Friday Roundup
A focus on asset recovery, a substantial upgrade to the DOJ’s FCPA website, might Comverse Technologies face a double prosecution, Cosgrove is sentenced to home confinement, and on-point. It’s all here in the Friday roundup.
Asset Recovery
The Arab Forum of Asset Recovery (here) took place earlier this week in Doha, Qatar. President Obama delivered this recorded message. Attorney General Eric Holder delivered this speech at the event and stated as follows. “Corruption has long been recognized as a transnational problem that demands a coordinated, global response. Time and again, we’ve seen its destructive, corrosive effects – hindering development, impeding advancement, and siphoning precious resources away from those in need at a time when they could hardly be more scarce – and when the world economy could hardly be more vulnerable. We’ve come to understand its impact in eroding trust, favoring the interests of a dishonest few over the needs of the hardworking many, and even breeding contempt for the rule of law.” In his speech, Holder provided some highlights of the DOJ’s Kleptocracy Asset Recovery Initiative as well as outlined a U.S. committment to additional resources including two additional Justice Department attorneys to work exclusively on asset recovery and mutual legal assistance issues.
During this speech Holder further stated as follows. “As Attorney General, I’ve consistently worked to ensure that anticorruption remains a top priority for my colleagues at every level of the Justice Department. From our robust enforcement of the Foreign Corrupt Practices Act – an important law under which we have secured more than 30 individual convictions and over 40 corporate resolutions, totaling more than $2.1 billion in penalties, over the last three years alone; to the anticorruption work of our prosecutors stationed both in the United States and overseas – I’m proud to report that we’ve made great strides in our fight against corruption, within – as well as beyond – our borders.”
DOJ FCPA Website
As previously reported by the on-line news site Main Justice (here), the DOJ recently upgraded its FCPA website. Of particular note from a research perspective, the DOJ’s list of enforcement actions now appears to be complete – see here. A link to the DOJ’s FCPA website, as well as numerous other resources, is included on the resources page of this website – here.
Comverse Technology
As noted in this previous post, in 2011 Comverse Technology resolved a DOJ and SEC enforcement action by agreeing to pay $2.8 million (a $1.2 million criminal fine via a DOJ non prosecution agreement; $1.6 million in disgorgement and prejudgment interest via a SEC settled complaint).
The resolution documents contained the standard template clauses.
The two-year NPA (here) stated that for the term of the agreement, Comverse shall “commit no crimes whatsover” and that if the “Department in its sole discretion determines that Comverse has committed any crime after signing this Agreement” that Comverse “shall thereafter be subject to prosecution for any violation of federal law of which the Department has knowledge …”.
The SEC release (here) noted that Comverse consented to a “conduct-based injunction that prohibits Comverse from having books and records that do not accurately reflect, or from having internal controls that do not prevent or detect, any illegal payments made to obtain or retain business.”
Last week in an SEC filing (here) Comverse (CTI) disclosed as follows, after describing its 2011 resolution action and compliance obligations.
“CTI had implemented safeguards in an effort to eliminate improper practices by our employees, consultants, external sales agents and resellers. These safeguards, however, have proven to be ineffective in some instances. In response to the findings of the CTI Audit Committee’s internal investigation, CTI identified a material weakness in our anti-fraud program controls, including those relating to the FCPA, and as part of its remediation our safeguards were modified. However, these modified safeguards, the implementation of these remedial measures and any future improvements may prove to be less than effective, and our employees, consultants, external sales agents or distributors may engage in the future in conduct for which we might be held responsible. Violations of the FCPA and other laws of the United States and other countries may result in significant civil and/or criminal penalties and other sanctions, which could have a material adverse effect on our business, financial condition and results of operations.”
One can look at Comverse’s recent disclosure in two ways. That the company does not have a committment to FCPA compliance and has not taken its post-enforcement action compliance obligations seriously. The other is that even a company under the threat of double prosecution (the first being for conduct at issue in the NPA, the second being the post-enforcement action conduct) can not, despite presumed good faith best efforts, guarantee FCPA compliance across its vast business organization and can not ensure that its numerous employees, consultants, external sales agents and resellers will not engage in problematic conduct.
