This recent FCPA Flash podcast episode focused on the SEC’s “unlawful” enforcement, in certain instances, of the FCPA’s books and records and internal controls provisions.
Off-the-rails SEC FCPA enforcement is a topic frequently discussed on these pages (see here among numerous other posts) and sometimes it is important to take a step back and review actual legal authority, as well as even prior enforcement agency guidance, relevant to the books and records and internal controls provisions.
Upon reviewing the below information, ask yourself whether it is possible to reconcile this legal authority and other sources of information with enforcement theories advanced in certain FCPA enforcement actions.
I’ve asked this question on occasion to former enforcement officials and a common answer I receive is something along the following laws: the resolution document does not capture the entire range or breadth of the alleged improper conduct and if you knew what we knew you would understand.
Even accepting that answer, all that means is the FCPA space has a transparency problem and transparency in law enforcement is a fundamental tenet of the rule of law. Like others, I take the position that the enforcement agencies have a duty to defend the enforcement record they create.
Another point to keep in mind is that several instances of seemingly “off-the-rails” SEC enforcement have originated with voluntary disclosures. In these situations, perhaps the best question is – based on the information in the resolution documents – why did the companies voluntarily disclose and upon receiving the disclosure what is the SEC really supposed to do?
The entire text of the FCPA’s books and records provisions state that issuers shall:
“make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer”
The text of the FCPA’s internal controls provisions state that issuers shall: “devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that:
- transactions are executed in accordance with management’s general or specific authorization;
- transactions are recorded as necessary (I) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (II) to maintain accountability for assets;
- access to assets is permitted only in accordance with management’s general or specific authorization; and
- the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.”
Against this general statutory framework, the provisions set forth some important qualifications. For instance, “reasonable assurances” and “reasonable detail” are defined to mean “such level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own affairs.” Further, the FCPA provides the following qualification:
“If an issuer “holds 50% or less of the voting power with respect to a domestic or foreign firm, [the books and records and internal controls 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 …. 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 books and records and internal controls provisions].”
Even though Congress viewed the books and records and internal controls provisions as useful supplements to the FCPA’s anti-bribery provisions, it is clear from the legislative history that Congress intended for these provisions to be qualified by concepts of reasonableness and good faith. A 1977 Senate Report stated:
“The establishment and maintenance of a system of internal controls and accurate books and records are fundamental responsibilities of management. The expected benefits to be derived from the conscientious discharge of these responsibilities are of basic importance to investors and the maintenance of the integrity of our capital market system. The committee recognizes, however, that management must exercise judgment in determining the steps to be taken, and the cost incurred, in giving assurance that the objectives expressed will be achieved. Here, standards of reasonableness must apply. In this regard, the term ‘accurately’ does not mean exact precision as measured by some abstract principle. Rather it means that an issuer’s records should reflect transactions in conformity with generally accepted accounting principles or other applicable criteria. While management should observe every reasonable prudence in satisfying the objections called for [in the books and records and internal controls provisions] the committee recognizes that management must necessarily estimate and evaluate the cost/benefit relationships to the steps to be taken in fulfillment of its responsibilities … The size of the business, diversity of operations, degree of centralization of financial and operating management, amount of contact by top management with day-to-day operations, and numerous other circumstances are factors which management must consider in establishing and maintaining an internal accounting controls systems.”
A 1977 House Conference Report likewise stated as follows regarding the “in reasonable detail” requirement of the provisions:
“The conference committee adopted the ‘in reasonable detail’ qualification to the accurate and fair requirement in light of the concern that such a standard, if unqualified, might connote a degree of exactitude and precision which is unrealistic.”
In 1988, the books and records and internal control provisions were amended to better address a parent company issuer’s responsibility for the books and records and internal controls of minority-owned subsidiaries. A 1988 House Conference Report stated:
“[The provision] recognizes that it is unrealistic to expect a minority owner to exert a disproportionate degree of influence over the accounting practices of a subsidiary. The amount of influence which an issuer may exercise necessarily varies from case to case. While the relative degree of ownership is obviously one factor, other factors may also be important in determining whether an issuer has demonstrated good-faith efforts to use its influence.”
