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 <strong>The</strong> <strong>For</strong>eignCorrupt Practices Act (Feb. 11, 2009),http://www.sec.gov/litigation/litreleases/2009/lr20896.htm.• On <strong>October</strong> 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 <strong>For</strong>eign 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. <strong>The</strong> 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 <strong>For</strong> <strong>The</strong> <strong>Defense</strong> n <strong>October</strong> <strong>2010</strong>Each 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 <strong>For</strong>eignPayments (July 31, 2009), http://www.sec.gov/litigation/litreleases/2009/lr21162.htm. <strong>The</strong> 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. <strong>The</strong> 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 Auditors<strong>The</strong> 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. <strong>The</strong> 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
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 E“Corporate Miranda”By William J. Powelland Emily M. RenzelliNot Justfor CriminalLawyersIf a civil investigationturns into somethingmuch more serious,appropriate warningsat the outset may avoidpotential problemsdown the road.<strong>The</strong> corporation you have represented for the past 20 yearsis the subject of an accident investigation. Everyone fromsenior management to administrative support staff rushesto you, “their lawyer,” wanting to tell their stories. Whocan you talk to and what should you say?White collar defense lawyers have frequentencounters with the limitationsimposed upon an attorney while dealingwith employees of his or her client. Instraightforward criminal investigations,the issues are often easily anticipated. However,government agencies have becomeaggressive in reviewing routine civil mattersto determine if there are potentialcriminal issues. What were once strictlycivil investigations now carry an increasedchance of having criminal ramifications.<strong>The</strong> environmental, health care, safety andhealth, and financial arenas all occasionallyinvolve internal investigations and arefraught with potential problems. Whilethere was a time when civil lawyers did nothave to think much about their interviewswith employees during a “run-of-the-mill”health care or environmental matter, therecent emphasis by government agenciesto make criminal referrals makes any lackadaisicalapproach dangerous for not onlythe client, but for the lawyer.This article will attempt to identify theapplicable legal and ethical standards, thelikely scenarios one would confront in hisor her practice and some practical advicefor those conducting fact- finding interviews.It should be noted, as evidenced bythe cited case law, that very good lawyershave fallen prey to situations that put themand their clients in very difficult situations.Experienced civil lawyers who conductemployee interviews are often afraid to setthe wrong tone or cause undue concernduring the interview. While the odds aregood that a civil matter will not turn intoanything criminal, if you take the risk, theresulting ethical and legal problems for youor your client could provide a very harshlesson—one that can be avoided.Realistic ScenarioYour contact for a long-term firm client is■ William J. Powell is a Member of Jackson Kelly PLLC and manages the Martinsburg, West Virginia, office.He has handled the defense of clients in civil litigation, white collar and internal investigation matters for 25years. He is chair of the White Collar Criminal <strong>Defense</strong> Committee for the West Virginia State Bar, a memberof <strong>DRI</strong>, ADTA and <strong>Defense</strong> Trial Counsel of West Virginia. Emily M. Renzelli is a former summer associateat Jackson Kelly PLLC in Charleston, West Virginia, and currently a second-year student at the Universityof Virginia School of Law.<strong>For</strong> <strong>The</strong> <strong>Defense</strong> n <strong>October</strong> <strong>2010</strong> n 65
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