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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, hereherehereherehere 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.

Earlier this week, the SEC announced an enforcement action against BorgWarner Inc. (a motor vehicle parts manufacturer headed in Michigan). This administrative order finds in summary fashion:

“From 2012 until the fourth quarter of 2016, BorgWarner failed to estimate its “incurred but not reported” or “IBNR” liability for future asbestos claims. As a result, BorgWarner’s financial statements were materially misstated. Although the Company recorded liabilities for filed asbestos-related claims and noted that future claims were probable, prior to 2016, BorgWarner concluded that it could not reasonably estimate its IBNR liability for future asbestos claims. BorgWarner came to this conclusion without conducting sufficient analysis, including any substantive quantitative inquiry, despite possessing nearly 40 years of historical raw claims data. Rather, the Company’s assessment was based on untested qualitative assumptions not relevant to calculating an estimate. As reported in its 2017 Form 10-K/A, filed in 2018, BorgWarner could have estimated its IBNR asbestos liability as early as 2012.

In the fourth quarter of 2016, BorgWarner recorded a pre-tax $703.6 million charge for the IBNR liability and identified the charge as being the result of a change in estimate. Thereafter, the Company concluded that the charge was the result of an error and filed a restatement in 2018 to reflect its IBNR liabilities in appropriate prior periods dating back to 2012. The restated numbers were material to the Company’s financial statements and impacted, among other items, the amounts accrued for asbestos-related liabilities and pre-tax earnings. BorgWarner reported that its failure to record the IBNR estimate was due to a material weakness in the Company’s internal controls over financial reporting.”

In short, the SEC found that BorgWarner financial statements were materially misleading (a finding that is generally rare in traditional FCPA enforcement actions) and that the company had a material weakness in its internal controls over financial reporting (a finding that is generally rare in traditional FCPA enforcement actions).

Based on the above, the SEC found that BorgWarner violated, among other things, the FCPA’s books and records and internal controls provisions. Without admitting or denying the SEC’s findings, BorgWarner agreed to pay a $950,000 civil penalty.

Compare this paltry civil penalty for materially misleading financial statements and a material weakness in internal controls 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.” Or the SEC’s enforcement action against Telefonica Brasil (see prior posts here and here) in which the SEC assessed a $4.1 million civil penalty for – hopefully you are still sitting down – “a hospitality program that the company hosted in connection with the 2014 World Cup and 2013 Confederations Cup.”

As the BorgWarner enforcement action 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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