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Feb 04, 2014

Expanding FCPA violations to include commercial bribery

Invoking other provisions that lack a materiality threshold would hold companies liable for violations related to all transactions, not only those related to the FCPA’s anti-bribery guidelines

With the high-profile investigations into alleged FCPA violations by Walmart and GlaxoSmithKline, companies have become more convinced federal regulators mean business when it comes to enforcing anti-corruption laws. What corporate compliance departments may be less aware of is that, in addition to bribery directed at foreign government officials, the SEC and Department of Justice plan to get tougher on commercial bribery as well. As reported by the FCPA blog recently, the SEC’s FCPA unit chief, Kara Brockmeyer, announced at a conference in November that the commission will use the FCPA’s accounting provisions to go after commercial bribery that comes to light during probes into bribery of foreign officials, paying extra attention to a company’s books and records.

Kevin Abikoff, chair of Hughes Hubbard & Reed’s anti-corruption and internal investigations practices group, sees this as coming full circle with the SEC’s approach before the advent of the FCPA in 1977. Back then, the SEC’s only recourse for prosecuting bribery matters was under the disclosures provision of the Securities Exchange Act of 1934, charging a company with failure to disclose the bribes.

‘We don’t really have a statute like the [UK Bribery Act] prohibiting commercial bribery, so the SEC is looking to see if it can use some of the tools it has,’ Abikoff says. ‘The big question mark is: will there ultimately be the appetite to amend the FCPA as a better vehicle for getting at the same thing than trying to prosecute as a disclosure violation? Or in this case, a books and records violation?’

Even before Brockmeyer’s announcement, in a complaint against Diebold for FCPA violations in China and Indonesia, the SEC invoked the FCPA’s accounting and internal controls provisions to allege that a Russian subsidiary of Diebold had paid roughly $1.2 million in bribes to private banks, disguising the payments through phony service contracts with a distributor in Russia.

Abikoff says he finds the development a bit frightening because the books and records provisions are so broad and don’t have a materiality threshold. That means a company would be held liable for violations related to all transactions, not only those that fail to follow the guidelines of the FCPA’s anti-bribery provisions.

‘And when pressed, almost no one’s books are completely accurate. They have to be reasonably accurate,’ says Abikoff. Although he respects the SEC’s good judgment in prosecuting only cases that deserve it, the thought of bringing a new area of criminal activity within its ambit is unsettling because of how much discretion is built into that, he adds.

Abikoff further worries that the FCPA’s legitimacy may be questioned if it is expanded to include commercial bribery, in which case the law’s moral imperative against the corruption of government officials could be diluted.

The bottom line is that compliance officers need to incorporate commercial bribery into their codes of conduct, training programs and internal controls and be prepared to explain the steps they are taking to mitigate such conduct if the SEC comes calling with a complaint.