The FCPA’s books and records and internal control provisions were further amended in 1988 by defining the terms “reasonable assurance” and “reasonable detail” to mean such level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own affairs.” Legislative history states as follows:
“The prudent man qualification [was adopted] in order to clarify that the current standard does not connote an unrealistic degree of exactitude or precision. The concept of reasonableness of necessity contemplates the weighing of a number of relevant factors, including the costs of compliance.”
In addition to statutory text and legislative history, judicial decisions are also another form of legal authority concerning the FCPA’s books and records and internal controls provisions. However, notwithstanding the broad scope of the FCPA’s books and records and internal controls provisions, SEC v. World-Wide Coin Investments is the only judicial decision to directly address the substance of these provisions and because of this the decision is discussed below in detail.
Factually, World-Wide Coin was an egregious case and like many enforcement actions involving the books and records and internal controls provisions it was a “non-FCPA FCPA enforcement action” in that the case had nothing to do with foreign bribery. Instead, the case involved a wide-ranging securities fraud involving a company engaged primarily in the wholesale and retail sale of rare coins. As the judge stated:
“The deterioration of World-Wide’s internal controls and accounting procedures constituted the primary thrust of the SEC’s complaint. The SEC contended that the combination of late filings, lack of internal controls, transactions unsupported by adequate documentation, and a total disregard for proper accounting procedures resulted in the precarious position of the company. […] The company’s accounting books were virtually ignored. General ledgers and general journals were not kept, and the checks written on World-Wide’s five checking accounts were not reconciled.”
The judge described the bookkeeper hired by the company as follows. “[She] was not a high school graduate; her only experience for this position consisted of five months of vocational school training and seven years of bookkeeping for a privately held lumber company.” The judge’s findings of fact further highlighted how the accounting firm retained by the company as an independent auditor wrote a letter to the company “expressing grave concern over certain accounting procedures and lack of internal controls that [it] considered to be detrimental to the company.” Yet, as stated by the judge, company management “did nothing to remedy the situation” and the company had “total disregard for an adequate internal control system.”
Thereafter, the judge called that the books and records and internal controls provisions were “short and deceptively straight-forward” and stated as follows.
“The only express congressional requirement for accuracy is the phrase ‘in reasonable detail.’ Although [the books and records provisions] expect management to see that the corporation’s recordkeeping system is adequate and effectively implemented, how the issuer goes about this task is up to management; the FCPA provides no guidance, and this court cannot issue any kind of advisory opinion. Just as the degree of error is not relevant to an issuer’s responsibility for any inaccuracies, the motivations of those who erred are not relevant. There are no words in [the books and record provisions] indicating that Congress intended to impose a scienter requirement …”.
“Like the recordkeeping provisions of the Act, the internal controls provision is not limited to material transactions or to those above a specific dollar amount. While this requirement is supportive of accuracy and reliability in the auditor’s review and financial disclosure process, this provision should not be analyzed solely from that point of view. The internal controls requirement is primarily designed to give statutory content to an aspect of management stewardship responsibility, that of providing shareholders with reasonable assurances that the business is adequately controlled.”
“Internal accounting control is, generally speaking, only one aspect of a company’s total control system; in order to maintain accountability for the disposition of its assets, a business must attempt to make it difficult for its assets to be misappropriated. The internal accounting controls element of a company’s control system is that which is specifically designed to provide reasonable, cost-effective safeguards against the unauthorized use or disposition of company assets and reasonable assurances that financial records and accounts are sufficiently reliable for purposes of external reporting. […] Internal accounting controls must be distinguished from the accounting system typically found in a company. Accounting systems process transactions and recognize, calculate, classify, post, summarize, and report transactions. Internal controls safeguard assets and assure the reliability of financial records, one of their main jobs being to prevent and detect errors and irregularities that arise in the accounting systems of the company. Internal accounting controls are basic indicators of the reliability of the financial statements and the accounting system and records from which financial statements are prepared.”
“Among the factors that determine the internal accounting control environment of a company are its organizational structure, including the competence of personnel, the degree and manner of delegation and responsibility, the quality of internal budgets and financial reports, and the checks and balances that separate incompatible activities. The efficiency of the internal control system of a company cannot be evaluated without considering the company’s organizational structure, the caliber of its employees, the strength of its audit committee, the effectiveness of its internal audit operation, and a host of other factors which, while not part of the internal control system itself, have an impact on the function of the system.”
