fcpa books and records compliance
TRANSCRIPT
FCPA Books and Records Compliance Meeting FCPA Accounting Requirements and Minimizing Liability Risks
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THURSDAY, FEBRUARY 28, 2013
Presenting a live 90-minute webinar with interactive Q&A
Edward J. Fishman, Partner, K&L Gates, Washington, D.C.
Luke T. Cadigan, Partner, K&L Gates, Boston
Manny A. Alas, Partner, PricewaterhouseCoopers, New York
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Copyright © 2010 by K&L Gates LLP. All rights reserved.
FCPA Books and Records Compliance: Meeting FCPA Accounting Requirements and
Minimizing Liability Risks
Luke T. Cadigan
Edward J. Fishman
K&L Gates LLP
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Statutory Requirements
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Historical Background
FCPA enacted in 1977 after discovery of widespread global corruption in wake of Watergate scandal
More than 400 U.S. companies had paid hundreds of millions of dollars in bribes to secure business overseas
Congress implemented provisions to prohibit bribery of foreign officials and off-the-books accounting
Accounting provisions consist of (1) Books and Records Provision and (2) Internal Controls Provision
Although enacted as part of FCPA, they do not apply only to bribery-related violations
• They are regularly part of most accounting fraud and issuer disclosure cases brought by the SEC
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Books and Records Provision Section 13(b)(2)(A) of the Exchange Act
Requires every issuer to make and keep books, records, and accounts which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer.
• “Reasonable detail” means such level of detail as would satisfy prudent officials in the conduct of their own affairs.
• Concept of reasonableness of necessity contemplates the weighing of a number of relevant factors, including the costs of compliance.
• “Records” include “accounts, correspondence, memorandums, tapes, discs, papers, books, and other documents or transcribed information of any type.”
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Internal Controls Provision Section 13(b)(2)(A) of the Exchange Act
Requires issuers to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that:
• Transactions are executed in accordance with management’s general or specific authorization;
• Transactions are recorded as necessary:
To permit preparation of financial statements in conformity
with generally accepted accounting principles or any other
criteria applicable to such statements; and
To maintain accountability for assets;
• Access to assets is permitted only in accordance with management’s general specific authorization; and
• The recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.
10
Internal Controls Provision Section 13(b)(2)(A) of the Exchange Act
The term “reasonable assurances” is defined as “such level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own affairs”
11
SEC Enforcement Authority with Respect to
Accounting Provisions
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SEC Enforcement Considerations
Accounting provisions are applicable only to public companies
• Company liable for acts of subsidiary if subsidiary’s financials are incorporated into parent’s
No materiality requirement
Possible liability under accounting provisions even if improper payments do not result in violation of anti-bribery provisions (e.g., where element is not met)
• Most cases have involved anti-bribery violation
13
SEC Enforcement Options
Direct violation by reporting issuer
Charges against third parties for aiding and abetting or causing violations
Claims against corporate officers as control persons
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Civil Remedies and Penalties
Injunctions (federal court)
Cease-and-desist orders (administrative proceedings)
Disgorgement and other equitable relief
Penalties not to exceed greater of
• Gross amount of pecuniary gain or
• $75,000-$725,000 for a company or
$7,500-$150,000 for an individual
Collateral consequences
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Enforcement Processes and Procedures SEC can bring claim in federal court or in SEC administrative proceeding
In SEC administrative proceeding:
• Trial by SEC administrative law judge with first appeal to SEC de novo
• No right to jury
• No discovery (even of experts)
• No dispositive motions (with minor exceptions)
• All relevant evidence (including hearsay) is admitted
• Trial within 4-5 months; decision within 10 months
16
DOJ Enforcement
Under general criminal penalty provision of Exchange Act, a willful violation of the accounting provisions is subject to:
• A fine of up to $25 million (companies)
• A fine of up to $5 million and/or 20 years in prison (individuals)
17
