To best understand (and place in context) current SEC FCPA enforcement positions and policies, it is useful to understand past SEC FCPA enforcement positions and policies.
The year was 1981, the event was the American Institute of Certified Public Accountants, and the speaker was Harold Williams, the Chairman of the SEC. The speech did not contain the standard disclaimer (i.e. I am just an individual and not speaking on behalf of the SEC), rather Williams specifically stated that his remarks “constitute a statement of the Commission’s policy.”
Williams focused his remarks (here) “solely to one major auditing development of recent years: the accounting provisions of the Foreign Corrupt Practices Act of 1977″ and stated that “the anxieties created by the Foreign Corrupt Practices Act – among men and women of utmost good faith – have been, in my experience without equal.”
Williams tried to damper these anxieties and spoke about the scope of the provisions including when an enforcement action would be warranted.
“If a violation was committed by a low level employee, without the knowledge of top management, with an adequate system of internal control, and with appropriate corrective action taken by the issuer, we do not believe that any action against the company would be called for.”
“… [D]epending on the circumstances, intentional circumventions of a company’s system of records and of accounting controls by a low-level employee would not always be considered violations of the Act by the issuer. No system of adequate records and controls – no matter how effectively devised or conscientiously applied – could be expected to prevent all mistaken and improper transactions and disposition of assets. Given human nature, regardless of the adequacy of the system, a bookkeeper may still erroneously post entries, an overzealous agent may make unauthorized payments, or an unscrupulous employee may falsify records for his own purposes. The Act recognizes each of these limitations. Neither its text and legislative history nor its purposes suggest that occasional, inadvertent errors were the kind of problem that Congress sought to remedy in passing the Act. No rational federal interest in punishing insignificant mistakes has been articulated. And, the Act’s accounting provisions do not require a company or its senior officials to be the guarantors of all conduct of company employees.”
In concluding this portion of his speech, Williams stated:
“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. But, an adequate system of internal controls means that, when such breaches do arise, they will be isolated rather than systemic, and they will be subject to a reasonable likelihood of being uncovered in a timely manner and then remedied promptly. Barring, of course, the participation or complicity of senior company officials in the deed, when discovery and correction expeditiously follow, no failing in the company’s internal accounting system would have existed. To the contrary, routine discovery and correction would evidence its effectiveness.”
That was then.
As highlighted here, last week the SEC announced a $6.5 million FCPA enforcement action against 3M.
The basic SEC findings were as follows.
Approximately 6-10 years ago, a former Marketing Manager of a 3M China-based subsidiary “secretly” provided “tourism activities” for Chinese health care officials.
According to the SEC, the Marketing Manager “would create a travel itinerary that included various legitimate business, training and marketing activities for submission to 3M-China’s compliance personnel for approval,” however there were “alternate itineraries” that “consisted of various tourism activities at or near the location of the educational events.”
There is no suggestion that anyone at 3M headquarters knew of or approved of the conduct. Indeed, subsidiary employees, among other things, “falsified internal compliance documents that affirmatively denied and/or omitted mention of the Tourism Activities that were planned as part of the overseas trip.”
The type of conduct at issue in the 3M enforcement action would seem to fit squarely within prior SEC policy for when an enforcement action would not be warranted – particularly since 3M – in the words of the SEC – “promptly self-reported the misconduct after first learning of it.”
However, that is obviously not what happened.
Instead, the SEC found that 3M violated the FCPA’s books and records and internal control provisions because 3M provided funds to Chinese Travel Agencies (whom the SEC stated “colluded” with the former Marketing Manager) and that “3M had insufficient controls over the fund transfers, which did not adequately describe the purpose or uses of the funds.”