Cosgrove Sentence
As noted in this previous post, in May Paul Cosgrove (one of the defendants in the so-called Carson case involving former employees of Control Components Inc.) pleaded guilty to a one-count superseding information charging him with making a “corrupt payment to a foreign government official in China in violation of the FCPA.” As noted in the prior post and as detailed in the plea agreement, Cosgrove suffers from significant health issues. The DOJ stated, in its sentencing memo (here) as follows. “Absent defendant’s health condition, the government would recommend a term of incarceration of 15 months. However, to the extent the Court believes that defendant’s health condition warrants a non-incarceratory sentence, the government recommends that the term of home confinement be 15 months.”
As noted in this article from the Orange County Register, yesterday U.S. District Court Judge James Selna sentenced Cosgrove to 13 months home confinement.
On-Point
Russell Ryan (a former assistant director of the SEC’s division of enforcement and currently with King & Spalding – here) had a dandy op-ed (here) recently in the Wall Street Journal concerning the SEC seeking to punish, not just conduct, but an individual being “unrepentant” and “impenitent.” Ryan’s piece reminded me of this prior post in which the DOJ criticized an FCPA corporate defendant for not cooperating “based on jurisdictional issues.” Once again, do the enforcement agencies expect defendants to roll over and play dead?
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A good weekend to all.
The Dilution Of FCPA Enforcement Has Reached A New Level With The SEC’s Enforcement Action Against Oracle
Yesterday,the SEC announced (here) a Foreign Corrupt Practices Act books and records and internal controls enforcement action against Oracle Corporation.
With the enforcement action, the dilution of FCPA enforcement has reached a new level. The only allegations against Oracle itself is that it failed to audit distributor margins against end user prices and that it failed to audit third party payments made by distributors. It is common for large multi-national companies to have hundreds, if not thousands, of distributors. Because of this, audits Oracle was held liable for not conducting are not practical or cost-effective absent red flags suggesting improper conduct. The SEC did not allege any such red flag issues. In fact, the SEC alleges that Oracle’s Indian subsidiary “concealed” and kept “secret” the conduct from Oracle. Congress did not intend for the FCPA’s books and records and internal control provisions to be a strict liability statute. The SEC used to recognize this. However, it no longer does as once again demonstrated by the Oracle action.
In reading the Oracle action, I was reminded of a 1981 speech by Harold Williams (Chairman of the SEC) regarding the FCPA books and records and internal control provisions. See here for the prior post. Williams stated that the provisions are not “independent unrestrained mandate[s] to the Commission to establish novel or unprecedented corporate recordkeeping standards.” Williams further stated as follows. “Depending on the circumstances, intentional circumventions of a company’s system of records and of accounting controls by a low-level employee would not always be considered violations of the Act by the issuer. No system of adequate records and controls – no matter how effectively devised or conscientiously applied – could be expected to prevent all mistaken and improper transactions and disposition of assets. Given human nature, regardless of the adequacy of the system, a bookkeeper may still erroneously post entries, an overzealous agent may make unauthorized payments, or an unscrupulous employee may falsify records for his own purposes. The Act recognizes each of these limitations. Neither its text and legislative history nor its purposes suggest that occasional, inadvertent errors were the kind of problem that Congress sought to remedy in passing the Act. No rational federal interest in punishing insignificant mistakes has been articulated. And, the Act’s accounting provisions do not require a company or its senior officials to be the guarantors of all conduct of company employees.”
Back to the SEC’s enforcement action against Oracle.
The SEC complaint (here) states in summary fashion as follows.