“Although not specifically delineated in the Act itself, the following directives can be inferred from the internal controls provisions: (1) Every company should have reliable personnel … and all should be supervised. (2) Account functions should be segregated and procedures designed to prevent errors or irregularities. The major functions of recordkeeping, custodianship, authorization, and operation should be performed by different people to avoid the temptation for abuse of these incompatible functions. (3) Reasonable assurances should be maintained that transactions are executed as authorized. (4) Transactions should be properly recorded in the firm’s accounting records to facilitate control, which would also require standardized procedures for making accounting entries. Exceptional entries should be investigated regularly. (5) Access to assets of the company should be limited to authorized personnel. (6) At reasonable intervals, there should be a comparison of the accounting records with the actual inventory of assets, which would usually involve the physical taking of inventory, the counting of cash, and the reconciliation of accounting records with the actual physical assets. Frequency of these comparisons will usually depend on the cost of the process and upon the materiality of the assets involved.”
“The main problem with the internal accounting controls provision of the FCPA is that there are no specific standards by which to evaluate the sufficiency of controls; any evaluation is inevitably a highly subjective process in which knowledgeable individuals can arrive at totally different conclusions. Any ruling by a court with respect to the applicability of both the accounting provisions and the internal accounting control provisions should be strictly limited to the facts of each case.”
Thereafter, the judge offered the following key language:
“The definition of accounting controls does comprehend reasonable, but not absolute, assurances that the objectives expressed in it will be accomplished by the system. The concept of ‘reasonable assurances’ contained in [the internal controls provisions] recognizes that the costs of internal controls should not exceed the benefits expected to be derived. It does not appear that either the SEC or Congress, which adopted the SEC’s recommendations, intended that the statute should require that each affected issuer install a fail-safe accounting control system at all costs. It appears that Congress was fully cognizant of the cost-effective considerations which confront companies as they consider the institution of accounting controls and of the subjective elements which may lead reasonable individuals to arrive at different conclusions. Congress has demanded only that judgment be exercised in applying the standard of reasonableness. The size of the business, diversity of operations, degree of centralization of financial and operating management, amount of contact by top management with day-to-day operations, and numerous other circumstances are factors which management must consider in establishing and maintaining an internal accounting controls system. However, an issuer would probably not be successful in arguing a cost-benefit defense in circumstances where the management, despite warnings by its auditors or significant weaknesses of its accounting control system, had decided, after a cost benefit analysis, not to strengthen them, and then the internal accounting controls proved to be so inadequate that the company was virtually destroyed. It is also true that the internal accounting controls provisions contemplate the financial principle of proportionality—what is material to a small company is not necessarily material to a large company.”
Consistent with the World-Wide Coin holding, various courts have held in the context of civil derivative actions that just because improper conduct allegedly occurred does not mean that internal controls must have been deficient. As you read certain of the enforcement actions highlighted later in this chapter, you can analyze for yourself whether the allegations giving rise to books and records and internal controls charges were consistent with the above legal authority.
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Non-Legal Sources of Information
In addition to the legal authority dissected above, there is also non-legal sources of authority relevant to the books and records and internal controls provisions. Highlighted below in chronological order is DOJ and SEC guidance regarding these provisions.
1979 SEC Guidance
Soon after the FCPA was enacted in 1977, the SEC adopted rules to supplement the FCPA’s books and records and internal control provisions. In promulgating the rules, the SEC received numerous comments that “false entries of insignificant or nominal amounts would give rise to a violation” and that “in view of the large number of books, records and accounts kept by some corporations, particularly large corporations, application of the [provisions] to any falsification of such books, records and accounts would make compliance impossible.”
The SEC responded to these concerns by referencing congressional intent, specifically that the provisions were “qualified” by Congress “to make clear that issuers are required to ‘make and keep books, records and accounts, which in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer.” The SEC concluded that the “presence of the words ‘in reasonable detail’ in [the books and records provisions] should alleviate much of the concern expressed in comments …”. In addition, the SEC concluded that concerns expressed “with respect to inadvertent and inconsequential errors is unwarranted” because the FCPA “does not require perfection but only that books, records and accounts ‘in reasonable detail’ accurately and fairly reflect the transactions and dispositions of the assets of the issuer.” The SEC further stated that “the legislative history reflects that ‘standards of reasonableness’ are to be used in applying the provisions.”
