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Home Compliance

Don’t Overlook Your Books

by Wendy Wysong
March 8, 2016
in Compliance
New legislation will have companies taking greater care to maintain compliance

with contributing authors Diana Chang and Thomas Haystead

Given the increased use of the “books and records” provisions of the U.S. Foreign Corrupt Practices Act 1977 (FCPA) by the U.S. Securities and Exchange Commission (SEC) to target corporate entities whose accounting records do not accurately and fairly reflect the company’s transactions, it may come as little surprise that other jurisdictions are starting to introduce similar regimes into their anti-bribery legislation.

Australia, for example, has recently introduced to its foreign bribery legislation accounting offenses that are based loosely on the FCPA “books and records” provisions.

The trend of the SEC pursuing only books and records charges — such as in the cases of Mead Johnson and Hitachi during 2015 — demonstrates that, with a lower evidentiary burden on the prosecution than the related bribery offenses, the introduction of anti-bribery “books and records” provisions may prove an increasingly attractive option to other jurisdictions outside the U.S.

The FCPA “Books and Records” Provisions

The FCPA books and records provisions create two principal obligations:

  • first, to make and keep records that are accurate and that fairly reflect the transactions and dispositions of the assets of the issuer and
  • second, to devise and maintain sufficient internal accounting controls to provide reasonable assurances that (amongst other things) transactions are recorded in accordance with management authority and to enable accountability of assets and that access to assets is permitted only in accordance with management authority.  In circumstances in which the issuer controls an entity in which it holds 50 percent or less of the voting power, the obligation is reduced to a requirement to “proceed in good faith to use its influence, to the extent reasonable under the issuer’s circumstances” to cause the entity to implement adequate controls.

Knowingly failing to implement a system of internal accounting controls or knowingly falsifying books or accounts kept in accordance with the FCPA obligations will, if detected, result in prosecution.

The case against Hitachi focused on Hitachi’s sale of a 25 percent share in a South African subsidiary to a company allegedly serving as a front to the African National Congress (ANC), facilitating the ANC’s ability to share in profits derived from any contracts awarded to Hitachi to build power stations in South Africa.  Various payments were subsequently made to the ANC’s front company as “dividends” or “success fees,” inaccurately booked as consulting fees.

The SEC alleged that Hitachi’s “lax internal control environment” enabled the payment of millions of dollars to the politically connected front company, funds which Hitachi allegedly characterized as consulting fees and other legitimate payments in its books and records.

Hitachi has agreed to pay $19 million to settle the SEC charges (with no admission or denial of liability).

Developments in Other Jurisdictions

In 2013, Canada made various amendments to its Corruption to Foreign Public Officials Act (CFPOA), including the introduction of a books and records provision that is closely aligned with its FCPA counterpart. The CFPOA provisions attach criminal liability to, amongst other things, failing to record or inadequately recording transactions, recording expenditures that did not occur, knowingly using false documents, incorrectly identifying the purpose of a liability and intentionally destroying accounting books and records earlier than permitted by law.

The Organisation for Economic Co-Operation and Development (OECD) has applied pressure on various countries such as Ireland, Argentina, Austria, Belgium and Denmark in its reports on compliance with Article 8 of the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (OECD Anti-Bribery Convention). Article 8 requires signatories to the OECD Anti-Bribery Convention to take all measures necessary in relation to the maintenance of books and records to combat the bribery of public officials.

In 2015, the OECD found that one of the shortcomings of Australia’s anti-corruption legislation was that it had still not implemented offenses of false accounting for the purpose of concealing or enabling bribes to a foreign official, as required by Article 8 of the OECD Anti-Bribery Convention.

In response, on March 1, 2016 the Crimes Legislation Amendment (Proceeds of Crime and Other Measures) Act 2016 came into force; the act introduces new offenses for false dealing with accounting documents. The amendments to the Criminal Code (Cth) create two new offenses:

  1. Making, altering, destroying or concealing an accounting document, or failing to make or alter an accounting document a person is required by law to make or alter, with the intention that such conduct would facilitate, conceal or disguise the giving or receiving (by any person) of a benefit that is not legitimately due, or a loss not legitimately incurred and
  2. Reckless (rather than intentional) conduct regarding the facilitation, concealment or disguise of an illegitimate benefit or loss.

Penalties for individuals  committing the former offense can include up to 10 years imprisonment, up to AUD$1.8 million, or both.  For a corporation, an offense can result in a fine of up to AUD$18 million, an amount three times the value of the illegitimate benefit obtained by the company for the offense or 10 percent of the company’s turnover for the 12 months before the offense was committed, whichever is greater.  Penalties for reckless conduct are half that. Notably, for both offenses, it will not be necessary for the prosecution to prove that a benefit was actually given or received, a loss incurred or that the defendant intended that a particular person receive a benefit or incur a loss.

While the new offenses have received support from the Senate Committee (which was inquiring into the proposed amendments) and the Australian Securities and Investments Commission, concern was expressed that the absence of a nexus with foreign bribery and the breadth of the provisions means the offenses have the potential to impose criminal liability in an unintended and unreasonable range of situations.  Others sought broader application and, like their U.S. equivalents, an express obligation on persons to maintain proper accounting records for the purpose of demonstrating compliance with the foreign bribery provisions.

Looking Forward

The introduction of the new offenses in Australia raises a number of interesting issues and in particular:

  • whether the scope of the new Australian offences will extend beyond conduct relating to bribery of foreign officials and into, as the Attorney General’s Department has suggested, “all manner of duplicitous payments” and
  • whether Australian prosecutors will be hindered by the absence of an FCPA-style express obligation to maintain proper accounting records for the purpose of demonstrating anti-bribery compliance to allow prosecutions similar to the SEC’s recent settlements.

In a broader context, other jurisdictions outside the U.S. may follow suit with the introduction of their own “books and records”-style provisions to supplement their anti-bribery regimes. This will particularly be the case in the context of increased OECD pressure on various countries for Article 8 compliance.


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Wendy Wysong

Wendy L. Wysong is a partner at Steptoe & Johnson. She served previously as a litigation partner with Clifford Chance, offering clients advice and representation on compliance and enforcement under the Foreign Corrupt Practices Act, the Arms Export Control Act, International Traffic in Arms Regulations, Export Administration Regulations, and OFAC Economic Sanctions. She was appointed by the State Department as the ITAR Special Compliance Official for Xe Services (formerly Blackwater) in 2010. Wendy combines her experience as a former federal prosecutor with the United States Attorney for the District of Columbia for 16 years with her regulatory background as the former Deputy Assistant Secretary for Export Enforcement at the Bureau of Industry and Security, U.S. Department of Commerce. She managed its enforcement program and was involved in the development and implementation of foreign policy through export controls across the administration, including the Departments of Justice, State, Treasury and Homeland Security, as well as the intelligence community. Wendy received her law degree in 1984 from the University of Virginia School of Law, where she was a member of the University of Virginia Law Review.

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