“This matter involves violations of the books and records and internal controls provisions of the FCPA by Oracle Corporation. From 2005 to 2007, certain employees of Oracle’s Indian subsidiary Oracle India Private Limited (“Oracle India”) secretly ‘parked’ a portion of the proceeds from certain sales to the Indian government and put the money to unauthorized use, creating the potential for bribery or embezzlement. These Oracle India employes structured more than a dozen transactions so that a total of around $2.2 million was held by the Company’s distributors and kept off Oracle India’s corporate books. The Oracle India employes would then direct its distributor to disburse payments out of the unauthorized side funds to purported local ‘vendors.’ Several of the ‘vendors’ were merely storefronts that did not provide any services. Oracle failed to accurately record these side funds on the Company’s books and records, and failed to implement or maintain a system of effective internal accounting controls to prevent improper side funds in violation of the FCPA, which requires public companies to keep books and records that accurately reflect their operations.”
Specifically, the SEC complaint states as follows.
“On approximately 14 occasions related to 8 different government contracts between 2005 and 2007, certain Oracle India employees created extra margins between the end user and distributor price and directed the distributors to hold the extra margin in side funds. Oracle India’s employees made these margins large enough to ensure a side fund existed to pay third parties. At the direction of the Oracle India employees, the distributor then made payments out of the side funds to third parties, purportedly for marketing and development expenses. Some of the recipients of these payments were not on Oracle’s approved local vendor list; indeed, some of the third parties did not exist and were merely storefronts. Because the Oracle India employees concealed the existence of the side fund, Oracle did not properly account for these side funds. These funds constituted prepaid marketing expenses incurred by Oracle India and should have been recorded as an asset and rolled up to Oracle’s corporate books and records. These marketing expenses should then have been reflected in the income statement once they were used. Instead, the parked funds were not reflected on Oracle India’s books and were not properly recorded as prepaid marketing expenses. This incorrect accounting in turn affected Oracle’s books and records. Between 2005 and 2007, government customers paid Oracle India’s distributors at least $6.7 million on these sales, with Oracle receiving approximately $4.5 million in revenue, resulting in about $2.2 million in funds improperly ‘parked’ with the Company’s distributors.”
The SEC further alleged as follows.
“Oracle lacked the proper controls to prevent its employees at Oracle India from creating and misusing the parked funds. For example, Oracle knew distributor discounts created a margin of cash from which distributors received payments for their services. Before 2009, however, the company failed to audit and compare the distributor’s margin against the end user price to ensure excess margins were not being built into the pricing structure. In addition, although Oracle maintained corporate policies requiring approvals for payment of marketing expenses, Oracle failed to seek transparency in or audit third party payments made by distributors on Oracle India’s behalf. This control would have enabled Oracle to check that payments wer made to appropriate recipients.”
Based on the above conduct, the SEC charged Oracle with FCPA books and records and internal controls violations.
In the SEC’s release, Marc Fagel (Director of the SEC’s San Francisco Regional Office) stated as follows. “Through its subsidiary’s use of secret cash cushions, Oracle exposed itself to the risk that these hidden funds would be put to illegal use. It is important for U.S. companies to proactively establish policies and procedures to minimize the potential for payments to foreign officials or other unauthorized uses of company funds.” As noted in the release, without admitting or denying the SEC’s allegations, Oracle consented to the entry of a final judgment ordering the company to pay a $2 million penalty and permanently enjoining it from future books and records and internal control violations. The release further states as follows. “The settlement takes into account Oracle’s voluntary disclosure of the conduct in India and its cooperation with the SEC’s investigation, as well as remedial measures taken by the company, including firing the employees involved in the misconduct and making significant enhancements to its FCPA compliance program.”
It is typical for the DOJ and SEC to announce FCPA enforcement actions on the same day. Thus, the absence of a parallel DOJ enforcement action as to the alleged conduct at issue suggests that there will be no DOJ enforcement action, a good result given the SEC’s allegations and for the reasons stated above.
However, it may be premature to conclude that Oracle’s FCPA scrutiny is over. As noted in this prior post, in September 2011, the Wall Street Journal reported that the DOJ was investigating “whether Oracle employees or agents acting on the company’s behalf made improper payments in Africa in order to land sales of database and applications software.”
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The SEC’s enforcement action against Oracle is not the first time distributor margin payments have served as the basis of an FCPA enforcement action. See here for the 2005 enforcement action against InVison, specifically the Thailand allegations. However, in that action the SEC alleged that the company was aware of the “high probability” that the margin was being used for improper purposes.
