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The FCPA Has Always Been A Law Much Broader Than Its Name Suggests

Yesterday, the Foreign Corrupt Practices Act turned 42.

Thus, an appropriate time to highlight that the FCPA 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 and these provisions are among the most generic legal provisions one can possibly find.

Case in point is this recent SEC enforcement action [1] against MetLife for “long-standing” internal control failures and associated books and records issues.

In summary fashion, the SEC order states:

“These proceedings arise out of MetLife’s failure to keep accurate books and records and devise and maintain a sufficient system of internal accounting controls with respect to its accounting for reserves associated with certain of its annuities products.

In a series of announcements beginning in December 2017 and culminating in MetLife’s Form 10-K for the fiscal year ending December 31, 2017 (the “2017 10-K”), filed on March 1, 2018, MetLife disclosed two significant errors in its historical accounting for reserves associated with its annuities business. MetLife attributed each of those errors to a material weakness in MetLife’s internal control over financial reporting (“ICFR”).

The first error involved MetLife’s reserves for benefits owed to annuitants under certain group annuities in its Retirement and Income Solutions (“RIS”) business whom MetLife had been unable to locate or reach via the information in its systems (the “RIS Error”). For more than 25 years, MetLife had utilized a practice of releasing reserves – that is, reducing liability for future policy benefits, with a corresponding increase in income – associated with RIS group annuitants who had not responded to MetLife after two mailing attempts, based on a presumption that those annuitants were dead or otherwise would never be found. MetLife’s historical practices were insufficient to justify that presumption and the release of reserves, as was later confirmed when MetLife employed enhanced outreach procedures.

To correct the RIS Error, MetLife increased reserves by $510 million pre-tax as of December 31, 2017 “to reinstate reserves previously released, and to reflect accrued interest and other related liabilities” accumulated over a 25-year period. Of the $510 million adjustment, $372 million was considered an “error,” or a revision of prior period results. The remaining $138 million reflected a change in estimate for fiscal year 2017.

MetLife attributed the RIS Error to a material weakness in its ICFR consisting of two control deficiencies: one relating to the processes and procedures for locating unresponsive and missing annuitants, and the other relating to timely communication and escalation of the issue within the Company.

MetLife also disclosed in its 2017 10-K a second, unrelated reserve error involving a different line of annuity products, and a second material weakness in its ICFR. This second error related to accounting for variable annuity guarantees assumed by a MetLife subsidiary, MetLife Reinsurance Company of Bermuda (“MrB”), from a former operating joint venture in Japan (the “MrB Error”). Unlike the RIS Error, which resulted in MetLife understating its reserves (and overstating income) prior to the correction, the MrB Error involved an overstatement of reserves (and understatement of income). MetLife disclosed that the MrB Error was caused by data errors, including a failure to properly incorporate policyholder withdrawals into MetLife’s valuation model.

To correct the MrB Error, MetLife reduced reserves by $896 million pre-tax as of December 31, 2017, and recognized the same amount as income. Of the $896 million adjustment, $682 million represented a correction of prior-period errors dating back more than ten years, while the remaining $214 million was recognized as a change in estimate for fiscal year 2017. MetLife attributed the MrB Error to a material weakness in its ICFR relating to data validation and monitoring of reserves for the variable annuity guarantees issued by the former operating joint venture in Japan. MetLife subsequently discovered that the $896 million reserve decrease was understated by $10 million, which was recognized and reported as a reserve change in the first quarter of 2018.

Both RIS and MrB’s books, records and financial statements are consolidated into those of MetLife. As a result, MetLife’s books and records were inaccurate in violation of [the books and records provisions], which requires issuers to keep accurate books and records. Moreover, both errors resulted from failures by MetLife to devise and maintain sufficient internal accounting controls as required by [the internal controls provisions].”

Without admitting or denying the SEC’s findings, Metlife agreed to pay a $10 million civil penalty.

In the SEC’s release, Marc Berger (Director of the SEC’s New York Regional Office) stated:

“Investors are entitled to the reliability and accuracy of financial information. The Commission found that MetLife’s insufficient internal controls caused longstanding accounting errors.”