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Further To The SEC’s Inconsistent Approach To Enforcing The FCPA’s Books And Records And Internal Controls Provisions


Other than this website (see here, herehereherehere and here), there seems to be little focus on the SEC’s inconsistent approach to enforcing the FCPA’s books and records and internal controls provisions.

Which is too bad because consistency is a basic rule of law principle. In other words, the same legal violation ought to be sanctioned in the same way. When the same legal violation is sanctioned in materially different ways, trust and confidence in law enforcement is diminished.

As highlighted in the numerous prior posts as well as the latest example described below, there sure does seem to be a lack of consistency between how the SEC resolves Foreign Corrupt Practices Act books and records and internal controls violations.

As most readers no doubt know, the FCPA has always been a law much broader than its name suggests.   The anti-bribery provisions are just one prong of the FCPA.

Indeed, most FCPA enforcement actions do not involve allegations of foreign bribery, but rather violations of the FCPA’s generic books and records and internal controls provisions. These provisions generally require that issuers shall: (i) maintain books and records which, in reasonable detail, accurately and fairly reflect issuer transactions and disposition of assets (the books and records provisions); and (ii) devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are properly authorized, recorded, and accounted for (the internal controls provisions).

For lack of a better term, let’s call such actions “non-FCPA FCPA enforcement actions.” Such actions are not dissected in the FCPA space and do not appear on the DOJ or SEC’s FCPA websites (here and here). Yet such actions are deserving of analysis because they highlight a troubling aspect of FCPA enforcement: that being how the same alleged legal violations are sanctioned in materially different ways.

Consider last week’s SEC enforcement action against The Bancorp, Inc. (and two of its former executive officers). As stated in this administrative order in summary fashion:

“This matter concerns Bancorp’s failures between at least April 2012 and September 2014 to properly classify certain loans and to take appropriate charges for individually impaired loans, resulting in Bancorp materially understating its Allowance for Loan and Lease Losses (“ALLL”) and its Provision for Loan and Lease Losses (“PLLL”) in its requisite periodic reports filed with the Commission. Bancorp failed to assign appropriate risk ratings to certain loans and to identify certain large lending relationships as containing impaired or otherwise substandard loans, repeatedly overlooking indicators of borrowers’ and guarantors’ financial distress. Bancorp also failed to devise or maintain related internal accounting controls, including for credit file maintenance and for identifying and appropriately considering Troubled Debt Restructurings.

As a result of these failures, on September 28, 2015, Bancorp restated its financial results and financial statements for certain prior years. Pursuant to the restatement, the aggregate adjustment to the PLLL for its fiscal years 2010 through 2013 was approximately $138.6 million. Pursuant to the adjustments to the historical ALLL set forth in the restatement, Bancorp’s ALLL for 2012 increased by 78.23% from the balance previously reported, and the ALLL for 2013 increased by 73.97%.

As a result of the conduct described in this Order, Bancorp violated [the FCPA’s books and records and internal controls provisions] and Rules 13a-1 and 13a-13 of the Exchange Act.”

In short, the SEC found that Bancorp materially understated a key financial figure by approximately $138 million and another key financial figure by over 70%. To resolve the matter, Bancorp agreed to pay a $1.4 million civil penalty.

Compare this paltry civil penalty for material understatements of key financial figures with – for instance – the BHP Billiton enforcement action (see prior posts herehere and here) in which the SEC assessed a $25 million civil penalty for – better sit down for this one – the company’s “failure to devise and maintain sufficient internal controls over a global hospitality program that the company hosted in connection with its sponsorship of the 2008 Beijing Summer Olympic Games.”

As this recent example once again demonstrates, the SEC has some explaining to do and owes the legal and compliance community an explanation for why FCPA books and records and internal controls violations are not sanctioned in similar ways.

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