Further To The SEC’s Inconsistent Approach To Enforcing The FCPA’s Books And Records And Internal Controls Provisions

As highlighted in previous posts on this subject (here [1] and here [2]), a basic rule of law principle is consistency.

In other words, the same legal violation ought to be sanctioned in the same way. When the same legal violation is sanctioned in materially different ways, trust and confidence in law enforcement is diminished.

However, there sure does seem to be a lack of consistency between how the SEC resolves Foreign Corrupt Practices Act books and records and internal controls violations.

As most readers no doubt know, the FCPA has always been a law much broader than its name suggests.   The anti-bribery provisions are just one prong of the FCPA.

Indeed, most FCPA enforcement actions do not involve allegations of foreign bribery, but rather violations of the FCPA’s generic books and records and internal controls provisions. These provisions generally provide that issuers shall: (i) maintain books and records which, in reasonable detail, accurately and fairly reflect issuer transactions and disposition of assets (the books and records provisions); and (ii) devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are properly authorized, recorded, and accounted for (the internal controls provisions).

For lack of a better term, let’s call such actions “non-FCPA FCPA enforcement actions.” Such actions are not dissected in the FCPA space and do not appear on the DOJ or SEC’s FCPA websites (here [3] and here [4]). Yet such actions are deserving of analysis because they highlight a troubling aspect of FCPA enforcement: that being how the same alleged legal violations are sanctioned in materially different ways.

[5]

In the latest example, consider the below chart which compares the SEC’s January 6th books and records and internal controls enforcement action against Mondelez Int’l (see here [6] for the prior post) with the SEC’s January 11th books and records and internal controls enforcement action against L3 Technologies [7].

The SEC’s findings against L3 Technologies (improper recording of $17.9 million, high-level executive conduct, deliberate steps taken to evade internal controls and evade external auditors) are not even in the same league as the SEC’s findings against Mondelez Int’l (an acquired subsidiary paid an Indian agent approximately $100,000 which “created the risk” that the funds could be used for improper or unauthorized purposes).

Yet, L3 Technologies resolved the action for a $1.6 million civil penalty compared to Mondelez Int’l’s $13 million civil penalty.

This prior post [6] termed the Mondelez enforcement action a “joke” and even Michael Volkov (a member of the FCPA paparazzi – a term he frequently uses – who tends to lean pro-prosecution) penned a post [8] about the Mondelez action containing the title “An Abuse of Prosecutorial Discretion?” which stated “did the SEC properly exercise its discretion in extracting a $13 million settlement for this so-called “violation.”?

Matter Core Findings Settlement

 

Mondelez Int’l Inc.

(Jan. 6, 2017)

 

An acquired subsidiary, Cadbury India Limited (“Cadbury India”), retained an agent to interact with Indian government officials to obtain licenses and approvals for a chocolate factory in India.

Cadbury India’s failure to conduct appropriate due diligence on, and monitor the activities of, the agent created the risk that funds paid to agent (approximately $100,000) could be used for improper or unauthorized purposes.

Cadbury India’s books and records, which were consolidated with the issuer’s, did not accurately and fairly reflect the nature of the services rendered by the agent.

Based on the above findings, the SEC found that Mondelez Int’l, because of its acquisition of Cadbury, was responsible for Cadbury’s violations of the FCPA’s books and records and internal controls provisions.

$13 million civil penalty
L3 Technologies, Inc.

 

(Jan. 11, 2017)

Improperly recording $17.9 million in revenue based on invoices that was created in the company’s internal accounting system but not delivered to the customer

“Facing pressure from certain supervisors … the VP of Finance at ASD (the company’s Army Sustainment Division) requested that certain ASD employees generate approximately 69 invoices on performed by unbilled work … but refrain from delivering them to the U.S. Army.”

“Deliberate steps were taken by an individual to evade L3’s internal accounting controls and to mislead L3’s external auditors.”

The above conduct also prompted the company to review other business practices which resulted in L3 identified material weaknesses in the company’s Internal Control Over Financial Reporting (ICFR)

Based on the above findings, the SEC found that L3 violated the FCPA’s books and records and internal controls provisions

$1.6 million civil penalty

FCPA Institute - Boston (Oct. 3-4)

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