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


The Foreign Corrupt Practices Act  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.

The latest example is this recent SEC enforcement action against Baxter International (and two former executives) “for engaging in improper intra-company foreign exchange transactions that resulted in the misstatement of the company’s net income.”

In summary fashion, this administrative order finds:

“Baxter is a publicly-traded, U.S.-based healthcare product company that generates the majority of its revenue outside of the U.S. Baxter reports its consolidated financial results in U.S. dollars, although many of its subsidiaries have a different functional currency as they manufacture and sell products globally and transact in foreign currencies. The values of these foreign currencies relative to the U.S. dollar fluctuate frequently.

From at least 1995 through July 2019, the foreign exchange rate convention (“FX Convention”) Baxter used to record foreign currency transactions recognized by subsidiaries in their functional currencies and to uniformly translate the results of subsidiaries with foreign functional currencies into U.S. dollars was not in accordance with U.S. generally accepted accounting principles (“GAAP”).

Beginning in at least 2009 and continuing through July 2019, Baxter improperly leveraged its FX Convention by engaging in intra-company transactions for the purpose of generating foreign exchange accounting gains or avoiding foreign exchange accounting losses (the “FX Transactions”). These FX Transactions had the effect of materially misstating Baxter’s net income as reported in its public filings.

In October 2019, Baxter announced that it was conducting an internal investigation concerning the FX Transactions. In March 2020, Baxter restated its financial statements, which reduced its previously reported net income for 2017 through June 30, 2019 and retained earnings as of January 1, 2017 by $582 million, collectively. Of this amount, $517 million was related to foreign exchange gains and losses dating back to 2010, which was in part attributable to FX Transactions.”

Based on the above, the SEC found that Baxter violated, among other legal provisions, the FCPA’s books and records and internal controls provisions.

In pertinent part, the SEC found:

“Baxter did not have sufficient internal accounting controls over intra-company transactions. It also did not have adequate internal controls to monitor and quantify the difference between the foreign exchange gains and losses that it reported using its FX Convention and the gains and losses it would have reported using exchange rates in accordance with GAAP. Baxter’s internal accounting controls failed to identify that the foreign exchange gains generated by the FX Transactions were improper.”

Under the heading “Violations,” the order states:

“Baxter violated [the books and records provisions]. Scienter is not an element of the books and records provision. See Ponce v. SEC, 345 F.3d 722, 737 n.10 (9th Cir. 2003) (noting that a “plain reading of Section 13(b) reveals that it also does not impose a scienter requirement”).

Baxter violated [the internal controls provions]. Scienter is not an element of the internal accounting control provisions. See Ponce, 345 F.3d at 737 n.10.”

Without admitting or denying the SEC’s findings, Baxter agreed to pay an $18 million civil monetary penalty.

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