The FCPA: Accounting Provisions
Enacted in 1977, the Foreign Corrupt Practices Act (“FCPA”) was developed in response to revelations of widespread global corruption discovered during the Watergate investigation. Specifically, Congress learned that major American corporations were using secret slush funds and falsifying corporate financial records to conceal corrupt payments including the bribing of foreign officials. To address these concerns, the FCPA was structured to achieve two goals. First, Congress hoped to raise the standards of ethical business conduct by banning the practice of bribing foreign officials. Second, the legislation sought to increase transparency and accuracy in an organization’s corporate financial records.
The FCPA’s anti-bribery provisions were developed to meet the first goal. Generally speaking, these provisions prohibit offering or giving anything of value, directly or indirectly, to a foreign government official for purposes of obtaining or retaining business.[i] For a detailed analysis of the anti-bribery provision please refer to our April article. To address the second goal, the FCPA includes the so-called accounting provisions. These provisions impose two requirements on an organization. An organization must: (1) keep financial books, records and accounts with sufficient detail so that they accurately reflect the underlying transaction; and (2) maintain a system of internal accounting controls that provides reasonable assurances that an organization’s transactions are properly recorded.
It is important to note that the anti-bribery provisions and the accounting provision are independent from each other. That is, an organization can violate one set of provisions without the other. For example, a bribe payment that is accurately recorded will trigger a violation under the anti-bribery provisions but not the accounting provisions. Conversely, a non-corrupt payment may still trigger a violation of the accounting provisions if an organization attempts to conceal the payment in its books and records. In this article, we will analyze the accounting provisions and suggest some best practices to comply with their requirements.
The Accounting Provisions
The underlying policy interest of the accounting provisions is to protect investors and stakeholders by ensuring transparency and accuracy in an organization’s financial books, records and accounts. As a threshold matter, it is important to note that these provisions apply only to issuers; i.e., organizations listed on a national securities exchange in the United States. Non-issuer entities, however, are still encouraged to follow the dictates of the accounting provisions as they provide a framework for good governance that is universally applicable.
The accounting provisions address two aspects of an organization’s internal processes. First, they target an organization’s corporate books and records. Under the statute, an organization must:
. . . make and keep books, records and accounts, which, in reasonable detail, accurately and fairly reflect the transaction and disposition of the assets of the [organization].[ii]
Second, the accounting provisions focus on an organization’s internal accounting controls. With respect to this element, the statute requires and organization to:
. . . devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that [an organization’s transactions are properly recorded and accounted for in their financial books and records].[iii]
The terms “reasonable detail” and “reasonable assurances” are defined by statute as “such level of detail and degree of assurance as would satisfy prudent officials in the conduct of their own affairs.”[iv] The statutory definition of these terms, while not particularly helpful in defining acceptable conduct under the statute, is purposely vague in recognition that a one-size-fits-all standard is not practicable given the different types of organizations subject to these provisions. Accordingly, enforcement agencies perform case-by-case evaluations and consider various factors including an organization’s size and resources, the industry in which it operates and the controls systems in place.
In contrast to the anti-bribery provisions, which apply only to corrupt transactions involving foreign government officials, the accounting provisions apply to all activities of the organizations. The relevant focus for a “books and records violation” is not on the type of transaction, but the manner in which the transaction is recorded. Indeed, transactions that are entirely legal may still violate the accounting provisions if it is improperly documented. For example, facilitating payments, which are permissible under the FCPA, may violate the accounting provisions if an organization tries to conceal the payment or mischaracterize its purpose. Similarly, commercial bribes do not violate the anti-corruption provisions but, if the transaction is kept off the books or is otherwise hidden, the organization may be liable under the accounting provisions.
It is also important to point out, that there is no materiality requirement with respect to the transaction. In other words, an improperly recorded transaction need not involve a substantial sum of money or be significant to the overall business of the organization for there to be a violation. Equally significant, while inadvertent recording errors do not trigger liability, civil penalties may be assessed against an organization under a strict liability standard. That is, an organization will be held accountable even where it does not have direct knowledge of the underlying conduct. Criminal penalties, on the other hand, will only be assessed where there are “knowing” violations of the accounting provisions. The civil and criminal penalties authorized by the statute also apply to an organization’s officers, directors, agents and employees.
