For The Defense, October 2010 - DRI Today

G O V E R N M E N T E N F O R C E M E N T A N D C O R P O R AT E C O M P L I A N C Eof the Books and Records and InternalControls Provisions of The ForeignCorrupt Practices Act (Feb. 11, 2009),http://www.sec.gov/litigation/litreleases/2009/lr20896.htm.• On October 1, 2007, York Internationalsettled a SEC books and records enforcementaction by agreeing to the disgorgementof $8,949,132 in profits, plusA FCPA complianceprogram must focus onidentifying “risk- creating”expenditures that couldfinance improper payments.$1,083,478 in interest, and a $2,000,000civil penalty in connection with improperpayments made to an Iraqi public officialby an intermediary of a foreign subsidiary.See SEC Litigation Release No. 20319, SECFiles Settled Foreign Corrupt PracticesAct Charges Against York InternationalCorporation (Oct. 1, 2007), http://www.sec.gov/litigation/litreleases/2007/lr20319.htm.• On April 26, 2007, Baker Hughes settledan enforcement action with the SEC andDOJ by agreeing to pay a record $44.1million in connection with alleged briberypayments by its foreign operationsin Kazakhstan, Nigeria, Indonesia, Uzbekistan,Russia and Angola. The SECcomplaint alleged FCPA violations undercircumstances that reflected a failureto implement sufficient internal controlsto determine whether the payments werefor legitimate services, whether the paymentswould be shared with governmentofficials or whether the payments wouldbe accurately recorded in Baker Hughes’books and records. See DOJ Press ReleaseNo. 07-296, Baker Hughes SubsidiaryPleads Guilty to Bribing Kazakh Officialand Agrees to Pay $11 Million CriminalFine as Part of Largest Combined SanctionEver Imposed in FCPA Case (Apr. 26,2007), http://www.justice.gov/opa/pr/2007/April/07_crm_296.html, and SEC v. BakerHughes, No. 07-cv-1408 (S.D. Tex. 2007).64 n For The Defense n October 2010Each instance signifies the government’saggressive enforcement of the FCPA basedon dubious accounting practices in the foreignoperations of security issuers subjectto the FCPA. In each case, the security issuer’sinadequate internal controls providedthe government with an aggravating circumstanceto enhance the penalty.Control Person LiabilityOne enforcement action concluded in 2009against Nature’s Sunshine Products Inc.and two of its officers underscores the government’saggressive use of strict liabilityto pursue corporate agents for FCPA violations.In that enforcement action theSEC charged the company with variousFCPA books and records violations resultingfrom payments by a subsidiary to customsbrokers. See SEC Litigation ReleaseNo. 21162, SEC Charges Nature’s SunshineProducts, Inc. with Making Illegal ForeignPayments (July 31, 2009), http://www.sec.gov/litigation/litreleases/2009/lr21162.htm. The SEC,however, took the additional step of chargingthe company’s chief executive officerand chief financial officer with books andrecords and internal control violationsbased on their positions as “control persons”under Section 20(a) of the SecuritiesExchange Act, even though those seniorexecutives had no knowledge of the subsidiary’sactions. The SEC concluded that bothexecutives failed to supervise their personnelto ensure that the company’s books andrecords were accurately prepared and thatan adequate system of internal controlswas in place.This represented the first time that thegovernment used a “control person” theoryof liability to hold United States-basedexecutives responsible for corrupt paymentsmade by a foreign subsidiary whenthe executives did not have knowledge ofthe payments or even direct responsibilityfor the company’s records and filings.Before this case, the SEC targeted executiveswho had direct knowledge of bribepayments or books and records violations.Now, however, a company’s senior executivesmay be held personally responsiblefor the misconduct of subordinate employeesand managers who have much greaterday-to-day responsibility for ensuring thatthe company’s books and records are accuratethan senior executives.Importance of Internal AuditorsThe expansive reach of the FCPA accountingprovisions presents formidablechallenges to businesses with foreign operations.While the varied elements of a FCPAcompliance regime are beyond the scope ofthis article, business leaders must ensurethat internal auditors are trained to identifythe evidence necessary to establishFCPA violations in foreign operations.To comply with the FCPA, a companywill need to do more than train managersor third-party intermediaries or periodicallyengage independent auditors to completeaudits. The day-to-day gatekeepersoverseeing a company’s expenditures mustalso receive FCPA compliance training.To amount to more than a “paper program,”a FCPA compliance program mustfocus on identifying “risk- creating” expendituresthat could finance improper payments.Toward that end, internal auditorsshould establish accounting controls forsuch items as charitable contributions,gifts and cash expenditures. A companymust retain back-up documents alongwith strong cash controls to minimize thepresence of and access to cash accounts.Financial personnel must complete regularaccount reconciliations for petty cash.Moreover, transaction process controlsshould also identify the “who, what andwhy” of all gifts and cash expenditures.Financial and audit personnel shouldclosely review expenses to ensure the bonafides, searching for expenses recorded asconsulting, licensing or promotional paymentsto intermediaries. Personnel inbusiness operations should look for the followingred flags:• A request for an in-cash payment or fora payment to a numbered account or fora payment to the account of a third party• A request to forward a payment to acountry other than the intermediary’scountry of residence or the territory ofthe sales activity, especially, if that countryhas little banking transparency• A request for payment in advance or apartial payment immediately before aprocurement decision• A reimbursement request for extraordinary,ill- defined or last minute expenses• A payment request that lacks supportingdocumentationFCPA Compliance, continued on page 87