Richard Shine’s 1982 Lecture – “Enforcement Of The FCPA By The Department Of Justice”
Before Charles Duross, Mark Mendelsohn and others headed the DOJ’s FCPA unit, there was Richard Shine. The year was 1982 and Shine was Chief, Multinational Fraud Branch, Criminal Division, U.S. Department of Justice (the name given to the DOJ’s then de facto FCPA Unit). Shine gave a lecture titled “Enforcement of the FCPA by the Department of Justice” at Syracuse University that was published by the Syracuse Journal of International Law & Commerce – see 9 Syr. J. Int’l L. & Com. 283 (1982).
Three things stand out from Shine’s lecture.
First, the lecture is populated with references to the FCPA’s legislative history. On one level, this is not surprising given that in 1982 the DOJ was likely still finding its way as to the FCPA and its enforcement and it is logical that the legislative history which evidences Congressional intent would be a guide.
Yet the passage of time should make the FCPA’s legislative history and the Congressional intent it represents no less relevant today.
Second, under the heading “Enforcement Policies of the Justice Department,” Shine’s lecture evidences DOJ’s recognition and understanding of the primary foreign policy motivation Congress had in enacting the FCPA and how FCPA inquiries focused on the conduct of foreign governments and thus presented national security issues. Shine stated as follows. “Because of the obvious sensitivity both from a national security point of view and a foreign policy point of view, the Department has administered the enforcement of this statute quite differently than the enforcement of most of the provisions of Title 18 of the United States Code. Administration of the enforcement effort has been highly centralized. Generally, FCPA cases, by the terms of the United States Attorney’s Manual, are not investigated and prosecuted by the ninety-four United States Attorney’s Offices around the country. They are primarily investigated and prosecuted by the Multinational Fraud Branch in the Criminal Division at the Justice Department. Among other reasons, that is being done to make sure that there is a nationally uniform enforcement policy. Moreover, virtually any step that is taken in the investigative process, even more than in the post-indictment process, has potentially significant foreign policy and national security implications.” In speaking of “Investigative Procedures,” Shine stated as follows. “When an informant or an insider tells us that there is a bribe in process or that a bribe of a foreign government official has already occurred, we do not immediately notify the foreign government. As you can well imagine, if we started to communicate to a foreign government every unsupported and uncorroborated allegation of bribery of its officials, there would be worldwide foreign relations turmoil …”. Only after we have concluded, as a result of our initial investigation, that indeed there is a significant reason to believe a bribe was paid or offered to a foreign government official, do we notify the foreign government.”
With numerous FCPA enforcement actions in this new era based on alleged payments to alleged state-owned or state-controlled enterprises with many attributes of private commercial enterprises and with numerous FCPA enforcement actions also based on foreign licenses, customs, and certification issues, can it truly be said that in this new era most FCPA enforcement actions present “significant foreign policy and national security implications.” If the answer is no, what does it say about these numerous enforcement actions?
Third, Shine discusses the identity of the foreign official allegedly bribed. Shine stated as follows. “In our public pleadings, whether we are bringing an indictment or filing a civil complaint, generally we will not agree to withhold the identity of the foreign country or of the foreign official.”
As highlighted in this recent post concerning the SEC’s response to the Jackson and Ruehlen motion to dismiss, the SEC argues that “the name, title or exact position of the official need not be pleaded or proved” and the DOJ has likewise argued the same in other actions.
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I first learned of Shine’s lecture and published article this past March when Duross participated in “The FCPA at Thirty-Five and Its Impact on Global Business” symposium at The Ohio State University Moritz College of Law (see here for the prior post). Duross referenced the article in stating that the DOJ’s FCPA enforcement practices and policies have been consistent over time and that even though the FCPA is approaching its 35th year, not much has changed in terms of DOJ practices and policies. To be sure, Duross is correct in part. Yet, as the above excerpts from Shine’s 1982 lecture demonstrate, when viewed in the context of the FCPA’s new era, there are some things that have changed.