1981 SEC Guidance
In 1981, the SEC issued additional formal guidance concerning the FCPA’s books and records and internal control provisions in the form of a speech given by the SEC Chairman that was thereafter adopted by the SEC as a formal statement of policy. Because this speech is most extensive guidance ever issued by the enforcement agencies regarding the books and records and internal controls provisions, it is highlighted below in detail.
The SEC Chairman began his remarks as follows:
“When viewed from an abstract perspective, the Act’s accounting provisions seem merely to codify a basic and uncontroversial management principle: no enterprise of any size can operate successfully without maintaining effective controls over its transactions and the disposition of its assets. Perhaps in part because these provisions were considered truisms, the Act was passed without Congressional dissent. However, practical experience with new legislation – even a law thought to be noncontroversial – often will reveal unanticipated problems. Newly enacted standards, for example, may be subject to differing constructions or raise compliance difficulties and ambiguities unforeseen by their draftsmen. And, until these problems are resolved by an agency, the courts or the Congress, those who are subject to these laws are often faced, unfortunately, with some disquieting circumstances. The anxieties created by the FCPA – among men and women of utmost good faith – have been, in my experience without equal.”
The Chairman noted that “such uncertainty can have a debilitating effect on the activities of those who seek to comply with the law” and stated:
“My sense is that, as a consequence, many businesses have been very cautious – sometimes overly so – in assuring at least technical compliance with the Act. And, therefore, business resources may have been diverted from more productive uses to overly-burdensome compliance systems which extend beyond the requirements of sound management or the policies embodied in the Act. The public, of course, is not well served by such reactions.”
As to the FCPA’s books and records provisions, the Chairman stated:
“This provision is intimately related to the requirement for a system of internal accounting controls, and we believe that records which are not relevant to accomplishing the objectives specified in the statute for the system of internal controls are not within the purview of the recordkeeping provision. […] Nor could a company be enjoined for a falsification of which its management, broadly defined, was not aware and reasonably should not have known.”
As to the FCPA’s internal control provisions, the Chairman stated:
“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.”
“The accounting provisions principal objective is to reaching knowing or reckless conduct.”
As to the “purposes of the Act,” the Chairman provided a brief review of the “events which led to the [FCPA]” and stated:
“Clearly, Congress went further than determining whether the payments which gave the new law its name were ethically and commercially justifiable. It also chose to consider the corporate accounting and control deficiencies which had been breeding grounds for these practices. And, by doing so, it addressed the far more serious issues raised by these disclosures. […] These payments and falsifications were not only previously unknown to public investors and independent auditors, but many were also unknown to the payer’s board and, in numerous examples, even to its senior management. In some of these instances, internal controls existed, but they were shown to be ineffective or easily subverted. Unauthorized payments and related falsifications of corporate records seemed to evidence – indeed, were fostered by – a lack of adequate accounting records and controls. Consequently, in the legislation which ultimately emerged from Congress, prohibiting questionable payments and mandating control and recordkeeping were inexorably interconnected.”
“The primary thrust of the Act’s accounting provisions, in short, was to require those public companies which lacked effective internal controls or tolerated unreliable recordkeeping to comply with the standards of their better managed peers. That is the context in which these provisions should be construed.”
The Chairman then addressed “four of the most important” interpretative questions concerning the FCPA: “first, the degree of exactitude in recordkeeping mandated by the Act; second, the deference it affords business decisions concerning internal controls; third, whether a particular state of mind is necessary for a violation to exist; and finally, liability for compliance by subsidiaries.”
As to the “degree of exactitude,” the Chairman stated:
“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.”
The Chairman noted that Congress specifically declined to adopt a materiality test and stated that “internal accounting controls are not only concerned with misconduct that is material to investors, but also with a great deal of misconduct which is not.” He noted that while materiality is “appropriate as a threshold standard to determine the necessity for disclosure to investors, [it] is totally inadequate as a standard for an internal control system.”
The Chairman stated that “procedures designed only to uncover deficiencies in amounts material for financial statement purposes would be useless for internal control purposes” and noted that “systems which tolerated omissions or errors of many thousands or even millions of dollars would not represent, by any accepted standard, adequate records and controls.” Indeed, he noted that many of the “questionable payments that alarmed the public and caused Congress to act […] were in most instances of far lesser magnitude than that which would constitute financial statement materiality.”
