The potent and broad-ranging implications of the accounting and record-keeping provisions of the Foreign Corrupt Practices Act.

• Author: Deming, Stuart H.
• Position: The Changing Face of White-Collar Crime

The criminal law of every country makes the corruption of its public officials a criminal offense. (1) Yet, until the latter part of the 20th century, almost every country limited the prohibitions to its own officials and not officials of other countries or international organizations. (2) This was in spite of general, if often unstated, agreement that the proliferation of this form of corruption threatens the functioning of democratic institutions and market economies. (3)

In 1977, as an outgrowth of the Watergate scandal and a series of revelations associated with that period, (4) Congress adopted the Foreign Corrupt Practices Act ("FCPA") to deter improper payments to foreign officials. (5) Yet, in reality, the FCPA's provisions play a far greater role in legal jurisprudence in the United States and elsewhere than is generally recognized. Aside from directly affecting business practices of individuals and entities in international settings, on a daily basis the FCPA bears directly on the foreign and domestic operations of publicly-held companies and many foreign companies entering U.S. capital markets. Often, in unexpected ways, it is increasingly having an impact on litigation and arbitral proceedings. (6)

1. THE FCPA'S TWO PRINCIPAL MECHANISMS

   Initially designed to deter improper payments to foreign officials in connection with business activities, the FCPA instituted two basic mechanisms to carry out its purposes. One is a set of prohibitions on payments to foreign officials. (7) These are generally referred to as the "anti-bribery provisions." The anti-bribery provisions first come to mind when reference is made to the FCPA. They prohibit any promise, offer, or payment of anything of value if the offeror "knows" that any portion will be offered, given, or promised to a foreign official, foreign political party, or candidate for public office for the purpose of influencing a governmental decision. (8)

   The second mechanism is comprised of a set of provisions known as the "accounting and record-keeping provisions." (9) Through the accounting and record-keeping provisions, the FCPA placed new and significant affirmative obligations on entities subject to its terms to maintain systems of internal controls and to maintain records that accurately reflect transactions and dispositions of assets. (10) These provisions directly affect business practices unrelated to the making of improper payments to foreign officials. In so doing, they directly affect the worldwide operations of entities subject to their terms and extend to their majority-owned subsidiaries and officers, directors, employees, shareholders, and agents acting on their behalf. (11)

   The two mechanisms are conceptually different from one another. The anti-bribery provisions are proscriptive whereas the accounting and record-keeping provisions are prescriptive in nature. (12) Their scope and application also differ. Each set of provisions must be considered separately, and neither provision should be considered alone. (13) They were intended to work in "tandem" and thereby complement one another. (14) A certain set of facts may suggest a violation of the anti-bribery provisions. At the same time, the same set of facts may not suggest a violation of the accounting and record-keeping provisions.

2. THE EXPANSIVE NATURE OF THE ACCOUNTING AND RECORD-KEEPING PROVISIONS

   The FCPA's accounting and record-keeping provisions constitute the FCPA's second and less-known mechanism for deterring improper payments to foreign officials. While their application is ostensibly limited to issuers, (15) the accounting and record-keeping provisions constitute the far more potent mechanism. Unlike the anti-bribery provisions, they are not limited to the making of improper payments to foreign officials. The accounting and record-keeping provisions "have a much broader reach." (16) They apply to all aspects of the practices relating to the preparation of the financial statements of an entity subject to their terms. (17)

   The accounting and record-keeping provisions go far beyond simply addressing the bribery of foreign officials. One of the problems disclosed by the revelations of the Watergate era in the United States was the accounting and record-keeping practices that made improper payments possible. (18) To address these practices, the accounting and record-keeping provisions placed new and significant obligations on the worldwide operations of all entities subject to its terms to maintain records that accurately reflect transactions and dispositions of assets and to maintain systems of internal accounting controls. (19)