DOJ FCPA Unit Chief Charles Duross At Ohio State’s FCPA Symposium
Today’s post is from James McGrath (McGrath & Grace Ltd. – here) and author of the Internal Investigations Blog (here).
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Last Friday, the Ohio State Law Journal presented a symposium entitled “The FCPA at Thirty-Five and Its Impact on Global Business” at the Moritz College of Law. Though Spring Break was already on for most of the student body and the Ohio State campus was relatively empty, experts, practitioners, and a sizable number of the law school’s students packed the William B. Saxbe Law Auditorium to focus on the FCPA.
While the conference consisted primarily of academic panelists presenting executive summaries of their forthcoming
papers on widely-ranging aspects of the Foreign Corrupt Practices Act, the Law Journal staff did score a coup in securing the DOJ’s Charles Duross, who is the Deputy Chief of its Fraud Section and the head of the DOJ’s FCPA unit. Duross said he elected to attend the OSU event instead of an OECD conference considering the submission of Russia’s most recent anti-corruption legislation in terms of treaty compliance and the audience’s reception indicated its gratitude.
Affable and self-deprecating, Duross sat on two of four presentation panels and gave what he represented to be his personal opinions on the FCPA and its enforcement. He asked, therefore, that they not be considered binding upon the Department of Justice. The concern that a double Wolverine – Duross attended both undergraduate and law school at Michigan – finding himself in Columbus might result in Duross in distress was quickly dismissed. In making his own presentation and addressing ad hoc issues raised throughout the day, he pressed the rightness of the DOJ’s enforcement posture much as one expected.
The substantive Duross presentation on the subject of “The FCPA and Government” consisted of his impressions of five things that have not changed about the DOJ’s approach to FCPA enforcement over the years, five things that have changed in the recent past, and five things to look for in the future.
Five Things That Have Not Changed
From the FCPA’s inception in 1977 to the present, the following are the five constants Duross identified:
FCPA as a constant source of complaints. These complaints primarily come from the U.S. Chamber of Commerce and are in direct contrast with his experience in talking to compliance officers who see the law as giving them a competitive advantage. As evidence of this, Duross indicated that a Chief Compliance Office recently told him that his people in the field have used the statute as a shield to explain non-payment of bribes to those demanding them.
Methods of corruption stay the same. Duross noted that in the 1970s, Lockheed used the Tokyo-based Marubeni Corporation as a middleman in securing sales in Japan and that Marubeni was back in the Bonny Island bribery case. Duross also indicated that the use of intermediaries to do the dirty work has not changed during the FCPA’s 35 years.
Centralization of enforcement. Duross noted that although some cases were initiated and prosecuted by individual U.S. Attorney’s at the FCPA’s inception, by and large, the Fraud Section has handled enforcement in the last 20 years. According to Duross, this has lent a consistency and certainty to the effort and this is an overwhelming positive.
Definitions of “instrumentality” and “anything of value”. While Duross acknowledged that the meanings of these terms are the subject of debate, they have been consistently construed over the years. To that point, the definition of “anything of value” has been the same as in the domestic bribery and other criminal statutes, where it is not often complained of or litigated.
Use of agency theory. Duross stated that this theory of criminal liability has always been used in FCPA enforcement, interpreted in the same way and that agency principles will continue in FCPA enforcement.
Five Things That Have Changed
The five changes seen by Duross are as follows.
Passage of international anti-bribery treaties. While the U.S was the first nation to pass a foreign bribery statute, the formation of the OECD by treaty has been a prime mover in getting other countries to pass similar laws. Passage of FCPA-style anti-bribery and anti-corruption laws is a major goal of the accord. Duross noted that while China and India are not signatories to the convention, Russia is one and its attempt at treaty compliance is now being considered in Paris.
Jurisdictional Changes. In 1998, Congress amended the FCPA statute to include alternative nationality jurisdiction – as to U.S. companies and citizens the law applies regardless of a U.S. territorial nexus – and jurisdiction over “persons other than issuers or domestic concerns” – including foreign nationals – while they are within the United States. According to Duross, these changes significantly expanded the scope of the law and the reach of the U.S. government enforcement agencies.
