FCPAméricas Blog
Connecting the Dots: Latin America Examples of Common FCPA Accounting Violations
3.12.2013
FCPAméricas has seen a spike in readership from Latin America, suggesting that regional businesspeople and companies are increasingly seeking to understand the FCPA.
Since we believe that having relatable examples is useful for new readers and for practitioners tasked with spreading the message to different audiences, this post seeks to ground discussions of common FCPA risks in real-world examples of enforcement in Latin America. In an earlier post, we offered example of anti-bribery violations. In this post, we offer common examples of accounting violations:
ACCOUNTING PROVISIONS. The accounting provisions require U.S. and foreign companies registered on any U.S. securities exchange to make and keep books and records in reasonable detail to accurately and fairly reflect transactions and disbursements of the company’s assets and to devise and maintain a system of internal accounting controls that ensures transactions are executed in accordance with management’s authorization. The FCPA Guidance offers helpful insight into the accounting provisions, discussed here.
Books and Records Violations
Off-the-Books Accounting: Maintenance of secondary books to hide bribe payments. This is the basis of some of the alleged wrongdoing in the Wal-Mart de Mexico investigation.
Mischaracterization of Bribes in Books and Records: Bribes concealed as legitimate payments, such as commissions, royalties, consulting fees, sales and marketing expenses, miscellaneous expenses, or petty cash withdrawals. A violation might involve misreporting large bribe payments or widespread inaccurate recording of smaller payments made as part of a systemic pattern of bribery. Such mischaracterizations were rife in the Biomet case involving Brazil and Argentina. For example, bribes to Brazilian doctors were recorded wrongly as “commissions.”
Absence of Supporting Documentation: Payments made for illegitimate reasons lacking legitimate supporting documentation to confirm the payment’s actual recipient and purpose. For example, in the Nature’s Sunshine case, the company made undocumented cash payments to Brazilian customs brokers, some of which were passed along to customs officials, to gain entry of unregistered products into Brazil. While the company booked the cash payments as “importation advances,” it failed to maintain any receipts or other documents supporting this characterization. In general, when employees use cash to make business payments, it is particularly important to maintain supporting documentation.
Fictitious Supporting Documentation: Companies obtaining false documentation to create the appearance that payments are legitimate. For example, in the Nature’s Sunshine case, after making cash payments to Brazilian customs agents without supporting documentation, the company began purchasing fictitious supporting documentation to attempt to conceal the actual purpose of the payments. In Biomet, employees of the company’s Argentine subsidiary obtained phony invoices from doctors stating that payments to them were for professional services or consulting when, in fact, no legitimate services were provided. Instead, the payments were made in exchange for sales of the company’s medical devices. In Siemens Venezuela, the company created sham equipment supply contracts to justify illicit payments made through a consultant.
Internal Controls Violations
Absence of Adequate Anti-Corruption Compliance Program: Failure to design and implement an adequate anti-corruption compliance program. A compliance program includes policies and procedures that minimize risks that bribes will be paid. FCPAméricas has published numerous posts about what makes an effective compliance program. A regional example of a lack of basic compliance functions is BellSouth in Nicaragua and Venezuela. In Orthofix, the company’s program in Mexico was inadequate because anti-bribery policies and trainings were provided only in English and not in Spanish.
Absence of Due Diligence on Third Parties: Failure to vet third parties that companies hire to interact with government officials and take steps to ensure that they do not pay bribes on the companies’ behalf. When companies fail to do so, their controls are seen as insufficient. FCPAméricas has discussed third party red flags in Latin America. Eli Lilly in Brazil is an example. Siemens Argentina also used consultants as conduits for bribes.
Use of Shell Companies: Setting up and using shell companies to generate funds to pay kickbacks. Internal controls should be structured to prevent such activity from occurring. FCPAméricas has offered perspectives on how to detect shell companies. For a case from the region, see Orthofix in Mexico.
Inadequacy of Internal Audit Function: Failure of internal audit to identify wrongdoing or act on red flags. For example, in the Biomet case, when internal audit identified that royalties were paid to surgeons purchasing the company’s medical devices, it only sought to confirm that the amounts paid were recorded in the books. It took no steps to determine why the royalties were paid to doctors. It did not seek evidence of the services provided in return for the payments. Instead, the internal audit report concluded that there were adequate controls in place to properly account for the royalties paid.
The FCPAméricas blog is not intended to provide legal advice to its readers. The blog entries and posts include only the thoughts, ideas, and impressions of its authors and contributors, and should be considered general information only about the Americas, anti-corruption laws including the U.S. Foreign Corrupt Practices Act, issues related to anti-corruption compliance, and any other matters addressed. Nothing in this publication should be interpreted to constitute legal advice or services of any kind. Furthermore, information found on this blog should not be used as the basis for decisions or actions that may affect your business; instead, companies and businesspeople should seek legal counsel from qualified lawyers regarding anti-corruption laws or any other legal issue. The Editor and the contributors to this blog shall not be responsible for any losses incurred by a reader or a company as a result of information provided in this publication. For more information, please contact Info@MattesonEllisLaw.com.
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© 2013 Matteson Ellis Law, PLLC
Post authored by Matteson Ellis, FCPAméricas Founder & Editor
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