SEC Guidance and Focus on Accounting
Provisions
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SEC Focus on Books and Records
Books and records must accurately reflect the payments made and the reasons for those payments
• For example, contracts and invoices must accurately reflect services provided
• Similarly, documentation supporting payments to consultants, agents, resellers, etc. must be accurate
SEC will examine books and records to see if bribes have been hidden or falsely described as something else
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Common Guises for Bribes (FCPA Resource Guide)
Commissions or royalties
Consulting fees
Sales and marketing expenses
Scientific incentives or studies
Travel and entertainment expenses
Rebates or discounts
After sales service fees
Miscellaneous expenses
Petty cash withdrawals
Free goods
Intercompany accounts
Supplier/vendor payments
Write-offs
“Customs intervention” payments
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SEC Focus on Books and Records
SEC will seek to understand company’s accounting system
Corporate level
Subsidiary level (effect on parent’s books)
Electronic or manual
Responsibility for inputting data into the system
• Entering payments and submitting expenses
General ledger and chart of accounts
• Specific accounts for commission payments
• Travel and Entertainment account; gift account
21
SEC Focus on Internal Controls
FCPA does not specify a particular set of controls that companies are required to implement
Companies have flexibility to develop and maintain a system of controls that is appropriate to their particular needs and circumstances.
22
Components of Internal Control Program (FCPA Resource Guide)
Control environment that covers tone set by company regarding integrity and ethics
Risk assessments
Control activities that cover policies and procedures designed to ensure that management directives are carried out
Information and communication
Monitoring
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Key Considerations for Internal Control Design (FCPA Resource Guide)
Compliance program must be tailored to the operational realities and risks attendant to the company’s business:
• Nature of products and services
• How products or services get to market
• Nature of work force
• Degree of regulation
• Extent of government interaction
• Degree to which company has operations in countries with high risk of corruption
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SEC Focus on Internal Controls
Due diligence for third-party agents
• Agents, consultants, subcontractors, channel partners, resellers, distributors
• What due diligence was conducted?
Who are the third-party agents?
What services do they provide?
Connections to government officials?
Any red flags? Commission payments
• Reasonable for the services provided?
• What is the internal process for approval?
• Who is receiving the payments?
Training Program
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Enforcement of Accounting Provisions
As practical matter, SEC is generally unlikely to assert violation of accounting provisions in absence of substantive violation
In case of bribery, if books and records do not accurately reflect that a payment is a bribe, SEC will allege an accounting provision violation
Cases have typically involved either
• Misreporting of large bribe payments or
• Widespread inaccurate recording of smaller payments made as part of a systematic pattern of bribery
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Representative Enforcement Actions
SEC v. Daimler AG
• Company allegedly used ledger accounts to maintain credit balances for benefit of government officials
• Accounts funded by bogus mechanisms such as “price surcharges” and excessive commissions
• Bribes allegedly made through phony sales intermediaries and corrupt business partners
SEC v. Oracle
• Company’s subsidiary alleged to have hidden proceeds from sales in secret side funds, from which distributions were made to third parties, creating “potential for bribery”
• SEC charged violations of books and records and internal controls provisions but not bribery
27
Representative Enforcement Actions
SEC v. Elkin
• SEC charged four former employees of Dimon, Inc. in scheme to bribe government officials in Kyrgyzstan and Thailand
• Also alleged they aided and abetted accounting provision violations by “knowingly provid[ing] assistance to” the company
In re Watts Water Technologies
• SEC brought administrative action against company for making bribes and then disguising bribes as sales commissions in subsidiary’s books and records
• General manager who allegedly approved payments and knew or should have known they were improperly recorded was charged with causing the company’s accounting provision violations