International enforcement cooperation. Thanks in large part to technological advances such as video conferencing, it is easier for multiple governments around the globe to coordinate investigations and prosecutions. In addition, data collection and transmission across vast distances and national boundaries has benefitted from the ever-expanding capabilities of successive generations of computers.
Advent of NPAs and DPAs. While not previously seen, their advent came in 1994 [in a non-FCPA case] when the DOJ and target corporations entered into two of them. In recent years, the average number of agreements has risen. According to Duross, increased popularity of NPAs and DPAs mirror the jump in enforcement and attest to the corporate ability to avoid the excessive adverse publicity of trials.
Increase in number of trials. According to Duross, from 1997 to 2010 there were 18 FCPA defendants who went to trial. In 2011 alone, there were 17 defendants who went to trial.
Five Things For The Future
In the future, Duross said to look for the following: more case law; more scholarly analysis of the FCPA; increasingly complex multi-jurisdictional issues (with overlapping efforts by various nations and their agencies, Duross said these issues will most likely be resolved by treaties between the U.S. and those countries); more international attention (as additional countries join the OECD, the drive to fight foreign bribery and corruption will continue to move forward); more discussion on amending the FCPA (Duross noted that while the U.S. Chamber of Commerce leads the call to amend the law – primarily to posit an affirmative “compliance defense” – the OECD has also suggested changes to the FCPA, such as extending its statute of limitations).
In response to a post-presentation query as to why FCPA enforcement is so hot now, Duross opined that while corruption has always been a problem, things such as the Sarbanes-Oxley reporting requirements and more whistleblower tips have shined additional light on illicit payoffs and other nefarious activities. According to Duross, technology and interconnectivity make for a smaller, less-isolated world and this translates into more reporting. In addition, the DOJ follows the trail of evidence wherever it leads, sometimes making for larger, more-publicized results.
Answering a second question as to how the Fraud Unit decides whether to defer enforcement to other nations, Duross indicated that there is no formal protocol and that it is primarily talked through and decided on an individual basis.
As part of an afternoon discussion of “The FCPA’s Impact on Global Business”, Duross seized the opportunity to respond to many issues presented by other panelists. Noting that he himself had left a large law firm as soon as he had paid off his student loans in order to enter public service and do something bigger, Duross stressed that he is proudly the face of a group that works hard to do the right thing. Occasionally it makes mistakes, but “not all mistakes are misconduct” – no doubt a reference to the Lindseydismissal. As to the size of the DOJ’s FCPA unit, Duross stressed the fact that even today there are only 20 lawyers in the entire section. This makes the job difficult, he said, particularly in light of the resources possessed by enforcement targets and the white collar defense bar. Nevertheless, he asserted that while he and his people might be outspent, they are “never out-classed and never out-hustled.” Duross acknowledged that assessment of their work is appropriate and the pride he showed in his people is not only admirable, but indicative of solid leadership.
Nevertheless, to paint the DOJ as the underdog in this fight – as it wields the full investigative and prosecutorial power of the United States government – reminds me of Lou Holtz’s fretful assessments of his team’s chances each week while hunting down a national title at Notre Dame in 1998. Subpoena and search warrant returns still trump big money and slick lawyers when the facts are bad for investigation targets and defendants.
Why does the FCPA Unit fight so hard? According to Duross, because foreign bribery is bad for business. As Duross analogized, paying bribes to corrupt officials is like dealing with the mob. Companies think that if they can get that first contract by greasing the skids, their superior product or services will get them the next one on merit. But the first shakedown, Duross asserted, is just that: the first shakedown. The sequence repeats itself and grows like a cancer, infecting an entire project, business, or industry. And as the bribes paid often equal the profit on the underlying job, these payoffs are for naught, according to Duross.
Further and on a larger scale, Duross believes that FCPA violations can be indicative of more widespread corporate problems. Where overseas corruption is present, there is a good chance that a company has other questionable business practices both at home and abroad. Therefore, he firmly believes that “compliance is good for business”.
