Earlier this week, a federal jury in Chicago found four former Commonwealth Edison (“ComEd”) executives and associates guilty on all counts charged, including conspiring to influence and reward the former Speaker of the Illinois House of Representatives in order to assist with the passage of legislation favorable to the electric utility company, in addition to multiple bribery and record falsification charges. (See here for the DOJ release).
Bribery of a state politician is not ordinarily the type of conduct that results in Foreign Corrupt Practices Act issues.
However, ComEd (a majority-owned indirect subsidiary of Exelon Corp) was an issuer (as was Exelon) and the FCPA has always been a law much broader than its name suggests because of the FCPA’s books and records and internal controls provisions.
Indeed, the most serious (from a sentencing and fine perspective) criminal charges the four individuals were found guilty of were record falsification in violation of the FCPA.
The 2020 indictment of the individuals (Michael McClain – who worked as a lobbyist and consultant for ComEd; Anne Pramaggiore – who served as CEO of ComEd from 2012 to 2018 and later as a senior executive at an affiliate of Exelon Corp; John Hooker – who served as ComEd’s executive vice president of legislative and external affairs from 2009 to 2012 after which he worked as an external lobbyist for ComEd; and Jay Doherty – who owned Jay D. Doherty & Associates, which performed consulting services for ComEd from approximately 2011 to 2019) generally began with a section titled “ComEd and Exelon’s Internal Controls Program” which stated:
“Pursuant to the FCPA, issuers, such as ComEd and Exelon, were required to maintain a system of internal accounting controls sufficient to provide reasonable assurances that: (i) transactions were executed in accordance with management’s general or specific authorization; (ii) transactions were recorded as necessary to (A) permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (B) maintain accountability for assets; (iii) access to assets was permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets was compared with the existing assets at reasonable intervals, and appropriate action was taken with respect to any differences. The FCPA prohibited any person from knowingly and willfully circumventing or failing to implement the required system of internal accounting controls or knowingly and willfully falsifying any book, record, or account that issuers were required to keep.
Exelon, together with ComEd and Exelon Business Services, maintained a system of internai controls to detect and prevent improper payments, including bribe payments. These controls included various policies, programs and procedures designed to ensure that Exelon’s books and records, and those of their majority-owned subsidiaries including ComEd and Exelon Business Services, accurately reflected transactions engaged in by the company. The controls were also designed to detect unlawful payments, and included requiring multiple employees to be involved in the approval of contracts that exceeded specified amounts and auditing to help ensure accurate reporting of payments. Exelon maintained a corporate anti-bribery policy and implemented a Code of Business Conduct, which governed the conduct of Exelon, ComEd, and Exelon Business Services employees and agents, including third-party consultants.
From in or around 2006 through in or around 2015, the Code of Business Conduct provided that “[m]anagement is accountable for establishing and maintaining a system of internal controls within an organization,” that management was required to “ensure that there is clear, complete, fair, and accurate reporting of financial and non-financial information pertaining to business transactions,” and that management was accountable to the Exelon board of directors for compliance. The Code of Business Conduct further specified that employees were accountable for “recording all business transactions, events and conditions accurately and completely,” and were prohibited from “falsifying data, information or records with respect to the Company’s finances or operations, including those related to, among other things: assets, liabilities, revenues, expenses and earnings . . . .” and from “creating off-book accounts or funds or making any other entry in any other record that intentionally misrepresents, conceals or disguises the true nature of any transaction, event or condition . . . .” Senior officers of Exelon were also required to ensure that internal controls around financial reporting were properly designed and effective, and were further required to promptly report any violations of these requirements. The Code of Business Conduct further provided that the “FCPA also requires that publicly held companies, like Exelon, maintain accurate books, records and accounts and devise a system of internal accounting controls sufficient to provide reasonable assurance that, among other things, the Company’s books and records fairly and accurately reflect business activities and transactions.”