According to the Chairman, “reasonableness, rather than materiality, is the appropriate test” and he further stated:
“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.”
As to the “specific recordkeeping requirement” in the FCPA, the Chairman stated:
“This provision is not an independent unrestrained mandate to the Commission to establish novel or unprecedented corporate recordkeeping standards; it is, rather, an integral part of Congress’ efforts to assure that the business community records transactions and assets in such a way as to maintain adequate control over them. And this leads to two important conclusions: First, the Act does not establish any absolute standard of exactitude for corporate records. And, second, records which are not related to internal or external audits or to the four internal control objectives set forth in the Act are not within the purview of the Act’s accounting provisions.”
As to “deference” with respect to “issuer liability for recordkeeping violations,” the Chairman stated that the SEC “will look to the adequacy of the internal control system of the issuer, the involvement of top management in the violation, and the corrective actions taken once the violation was uncovered.” He then stated:
“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.”
The Chairman next turned to the “state of mind needed to violate the Act’s accounting provisions,” reiterated that the “Act’s principal purpose is to reach knowing or reckless misconduct,” and stated:
“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.”
In concluding this portion of the speech, the Chairman stated:
“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, the Chairman concluded his remarks as follows.
“The genius – and challenge – of [the FCPA’s books and records and internal controls 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.”
In addition to the above 1981 formal statement of SEC policy, the SEC has also at various times affirmed statements of congressional intent relevant to the books and records and internal control provisions. For instance, in a 1999 SEC Staff Accounting Bulletin, the SEC cited with approval the following from the FCPA’s legislative history:
“[Congress] adopted the prudent man qualification [in the FCPA’s books and records and internal control provisions] in order to clarify that the current standard does not connote an unrealistic degree of exactitude or precision. The concept of reasonableness of necessity contemplates the weighing of a number of relevant factors, including the costs of compliance.”
In the same Bulletin, the SEC also cited with approval various aspects of its above highlighted 1981 formal statement of policy:
“The books and records provisions of the [FCPA] do not require registrants to make major expenditures to correct small misstatements. […] As [the SEC] Chairman noted with respect to the internal control provisions of the FCPA, “thousands of dollars ordinarily should not be spent conserving hundreds. […] Because the judgment of [‘reasonableness’ under the accounting provisions] is not mechanical, the [SEC] staff will be inclined to defer to judgments that ‘allow a business, acting in good faith, to comply with the Act’s accounting provisions in an innovative and cost-effective way.”
2012 FCPA Guidance
In 2012 the DOJ and SEC jointly issued FCPA Guidance setting forth its “FCPA enforcement approach and priorities” and a specific chapter concerned the books and records and internal control provisions. Like previous enforcement agency guidance, the FCPA Guidance cites legislative history or the FCPA itself for the following statements:
Books and Records Provision
“The ‘in reasonable detail’ qualification was adopted by Congress ‘in light of the concern that such a standard, if unqualified, might connote a degree of exactitude and precision which is unrealistic.’”
“The term ‘reasonable detail’ is defined in the statute as the level of detail that would ‘satisfy prudent officials in the conduct of their own affairs.’ Thus, as Congress noted when it adopted this definition, ‘the concept of reasonableness of necessity contemplates the weighing of a number of relevant factors, including the costs of compliance.’”
Internal Controls Provision
“Like the ‘reasonable detail’ requirement in the books and records provision, the Act defines ‘reasonable assurances’ as ‘such level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own affairs.’”
“The Act does not specify a particular set of controls that companies are required to implement. Rather, the internal controls provision gives companies the flexibility to develop and maintain a system of controls that is appropriate to their particular needs and circumstances.”
“Companies may not be able to exercise the same level of control over a minority-owned subsidiary or affiliate as they do over a majority or wholly owned entity. Therefore, if a parent company owns 50% or less of a subsidiary or affiliate, the parent is only required to use good faith efforts to cause the minority-owned subsidiary or affiliate to devise and maintain a system of internal accounting controls consistent with the issuer’s own obligations under the FCPA. In evaluating an issuer’s good faith efforts, all the circumstances—including ‘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’—are taken into account.”
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