With respect to a “compliance defense” tailored to the FCPA, Duross is against it. Duross believes that while it may properly be part of a larger discussion of vicarious liability and respondeat superior in criminal cases generally, enacting an affirmative defense to any single statute – and the FCPA in particular – would be unwise. He said that the anecdotal evidence supported his position, stating that no compliance officers at a recent meeting raised their hands in favor of a compliance defense. How many were attorneys and if any were white collar litigators was not disclosed. He also stated that no individuals in another forum he recently participated were willing to accept a more extensive U.K. Bribery Act-type statute as a trade off for a compliance defense.
The current trade-off for no compliance defense seems to be accessibility to DOJ decision-makers. Duross closed his remarks for the day by indicating that if there be a need for FCPA certainty – definitions, defenses, or prosecutorial philosophy – it can certainly be found at his door. Harkening back to the smallness of the FCPA Unit, Duross noted that it was unusual to be able to come to the same people who have been with the Department for long stints for guidance and answers.
Though well-intentioned, this does not provide real comfort in my opinion. Though Duross proved very likeable and earnest in his symposium presentations and in a one-on-one conversation afterwards, the notion that bankable advice will always be available from the FCPA Unit because of the quality and professionalism of its current personnel is troubling. After all, this has always been a nation of laws and not of men. That being said, one would have to wonder what or whom to rely upon for FCPA guidance – and to what degree of certainty – when Charles Duross no longer heads the FCPA Unit.
[I would like to thank Professor Koehler for the opportunity to write this guest post. Additionally, I would like to thank the Moritz College of Law at The Ohio State University, the Ohio State Law Journal, Editor-in-Chief Jaci Wilkening, Symposium Editor Katie Linehan, Symposium Faculty Advisor Professor Daniel Chow, and Professor Koehler for putting together an excellent event and for their collective hospitality.]
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Attending an event where a DOJ or SEC FCPA enforcement attorney is speaking? Consider this an open invite to do a guest post for FCPA Professor.
Reasonable
I recently discovered the awesomeness of word clouds. A word cloud is a graphical representation of word frequency in a source text. Word clouds can be a fun and informative learning device. The word cloud for the FCPA’s anti-bribery provisions is here and the word cloud for the FCPA’s books and records and internal control provisions is here. (Both word clouds – as well as future FCPA-related word clouds I create – can be found on the Resources tab of this website).
A quick glance at the FCPA books and records and internal controls word cloud demonstrates that the term “reasonable” is the most prominent term in these provisions. Yet, reviewing SEC FCPA enforcement actions you would hardly know as the agency seems to have, in many cases, converted the books and records and internal control provisions into strict liability provisions. See here for a prior post and for an extended discussion see here – “The Facade of FCPA Enforcement” (pages 976-981). Common verbiage in SEC FCPA enforcement actions includes generic statements that the parent company issuer failed to implement effective internal controls or that problematic payments in distant subsidiary books and records were consolidated with the issuer’s for purposes of financial reporting and that therefore the parent company issuer is liability.
The dominance of “reasonable’ in the FCPA books and records and internal control provisions, as demonstrated by the word cloud, is a good opportunity to revisit this prior post which details comments by Harold Williams (Chairman of the SEC) in 1981 as to the then infant FCPA. Terming his statements as official Commission policy, Williams stated as follows.
“The Act does not mandate any particular kind of internal controls system. The test is whether a system, taken as a whole, reasonably meets the statute’s specified objectives. ‘Reasonableness,’ a familiar legal concept, depends on an evaluation of all the facts and circumstances.” […] “Private sector decisions implementing these statutory objectives are business decisions. And, reasonable business decisions should be afforded deference. This means that the issuer need not always select the best or the most effective control measure. However, the one selected must be reasonable under all the circumstances.”
