Conveying knowledge about the Foreign Corrupt Practices Act’s anti-bribery provisions is relatively straight-forward as there are specific elements or issues such as anything of value, foreign official, obtain or retain business, jurisdiction, facilitating payments and various affirmative defenses. Moreover, in some cases statutory definitions assist in the analysis.
Conveying knowledge about the FCPA’s other provisions – the books and records and internal controls provisions – is often more difficult because these provisions – aside from the term reasonable – are basically standardless as written. Indeed, in SEC v. Worldwide Coin the judge stated: “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 knowledgable individuals can arrive at totally different conclusions.”
Moreover, individuals often become confused when confronting the FCPA’s so-called accounting provisions upon learning that the FCPA has always been a law much broader than its name suggests because the accounting provisions are implicated in many situations that have nothing to do with foreign bribery (what these pages have long called non-FCPA, FCPA enforcement actions).
An instructive example of such an action involves this recent SEC enforcement action against Celadon Group Inc. charging the truckload freight company with an accounting fraud .
This settled civil complaint alleges in summary fashion.
“Between June 2016 and April 2017, defendant Celadon Group, Inc. (“Celadon” or “Defendant”) orchestrated a fraudulent scheme designed to avoid disclosing substantial losses. The fraud involved a series of deceptive third-party transactions and Celadon’s subsequent filing of false financials for public consumption with the SEC.
The assets in question were more than a thousand trucks. Celadon held certain trucks on its books at values far in excess of what they could fetch in arms-length transactions. Had the company sold these vehicles on the open market, such sales would have necessitated Celadon booking significant losses on its financial statements amounting to tens of millions of dollars.
Faced with this prospect, Celadon arranged a series of transactions with a third party, through which it sold trucks at significantly inflated prices, and in exchange bought trucks from the same party at similarly inflated prices. Celadon then put the trucks it bought on its books at the inflated values it paid. This resulted in the dissemination of false financial information to the public.
Celadon then transferred the new batch of trucks to an off-book entity at the fraudulently inflated values. Having dumped the trucks from its books, Celadon then filed inaccurate financial statements with the SEC that included its investment in the off-book entity at an inflated value. When its auditors asked questions about this sketchy sequence of transactions, Celadon lied and failed to disclose critical facts.
The SEC brings this civil law enforcement action to hold Celadon accountable for its wrongdoing.”
Based on the above, the SEC charged Celadon with (among other things) violating the FCPA’s books and records and internal controls provisions.
As to the former, the complaint alleges:
“Celadon violated [the books and records provisions] because its records repeatedly reflected inaccurate transactions and dispositions of assets by failing to mark down the trucks to their fair values. Celadon’s records also reflected that Quality’s transfers to a third-party were sales rather than borrowings.”
As to the later, the complaint alleges:
“Celadon violated [the internal controls provisions] because, it had a number of internal control deficiencies, in that it failed to devise a system of internal accounting controls sufficient to provide reasonable assurance that transactions were recorded as necessary to prepare financial statement in accordance with GAAP. In addition, deficiencies existed in Celadon’s internal controls over financial reporting that constituted material weaknesses over the affected periods between 2014 and 2016.”
With history as a guide, certain commentators may say that the Celadon enforcement action was “like” an FCPA enforcement action ignoring of course that the statutory violations – Sections 13(b)(2)(A) (the books and records provisions) and Section 13(b)(2)(B) (the internal controls provisions) – are the exact same provisions implicated in “pure” FCPA enforcement actions.
As noted in the SEC’s press release, “Celadon agreed to pay $7 million in disgorgement, which will be deemed satisfied by Celadon’s payment of restitution in an action announced … by the Department of Justice.”
As noted in this DOJ release, Celadon “has agreed to pay total restitution of $42.2 million for filing materially false and misleading statements to investors and falsifying books, records and accounts.” In this criminal information (resolved through a deferred prosecution agreement) Celadon was charged with, among other things, conspiracy to violate the FCPA’s books and records provisions.
Strategies For Minimizing Risk Under The FCPA
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