Earlier this week, North Carolina won the national championship basketball game to cap off a successful season. By one measure, North Carolina was thus the most successful team in college basketball this year. But what if North Carolina was a business organization subject to the FCPA?
It is undisputed that North Carolina failed many times this year.
For starters, North Carolina ended the season 33-7 which means that North Carolina lost approximately 18% of its games. During the season, North Carolina lost to unranked Georgia Tech and Miami and failed to win the ACC tournament conference championship.
North Carolina’s season statistics also evidence less than perfection in several fundamental categories. For the year, North Carolina’s FT% was .681 (101 teams shot better), its 3P% was .294 (99 teams shot better), and its FG% was .434 (79 teams shot better). In short, there were numerous teams that performed better than North Carolina in key statistical categories fundamental to the game of basketball. Moreover, throughout the season various North Carolina players missed easy shots, committed numerous dumb fouls, and had countless unforced turnovers.
More generally, North Carolina’s season had the gray cloud of an lingering academic cheating scandal. As stated here “Put simply, for two decades until 2013, the university provided fake classes for many hundreds of student athletes, most of them basketball and football players.”
Despite North Carolina’s many failures this past season, the beauty of sports is that success is viewed holistically and not through a narrow lens of just one game, a discrete statistical category, or the specifics of a certain possession.
Yet the point of this post is to contemplate what would have happened to North Carolina this season if it was a business organization subject to various criminal or civil laws such as the Foreign Corrupt Practices Act.
The short answer is that North Carolina would have been prosecuted and criticized (by the DOJ/SEC and certain FCPA commentators) for its lack of internal controls. The enforcement theories / comments would have been along the following lines. That North Carolina lost approximately 18% of its games is evidence of ineffective internal controls; a team that losses to unranked teams does not have effective internal controls; and a team with rather dismal shooting percentages does not have effective internal controls. If only the team practiced more, all would have been perfect, or so the theory goes.
After all, FCPA enforcement actions are often based on the enforcement agencies wearing rose-colored glasses and with the benefit of hindsight viewing a multinational business organization with thousands of employees through the lens of just a 1% overall fail rate, through the lens of just one business unit, or through the lens of just one business transaction.
An interesting clause in most corporate FCPA enforcement action resolution documents is that the company conducted a thorough review of its business operations in a number of jurisdictions other than the locus of the alleged FCPA violation. Yet, in most cases no other improper conduct is alleged in the enforcement action. This alone is suggestive of effective internal controls regardless of the discrete conduct alleged in the enforcement action.
This holistic view of internal controls is consistent with legal authority, legislative history and enforcement agency guidance.
The FCPA’s internal control provisions are specifically qualified through concepts of reasonableness.
Legislative history instructs that the internal controls provisions standard does not equate to an “unrealistic degree of exactitude or precision.”
The only judicial decision to substantively address the internal controls provisions states:
“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.”
And even the SEC has stated in internal controls guidance as follows.
“Inherent in this concept [of reasonableness] is a toleration of deviations from the absolute.”
“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.”
Sports analogies are often useful in other contexts.
The sports analogy in this post demonstrates just how off-the-rails FCPA enforcement has become in many instances.
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