As to the “degree of exactitude” Williams stated as follows. “I turn first to the question of whether the Act’s text or purpose mandates that business records and controls conform to a standard of absolute exactitude or that a company’s control system meet some absolute ideal. The answer is ‘no.’ Both of the Act’s accounting provisions, it should be noted are modified by the key term ‘reasonable.’ […] In essence, therefore, the Act does provide a de minimus exemption, though not in absolute quantitative terms.” Williams further stated as follows. “Reasonableness, as a standard, allows flexibility in responding to particular facts and circumstances. Inherent in this concept is a toleration of deviations from the absolute. One measure of the reasonableness of a system relates to whether the expected benefits from improving it would be significantly greater than the anticipated costs of doing so. Thousands of dollars ordinarily should not be spent conserving hundreds. Further, not every procedure which may be individually cost-justifiable need be implemented; the Act allows a range of reasonable judgments.”
In a sign of just how much FCPA enforcement has changed, Williams stated as follows in his speech. “If a violation was committed by a low level employee, without the knowledge of top management, with an adequate system of internal control, and with appropriate corrective action taken by the issuer, we do not believe that any action against the company would be called for.”
In another sign of just how much FCPA enforcement has changed, William stated as follows. “… [D]epending on the
circumstances, intentional circumventions of a company’s system of records and of accounting controls by a low-level employee would not always be considered violations of the Act by the issuer. No system of adequate records and controls – no matter how effectively devised or conscientiously applied – could be expected to prevent all mistaken and improper transactions and disposition of assets. Given human nature, regardless of the adequacy of the system, a bookkeeper may still erroneously post entries, an overzealous agent may make unauthorized payments, or an unscrupulous employee may falsify records for his own purposes. The Act recognizes each of these limitations. Neither its text and legislative history nor its purposes suggest that occasional, inadvertent errors were the kind of problem that Congress sought to remedy in passing the Act. No rational federal interest in punishing insignificant mistakes has been articulated. And, the Act’s accounting provisions do not require a company or its senior officials to be the guarantors of all conduct of company employees.”
In concluding this portion of his speech, Williams stated as follows. “The test of a company’s internal control system is not whether occasional failings can occur. Those will happen in the most ideally managed company. But, an adequate system of internal controls means that, when such breaches do arise, they will be isolated rather than systemic, and they will be subject to a reasonable likelihood of being uncovered in a timely manner and then remedied promptly. Barring, of course, the participation or complicity of senior company officials in the deed, when discovery and correction expeditiously follow, no failing in the company’s internal accounting system would have existed. To the contrary, routine discovery and correction would evidence its effectiveness.”
As to the SEC’s enforcement policy, Williams concluded his remarks as follows. “The genius – and challenge – of [the FCPA’s accounting provisions] , it should be remembered, is their reliance on private sector decisionmaking – rather than specific federal edicts – to address an area of public concern. The Act’s eventual success or failure will, therefore, depend primarily upon business’s response. The Commission’s obligation, in turn, is to provide a regulatory environment in which the private sector can address these issues meaningfully and creatively. In this regard, we must encourage public companies to develop innovative records and control systems, to modify and improve them as circumstances change, and to correct recordkeeping errors when they occur without a chilling fear of penalty or inference that a violation of the Act is involved.”
The above comments by Williams are even more significant when one considers that the FCPA Williams was speaking about in 1981 did not contain the good faith compliance provisions added to the FCPA’s books and records and internal control provisions in 1988.
Those provisions currently state as follows.
“Where an issuer […] holds 50 per centum or less of the voting power with respect to a domestic or foreign firm, the [FCPA’s books and records and internal control provisions] require only that the issuer proceed in good faith to use its influence, to the extent reasonable under the issuer’s circumstances, to cause such domestic or foreign firm to devise and maintain a system of internal accounting controls consistent with [the provisions]. Such circumstances include the relative degree of the issuer’s ownership of the domestic or foreign firm and the laws and practices governing the business operations of the country in which such firm is located. An issuer which demonstrates good faith efforts to use such influence shall be conclusively presumed to have complied with the requirements of [the provisions].
In short, the FCPA’s books and records and internal control provisions focus on reasonable. Are the SEC’s enforcement theories as to these provisions reasonable?