Navigating the FCPA: Prohibited Conduct under the FCPA's Accounting Provisions

The accounting provisions of the Foreign Corrupt Practices Act (FCPA) primarily target companies whose securities are registered with the Securities and Exchange Commission (SEC) or those required to file regular reports with the SEC. These provisions center around two key requirements designed to prevent the concealment of bribes to foreign officials:

Maintaining Accurate Books and Records

The FCPA mandates that companies maintain detailed and accurate books and records that faithfully reflect their transactions. This requirement seeks to ensure transparency and accountability in a company's financial dealings, making it difficult to mask bribes as legitimate expenses.

• Specificity in Accounting: Accounting entries must be specific and accurately reflect the nature of the transaction. For instance, recording bribes as "consultant fees" or "incidental fees" is a direct violation, even if the actual act of bribery cannot be proven.
• No Off-Book Transactions: Any transaction conducted "off-book," meaning not recorded in the company's official accounting system, is strictly prohibited when dealing with foreign governments or their agents. This underscores the importance of maintaining a comprehensive and transparent record of all financial activities.
• Complete and Accurate Records: The requirement extends to all forms of payments, gifts, entertainment, and other benefits provided to foreign officials. This ensures that any potential red flags regarding improper payments can be easily identified during audits or investigations.

Implementing Internal Accounting Controls

Beyond maintaining accurate records, companies are also obligated to establish and maintain a system of internal accounting controls. This involves implementing procedures and processes to safeguard assets and ensure that financial information is reliable. The key objectives of internal accounting controls are:

• Authorization of Asset Use: To ensure that company assets are utilized only for authorized purposes as determined by management. This prevents employees from misappropriating funds for bribes or other illicit activities.
• Compliance with Accounting Principles: To guarantee that expenses and assets are recorded in accordance with generally accepted accounting principles (GAAP) or other applicable standards. This promotes consistency and transparency in financial reporting.
• Detection and Remediation: To establish mechanisms that can detect discrepancies or irregularities in financial transactions. This allows for timely intervention and corrective action to prevent further losses or violations.

An Example of Liability Due to Inadequate Controls

A U.S. technology company faced penalties not because it directly made illicit payments, but because its internal controls failed to prevent subsidiaries from engaging in bribery. The company's subsidiaries used various methods to bribe foreign officials for public contracts, including:

• Inflated Commissions: In Russia and Mexico, the subsidiaries used agents to funnel bribes by paying them inflated commissions, which were passed on to foreign officials. This method aimed to conceal the true nature of the payments.
• Off-Book Accounts: In Poland, bribes were paid directly from accounts that were not recorded in the company's official books. This deliberate concealment demonstrated a lack of oversight and a disregard for proper accounting practices.

The SEC held the U.S. parent company responsible for these actions because it failed to implement adequate internal controls to detect and prevent these illicit payments. This case underscores that companies must not only establish internal control systems but also ensure they are reasonably designed and appropriately implemented. In other words, the control mechanisms should be tailored to the specific risks and complexities of the company's operations and industry, and the company must enforce the established controls consistently across all its branches, subsidiaries, and business units.

The FCPA's accounting provisions demonstrate that companies cannot simply turn a blind eye to potential corruption within their ranks. They have an affirmative duty to maintain transparent financial practices and implement robust internal controls to prevent and detect any violations. Failure to meet these obligations can result in severe legal and financial repercussions.

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