A lot has been written about the definition of government “instrumentality” under the FCPA. That definition is important because it helps define the scope of the term “foreign official” for purposes of foreign bribery offenses. The May 2014 ruling by the U.S. Court of Appeals for the Eleventh Circuit in United States v. Esquenazi helped put some of this discussion to rest. In that decision, the court largely sided with the U.S. Department of Justice, providing a list of factors to consider and finding “instrumentality” to mean any “entity controlled by the government of a foreign country that performs a function the controlling government treats as its own.”
In practice, however, the definition of “foreign official” has been less important than the discourse would suggest. This is because, when building compliance programs, the best rule of thumb is to make sure that employees are not giving bribes to anyone, no matter the recipient. The potential applicability of other laws that reach commercial bribery, like the U.K. Bribery Act, also make the distinction of who is and is not a “foreign official” less important.
Instead, another issue of statutory interpretation takes on greater importance to practitioners: the scope of the FCPA Internal Accounting Controls provisions.
The Scope of the FCPA Internal Accounting Controls Provisions
Companies that are publicly listed in the United States are required under 15 U.S.C. § 78(b)(2)(B) of the FCPA to adopt accounting controls that, among other things, “provide reasonable assurances that . . . transactions are executed in accordance with management’s . . . authorization.” In other words, accounting controls must be adequate to protect against off-book accounts and disbursements and other unauthorized payments. As FCPAméricas has discussed in prior posts here and here, FCPA enforcement officials at times have asserted that this provision requires companies to implement broad anti-corruption compliance programs. For example, companies have been found to violate the FCPA’s accounting controls provision when they fail to train their employees on anti-corruption compliance or fail to translate their compliance policies into local languages. While there are many good reasons for companies to implement compliance programs, many argue that interpreting the FCPA’s internal accounting controls provisions to require anti-corruption compliance programs is a stretch, and inconsistent with the statute itself.
They cite the following:
- The Statute’s Plain Language: The plain language of the statute requires internal controls that are specifically accounting in nature. This would include things like delegations of authority, segregation of duties, dollar amount limits on expenditures, requirements to maintain backup support for expenses, and authorization requirements. Thus, it would be incorrect to read the statute’s language to require something beyond controls that are accounting in nature, like trainings or translations.
- The Statute’s Legislative History: In its first post-Watergate report on foreign bribery that provided the basis for the FCPA, the SEC highlighted that companies had been using slush funds that were outside of their usual financial accountability systems to pay bribes. This finding formed the genesis of the FCPA’s accounting provisions, requiring that companies have internal accounting measures to ensure adequate books and records. This accounting-focused approach at the time the FCPA was being drafted was described by the late Roderick M. Hills, former SEC Chairman, in a 2013 interview with FCPAmé In fact, Congress could not have mandated broader anti-corruption compliance programs at the time because the types of detailed programs that companies adopt today did not exist in 1977, when the FCPA was passed.
- Court Decisions: When interpreting the meaning of the phrase “internal accounting controls,” courts have consistently defined it as financial and accounting in nature (as discussed here).
Perhaps there will be more challenges to come of the SEC’s broad interpretation of the term “internal accounting controls.” In the meantime, the DOJ and SEC have both laid out clearly in their 2012 FCPA Guidance the following description of the term:
An effective compliance program is a critical component of an issuer’s internal controls. Fundamentally, the design of a company’s internal controls must take into account the operational realities and risks attendant to the company’s business, such as: the nature of its products or services; how the products or services get to market; the nature of its work force; the degree of regulation; the extent of its government interaction; and the degree to which it has operations in countries with a high risk of corruption. A company’s compliance program should be tailored to these differences. Businesses whose operations expose them to a high risk of corruption will necessarily devise and employ different internal controls than businesses that have a lesser exposure to corruption, just as a financial services company would be expected to devise and employ different internal controls than a manufacturer.
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