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Key Aspects of the FCPA Accounting Provisions

FCPAaccounting [1]The FCPA has two main provisions: (i) the anti-bribery provisions; and (ii) the books and records and internal control provisions. The second group is commonly referred to as the “accounting provisions.” (FCPAméricas provides a description of the basics of the FCPA in English [2], Spanish [3], and Portuguese [4].)

When people talk about the FCPA, however, what usually come to mind are just the anti-bribery provisions. While it may be obvious that paying a bribe to a foreign government official to obtain a public contract is a violation of the FCPA, one may not realize that falsifying or failing to keep sufficient records of a transaction may also violate the FCPA if the company is publicly listed in the United States – even if the underlying transaction is entirely legal. As a result, companies tend to overlook the accounting provisions when implementing their compliance programs and conducting their trainings.

This post offers tips to FCPA compliance officers for describing the accounting provisions to their personnel. It also attempts to clarify common misconceptions.

Broad reach. Unlike the anti-bribery provisions which apply only to transactions involving bribery of foreign officials, the accounting provisions apply to all activities of the company, even ones not related to bribery and entirely domestic. They also operate independently of the anti-bribery provisions. This means that they apply regardless of whether bribery is involved. Fake documents, for example, may result in violations of the accounting provisions even if what is being disguised is legal.

The accounting provisions require issuers to “make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets” and to “devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances”. The language used is broad. It fails to specify a particular set of controls that issuers are required to implement. It does not mention the types of records needed to show the quantitative and qualitative aspects of the transaction.

No materiality requirement. The accounting provisions do not have a materiality requirement and are not limited to transactions above a certain amount. Therefore, any transaction, even ones of low amounts, can create FCPA liability. At the same time, the accounting provisions do not necessarily require a fail-safe accounting and internal controls system. When analyzing the facts, enforcement officials consider proportionality.

Inaccurate books and records are not only about falsified records. Falsified records can obviously result in books and records violations. But these provisions are not just about falsified records. Off-the-book payments or records that fail to show the real purpose or nature of a transaction also violate the FCPA. For example, entertainment of public officials should be recorded as such and not buried in the cost of the product.

Internal control provisions are not the same thing as SOX. Oftentimes, people think that because their companies fulfill the requirements of the Sarbanes-Oxley Act of 2002 (SOX), they are also in compliance with the accounting provisions of the FCPA. In the book, A Guide to Forensic Accounting Investigations, Sulaksh Shah, Dana Waintraub, and Frederic R. Miller make some important distinctions between the FCPA and SOX:

Section 404 of SOX requires SEC registrants to establish and maintain an adequate internal control structure and procedures for financial reporting to assist in detecting a material misstatement, whereas the FCPA does not consider the materiality of the transaction (…). Similarly, the internal control requirements of FCPA are not synonymous with the periodic certifications of Section 302 of SOX.

Commercial bribery may violate the FCPA. Many people think that commercial bribes do not violate the FCPA. Although this is true for the anti-bribery provisions, such conduct may still violate the accounting provisions in certain situations. For example, in the Schnitzer Steel [5] case, the SEC brought an enforcement action for bribes paid to managers of private steel mills in China and South Korea that were falsely described as “sales commissions”, “commission to the customer”, “refunds”, or “rebates” in the company’s books and records. A related enforcement action [6] was brought by the DOJ. The SEC also brought an enforcement action [7] against its CEO for aiding and abetting Schnitzer`s failure to make and keep accurate books and records, and for failing to implement internal controls to prevent FCPA violations. As discussed here [8], the SEC has openly expressed its interest in investigating commercial bribery risks.

The opinions expressed in this post are those of the author in his or her individual capacity, and do not necessarily represent the views of anyone else, including the entities with which the author is affiliated, the author`s employers, other contributors, FCPAméricas, or its advertisers. The information in the FCPAméricas blog is intended for public discussion and educational purposes only. It is not intended to provide legal advice to its readers and does not create an attorney-client relationship. It does not seek to describe or convey the quality of legal services. FCPAméricas encourages readers to seek qualified legal counsel regarding anti-corruption laws or any other legal issue. FCPAméricas gives permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author and to FCPAméricas LLC.

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