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Particular Challenges under the FCPA Accounting Provisions
Facilitating Payments
Foreign Subsidiaries and Affiliates
Joint Ventures
M&A Transactions
Recent Judicial Decisions on SEC Enforcement Authority
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Facilitating Payments under the FCPA
FCPA anti-bribery provision contains exception for “facilitating or expediting payments” made in furtherance of “routine governmental action”
Interpreted very narrowly by DOJ and SEC (e.g. only covers de minimis payments to low-level government officials for non-discretionary acts)
“Routine governmental action” defined by statute to include the following:
Processing visas
Providing police protection
Supplying utility service
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Facilitating Payments under Other Laws
UK Bribery Act does not allow facilitating payments
Most local laws do not allow facilitating payments
OECD’s Working Group on Bribery recommended that all countries encourage companies to prohibit or discourage facilitating payments
Facilitating payments may still violate the FCPA accounting provisions if not properly recorded in an issuer’s books and records
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Proper Recording of Facilitating Payments
FCPA Resource Guide indicates that “labeling a bribe as a facilitating payment does not make it a facilitating payment”
SEC v. Noble Corp – Swiss offshore drilling company charged with violating anti-bribery and accounting provisions when payments to customs agents were recorded in a subsidiary’s “facilitating payment” account even though employees allegedly believed the payments were bribes
32
Foreign Subsidiaries and Affiliates
FCPA accounting provisions apply to issuer’s books and records, which include those of all consolidated subsidiaries and affiliates
SEC may assert accounting violation by issuer as a result of foreign subsidiary conduct even if there is no allegation of any improper payment
SEC v. Oracle – accounting charge settlement arising from alleged failure to prevent Indian subsidiary from creating and concealing “side funds” that were used to make unauthorized payments to phony vendors
33
Foreign Subsidiaries and Affiliates
If parent issuer owns 50% or less of a subsidiary or affiliate, parent is required to proceed in “good faith” to use its influence (to the extent reasonable) to cause the minority-owned subsidiary or affiliate to maintain a system of internal controls consistent with the issuer’s own obligations
In evaluating the issuer’s good faith efforts, all circumstances – including “the relative degree of the issuer’s ownership and the laws and practices governing business operations in the [relevant country]” – are taken into account
34
Joint Ventures
Issuer’s responsibility under the accounting provisions extends to joint venture entities that it controls
SEC v. RAE System – SEC action against U.S. issuer for violating accounting provisions when employees of Chinese joint venture partner allegedly paid $400,000 in bribes to obtain business through cash advance that were recorded as “business fees” or “T&E expenses”
U.S. issuer allegedly failed to have adequate internal controls for the joint venture and failed to act on red flags arising from partner’s conduct
35
M&A Transactions
FCPA diligence is critical part of any M&A transaction, particularly if target company is an issuer
Even if target company is not an issuer, SEC will expect any acquiring issuer to incorporate the target promptly into its compliance program
Adequate diligence may allow buyer to avoid FCPA liability if an accounting problem is discovered prior to closing and voluntarily disclosed to the government
Successor liability does not create liability when none existed before
36
Recent Judicial Decisions
SEC v. Straub (SDNY 2013)
Judge Sullivan denied motion to dismiss filed by former Magyar Telekom executives
Ruled that 5-year statute of limitations does not begin to run until defendant physically in U.S.
Concluded that SEC does not need to prove that defendants intended to engage in corruption through means of interstate commerce (cf. bribery-related e-mails stored on network servers in U.S. without knowledge of defendants)
Concealment of bribes through management rep letters sufficient to create “minimum contacts”
37
Recent Judicial Decisions
SEC v. Steffen (SDNY 2013)
Judge Schiendlin ruled that SEC did not establish personal jurisdiction over former CEO of Siemens Argentina due to his lack of minimum contacts with the U.S. (cf. criminal case pending)
Concluded defendant had no alleged role in the bribery, the cover up or false SEC filings
Distinguished Straub because defendants in that case allegedly signed off on misleading management representation letters and signed false SEC filings
38
Questions?