While there are countless transactions that could potentially trigger violations of the “books and records” provision, the following are most scrutinized:
• Payments to government officials
• Payments to third-party agents or consultants
• Facilitating or expediting payments
• Travel and entertainment expenses
• Charitable and political contributions
• Commercial bribes or kickbacks
While these and other transactions may be perfectly legal, an organization will violate the accounting provisions if it falsifies the description of a payment, conceals a transaction by using “off the books” accounts, or attempts to legitimize an improper payment by using false invoices.
With respect to the “internal control” provision, the following scenarios could potentially trigger a violation:
• Authorizing a payment that does not comply with the terms of a contract
• Authorizing a request for payment that has not been properly vetted
• Authorizing a payment that is contrary to an organization’s corporate policy
• Using “off the books” accounts to conceal certain transactions
• Authorizing payments with insufficient backup documentation
• Making a payment that has not been approved
A violation of the internal control provision is a message that an organization is not doing enough to detect improper requests for payment and prevent them from getting through the payment process. An organization, therefore, must develop and implement a system that identifies red flag transactions and is sufficiently proactive in quarantining these transactions for further scrutiny before making payment.
A violation of the accounting provisions can trigger significant civil and criminal penalties for an organization and its officers, directors, agents and employees. Moreover, because the evidentiary standard for civil violations does not require evidence of knowledge or intent, a violation of the accounting provisions is much easier to establish than a violation of the FCPA’s anti-bribery provisions. As such, it is not uncommon for enforcement agencies to target violations of the accounting provisions where the anti-bribery provisions present too significant of an evidentiary hurdle. Consequently, it is imperative that an organization invest the time and resources to comply with the accounting provisions.
While there is no one-size-fits-all solution to meet the requirements of the accounting provisions, the following is a list of best practices that an organization should consider implementing:
• Develop Internal Policies. An organization should develop policies and procedures for reviewing and authorizing payments. For example, the policies and procedures should, among other things, specify minimum requirements for supporting documentation, provide guidelines for recording transactions (e.g. reimbursement for meal expenses must include the name, organization and job title of each guest, the business purpose of the meal, and a description of the business relationship/related transaction), establish a process for use of petty cash, etc. Once implemented, the policies and procedures should be universally applied at all levels of the organization – no exceptions and no discretion.
• Segregation of Duties. Segregating duties within the payment process provides important safeguards that reduce the overall risk of approving improper or corrupt payment requests. For example, the person responsible for managing the relationship with a third-party vendor, agent or consultant should not be the same person that reviews and approves the third-party’s request for payment or invoice.
• The Contract is King. All payments must be submitted and approved in accordance with the terms of the contract including required back-up documentation.
• Due Diligence and Risk Assessments. An organization must perform detailed due diligence of its third-party agents, its business counterparts and the regulatory and business environment(s) where it operates. Using the information obtained through the diligence process, an organization should then perform a risk assessment and identify high risk transactions and relationships.
• Special Scrutiny for High Risk Transactions. High risk transactions – whether based on the region of the world, third-party agent involved, nature of the transaction, or a combination of factors – must be identified and subject to stricter scrutiny.
• Targeted Training. Employees in finance, accounting and audit should receive training focused on common tactics used to disguise corrupt and improper transactions. With training, these business professionals will be better positioned to identify and more deeply scrutinize questionable transactions. Compliance minded reviews will reduce the risk of corrupt and improper transactions falling through the cracks.
• Helplines and Hot Lines. An organization should encourage its employees to ask for guidance and to report misconduct through the use of helplines and hotlines. Along with these resources, the organization should clearly articulate a non-retaliation policy for reporting misconduct.
To address the two primary goals of the FCPA, Congress drafted the legislation in two parts: the anti-bribery provisions and the accounting provisions. While the anti-bribery provisions attract the majority of the headlines, the accounting provisions are equally important and can result in significant sanctions – even where there insufficient, or no, evidence of bribery and corruption. An organization, therefore, must analyze the accounting provisions, determine how it impacts its business, and develop a program to comply with the requirements therein.
[ii] See 15 U.S.C. §78m(b)(2)(A).
[iii] See 15 U.S.C. §78m(b)(2)(B).
[iv] See 15 U.S.C. §78m(b)(5).
*This article is intended to be a source of general information. It is not intended to provide legal advice. For specific counsel or advice, please consult with an experienced professional.
**For any questions or comments, please contact Three Twelve Group by phone at 404.872.5615 or by email at email@example.com.