In or around 2015, the Code of Business Conduct was revised, and from in or around 2015 to in or around 2019 provided that “[b]usiness and financial records are essential to our business operations. Exelon relies on the integrity and accuracy of these records to make strategic decisions and has designed and implemented a series of internal controls-organizational structures, processes, procedures, systems, etc.-to effectively manage financial reporting.” The Code of Business Conduct further instructed employees to: “[n]ever keep off-the-book accounts or false or incomplete records”; “[n]ever make an entry in any record that intentionally misrepresents, conceals or disguises the true nature of any transaction, event or condition”; “[r]ecord all business transactions, events and conditions accurately, completely and in a timely fashion”; “[e]nsure that there is clear, complete fair and accurate reporting and supporting records of financial information pertaining to business transactions”; “[n]ever mislead or misinform anyone about our business operations or finances”; “[i]mmediately report any requests received to manipulate accounts, books and records, or financial reports, and any suspected misconduct regarding accounting, internal controls, or auditing matters to the Ethics and Compliance Office, Audit and Controls, or the Legal Department.” The Code of Business Conduct further emphasized under the heading “Fighting Bribery and Corruption” that bribes and kickbacks of any kind violated the Code of Business Conduct and were illegal, and that the FCPA “[r]equires that publicly held companies, like Exelon, have accounting controls to assure that all transactions are recorded fairly and accurately in our financial books and records.” The Code of Business Conduct provided the following examples of what was expected of employees and agents: (a) “[k]eep accurate and complete records so all payments are honestly detailed and company funds are not used for unlawful purposes”; (b) “[c]onduct due diligence on all potential agents, consultants or other business partners”; and (c) “[n]ever use a third party to make payments or offers that could be improper.” Exelon’s Code of Business Conduct also prohibited bribery and listed as an example of a prohibited bribe: “Providing something of value for the benefit of a public official in a position to make a decision that could benefit the company.”
Exelon, together with ComEd and Exelon Business Services, provided training on the Code of Business Conduct to employees in the form of training guides.
Employees of Exelon and its subsidiaries, including ComEd and Exelon Business Services, were required to annually certify adherence to Exelon’s Code of Business Conduct. Employees were also required to promptly report potential violations of the Code of Business Conduct, including but not limited to “[a]ccounting improprieties, internal accounting controls or auditing matters.”
In connection with the core bribery scheme, the indictment charged (in Counts 3, 4, 7, and 9) that the defendants knowingly and willfully falsified and caused to be falsified certain ComEd and Exelon books, records, and accounts, so that those books, records, and accounts did not in reasonable detail, accurately and fairly reflect the transactions and dispositions of ComEd’s and Exelon’s assets.
During the trial, there were disputes between the defense and the DOJ regarding certain of the FCPA jury instructions – specifically the issue of “willful” and the types of records captured by the FCPA’s books and records provisions.
As stated by the DOJ’s response to the defendants’ proposed jury instructions:
“Defendants propose an unduly narrow definition of the “records” under the FCPA. […] The FCPA broadly defines “records” to mean “accounts, correspondence, memorandums, tapes, discs, papers, books, and other documents or transcribed information of any type, whether expressed in ordinary or machine language.” 15 U.S.C. § 78c(a)(37). The text could not be clearer. In this case, the books and records that are alleged to have been falsified include accounting records, but also financial records submitted to Exelon’s accounting department and incorporated into the company’s financials, such as contracts and invoices. Thus, the Court should define “records” as proposed by the government:
Such records include, for example, general ledgers, journal entries, income statements, financial certifications, and other records relating to transactions and dispositions entered into by the company, such as contracts, memoranda, invoices, as well as payment and account records.
The few decisions that have addressed this issue expansively interpret what “records” means in the FCPA. For example, a court in Georgia declined to dismiss a 15 U.S.C. § 78m(b)(2)(A) count where defendant was alleged to have made false statements “by preparing and/or signing (1) a contract with Egypt; (2) international consultant agreements; (3) international consultant basic data sheets, (4) international consultant certificates of compliance; and (5) correspondence with the governments of Egypt and United States, all of which falsely and fraudulently concealed the existence and true nature of the payments to Takla (i.e. payments made for purposes outlawed by 15 U.S.C. § 78dd–1(a)(1)).” United States v. Lockheed Corp., No. CR.A. 194CR226MHS, 1995 WL 17064259, at *6 (N.D. Ga. Jan. 9, 1995). And a California federal court held in a civil FCPA case that false statements in correspondence to auditors were false “records” under the definition of “record.” S.E.C. v. Retail Pro, Inc., 673 F. Supp. 2d 1108, 1142 (S.D. Cal. 2009).”
Although outside the foreign bribery context, this week’s conviction of the above individuals of FCPA books and records offenses is likely one of more high profile instances of criminal convictions of those provisions in the FCPA’s approximate 45 year history.
Of note, in 2020 ComEd resolved its own DOJ enforcement action based on the same core conduct by agreeing to pay $200 million. (See here). The enforcement action against ComEd did not involve any FCPA books and records or internal control charges. (See here).