Please contact:
Luke Cadigan
(617) 261-3118
Ed Fishman
(202) 778-9456
Webinar – Books and Records
Private and Confidential
Forensics Advisory
February 28, 2013
Presented by
Manny A. Alas
Complying with the FCPA Accounting Requirements
1. Key elements of FCPA Compliance Program 2. Internal Audit and Forensic Reviews 3. Training 4. Review and Remediation of Internal Controls
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1. Key Elements of FCPA Compliance Program
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• Compliance programs are critical components of a company’s internal controls and are essential to detecting and preventing FCPA violations
• Compliance programs are tailored to the company’s specific business and to the risks associated with that business
• DOJ and SEC have no formulaic requirements regarding compliance programs, but employ a common-sense and pragmatic approach to evaluating programs
• Effective compliance programs promote organizational culture, encourage ethical conduct, and commitment to compliance with the law
• Protects a company’s reputation, ensures investor value and confidence, reduces uncertainty in business transactions, and secures
a company’s assets
1. Key Elements of FCPA Compliance Program Cont’d
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Compliance programs should be tailored to an organization’s specific needs, risks, and challenges. These features include:
• Commitment from Senior Management and Clearly Articulated Policy Against Corruption (“Culture of Compliance”)
• Code of Conduct and Compliance Policies and Procedures
• Clear, concise, and accessible to all employees
• Oversight, Autonomy, and Resources
• Assign responsibility for oversight with adequate autonomy and sufficient resources to ensure effectiveness
• Risk Assessment (Increase procedures with risk)
• Training and Continuing Advice
• Communicate and continually train all necessary parties
1. Key Elements of FCPA Compliance Program Cont’d
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• Incentive and Disciplinary Measures
• Should apply from the board room to the supply room
• Third-Party Due Diligence and Payments
• Understand qualifications and associations
• Confidential Reporting and Internal Investigation
• Mechanism for employees to make anonymous reports
• Continuous Improvement: Periodic Testing and Review
• Constantly evolving programs
• Mergers and Acquisitions: Pre-Acquisition Due Diligence and Post-Acquisition Integration
• Evaluate targets value and risks
2. Internal Audit and Forensic Reviews
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• As the risk factors within a business operations model increase, compliance oversight and procedures, including periodic compliance assessments and effectiveness audits should be adjusted
• Risk assessment procedures allow for proper design of controls necessary to target the identified risk areas
• Ensure compliance audit activity is part of the compliance program at the beginning stages to make sure controls are properly designed, well established, and effectively operating
• Controls need to be periodically assessed to determine sustainability
• Strategically perform procedures to confirm whether the compliance activities and controls are working as intended or whether vulnerabilities still exist
3. Training
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• Strong pillar of a compliance program
• Important to properly train officers, employees, and third parties on corporate policies and prohibited conduct
• Key elements of proper training include:
a) The Right People – prioritize audiences by not only starting in higher risk markets, but with people who have direct contact with government officials or deal with state-owned entities
b) Training Methods – needs to be regular and frequent. Should cover company policies and procedures, instruction on applicable laws, practical advice to address real-life scenarios, and case studies
c) Tailored Training Programs – customize by region, country, industry, areas of compliance, and types of employees
4. Review and Remediation of Internal Controls
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• Internal controls must provide reasonable assurance that:
a) Transactions are executed in accordance with management authorization
b) Transactions are recorded as necessary to permit accurate preparation of financial statements
c) Access to assets is permitted only in accordance with management authorization
d) Recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to differences
• FCPA does not specify a set of controls that companies are required to implement.
• Internal control provision allows companies flexibility to develop and maintain a system of controls that is appropriate for particular needs and circumstances
4. Review and Remediation of Internal Controls Cont’d
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• Design of internal controls must take into account the operation realities and risks within the company’s business, such as:
a) Nature of products and services
b) How products and services get to market
c) Nature of work force
d) Degree of regulation
e) Frequency and level of government interactions
f) Degree to which is has operations in countries with a high risk of corruption
Thank You
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. © 2013 PricewaterhouseCoopers. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.
Manny A. Alas
FCPA Global Co-Leader
(646) 471-3242