   "Congress believed that almost all such bribery was covered up in the corporation's books, and that to require proper accounting methods and internal accounting controls would discourage corporations from engaging in illegal payments. Congress recognized that both investors and the corporation itself would benefit from accurate bookkeeping." (20)

   Although one of the major substantive provisions of the FCPA is to require corporate disclosure of assets as a deterrent to foreign bribes, the more significant addition of the FCPA is the accounting controls or "books and records" provision, which gives the SEC authority over the entire financial management and reporting requirements of publicly-held United States corporations. (21) Congress recognized at the time of the FCPA's consideration that the accounting provisions would have an effect extending beyond "questionable payments" made in connection with foreign business. (22) The SEC report proposing the legislation concerning accounting and record-keeping practices, which was in large part ultimately adopted as part of the FCPA, (23) stated that questionable payments "cast doubt on the integrity and reliability of the corporate books and records which are the very foundation for the disclosure system established by the federal securities laws." (24) The report went on to state that "[i]mplicit in the requirement to file accurate financial statements is the requirement that they be based on adequate and truthful books and records. The integrity of corporate books and records is essential to the entire reporting systems administered by the SEC." (25)

   Critics of the accounting provisions recognized that the effect of the SEC's proposal would apply to more than foreign payments. (26) A representative of the American Institute of Certified Public Accountants testified that the SEC proposal

   goes far beyond the problem of illegal corporate payments in establishing a required corporate structure of corporate accountability and by making it illegal to distort proper recordkeeping. The proposed amendment would, for the first time, involve the SEC on a broad basis in corporate activities which do not involve filings with the Commission or transactions in securities. (27) Despite these concerns, "Congress interjected itself into this process by establishing accounting standards for regulated companies and requiring them to implement a system of accounting controls to insure that the accounting standards are met." (28) The adoption of the accounting and record-keeping provisions "reflect[ed] a congressional determination that the scope of the federal securities laws and the SEC's authority should be expanded beyond the traditional ambit of disclosure requirements." (29)

   That congressional determination as to the expansive nature of the accounting and record-keeping provisions has not waned over time. At the core of the heightened obligations under the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley") are those that relate to the accounting and recordkeeping provisions of the FCPA. (30) As a result of the adoption of Sarbanes-Oxley, (31) issuers are required to include in their annual reports an internal control report expressing management's responsibility for establishing and maintaining adequate internal controls for financial reporting and assessing their effectiveness. (32) An issuer's outside auditor is required to provide an attestation with management's assessment of the adequacy of the issuer's internal controls. (33) Sarbanes-Oxley also expanded the record-keeping provisions to address a broader range of conduct than simply a material misstatement or omission. (34)

   Significantly, Sarbanes-Oxley increased the maximum penalty for a single criminal violation of the accounting and record-keeping provisions by an individual to twenty years. (35) Fines for a violation were increased to $5 million for an individual and $25 million for an entity. (36) In contrast, the penalties for a violation of the anti-bribery provisions are far less severe. (37) The maximum period of imprisonment for an individual is five years and the maximum fine for a criminal violation by an entity is $2 million. (38)

3. THE JURISDICTIONAL SCOPE OF THE ACCOUNTING AND RECORD-KEEPING PROVISIONS

   The accounting and record-keeping provisions are narrower in the scope of their application than the anti-bribery provisions. They apply to issuers of securities, as defined by [section] 3 of the Securities Exchange Act of 1934 ("Exchange Act"), (39) which are required by the Exchange Act to register under [section] 12 or file reports under [section] 15(d) or which have filed a registration statement that has not yet become effective under the Securities Act of 1933. (40)

   As a practical matter, unless otherwise exempted, an issuer subject to the terms of the accounting and record-keeping provisions includes the following categories of entities (41):

   * Entities with securities listed on a national securities exchange, including the National Association of Securities Dealers Automated Quotation System (42);

   * Entities with assets in excess of $1 million and more than 500 shareholders and that are engaged in interstate commerce, in a business affecting interstate commerce, or whose securities are traded by use of the mails or any means or...