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C-Bond Systems Resolves Books And Records And Internal Controls Matter

CBond

The Foreign Corrupt Practices Act has always been a law much broader than its name suggests.

Sure, the FCPA contains anti-bribery provisions which concern foreign bribery.

Sure, the FCPA’s books and records and internal controls provisions can be implicated in foreign bribery schemes.

However, the fact remains that most FCPA enforcement actions (that is enforcement actions that charge or find violations of the FCPA’s books and records and internal controls provisions) have nothing to do with foreign bribery. For lack of a better term, these enforcement actions have longed been called non-FCPA, FCPA enforcement actions by this site.

The latest example concerns C-Bond Systems, Inc., a Texas-based company that sells window strengthening products.

In summary fashion, this administrative order finds:

“On December 29, 2020, C-Bond Systems, Inc. improperly recognized approximately $102,000 in revenue for an order from a new customer. The order was shipped from C-Bond’s warehouse on December 29, 2020 with instructions for the shipping company to store the product in its own warehouse until further notice. Three months later, in March 2021, at C-Bond’s request, the shipping company returned the order to C-Bond. The products never left the control of C-Bond. Additionally, the customer never paid C-Bond for the order.

Subsequently, in April 2021, Scott Silverman, CEO and CFO of C-Bond at the time, signed an annual report on Form 10-K that reported the revenue from this proposed sale, which overstated total revenue for 2020 by more than 15%. In addition, in December 2021, Silverman approved and signed a registration statement on Form S-1 that contained the same materially overstated revenue.

By the time Silverman signed the annual report and registration statement, Silverman had received emails notifying him that the products were not delivered to the customer and had been returned to C-Bond. Accordingly, Silverman should have known that the revenue should not be recognized or reported in accordance with Generally Accepted Accounting Principles (“GAAP), which requires that the customer obtain control of the goods in order to recognize revenue. 4. In April 2022, C-Bond filed an amended annual report signed by Silverman that reversed all revenue from this transaction because it “did not meet the Company’s revenue recognition policy pursuant to ASC 606 and should not have been reflected as a sale.”

Based on the above, the SEC found that C-Bond and Silverman violated or caused violations of, among other things, the FCPA’s books and records and internal controls provisions.

Without admitting or denying the SEC’s findings, C-Bond and Silverman consented to a cease-and-desist order and agreed to pay penalties of $175,000 and $50,000, respectively. (See here for the SEC release).

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