The SEC’s Love Affair with Internal Controls

SECThe SEC has been flexing its muscles lately. If you had some of the enforcement tools the SEC has, you would be doing the same. What am I referring to?

The FCPA statute includes broad provisions requiring companies to maintain adequate internal controls and accurate books and records. If taken literally, these prohibitions can be applied to many situations to support aggressive SEC enforcement actions.

In the bribery context, the SEC has used these prohibitions skillfully to suggest bribery where they do not have adequate proof of bribery. In fact, the SEC has used these provisions to show that the only logical explanation for such conduct is that bribery occurred. Yet, in these cases, the SEC was not able to marshal evidence of actual bribery.

Going back to 2012, the SEC used this theory to support its prosecution of Oracle for creating a risk of bribery, citing deficiencies in Oracles internal controls and books and records. More recently, in the Las Vegas Sands case, the SEC set forth a mountain of evidence of expenditures that were either not recorded or inaccurately recorded. However, in the Sands case, the SEC was not able to cite specific evidence of bribery.SEC2

Even in the recent Analogic case, the SEC did not provide specific evidence that bribes were paid to foreign officials, primarily in Russia. Instead, the SEC presented compelling evidence that expenditures were authorized for improper purposes and payments were made to unknown or unaffiliated third parties. In this case, the SEC suggested that bribery occurred but failed to prove bribery actually occurred.

The SEC loves its internal controls and books and records requirement, and they are now stretching to make these provisions fully applicable in a variety of contexts. There is nothing surprising about its strategy, so long as it is committed to an aggressive enforcement regime against foreign bribery.

The Father of the FCPA, Judge Stanley Sporkin, called it correctly when the FCPA was enacted in 1977. As he has explained, Judge Sporkin sought enactment of the books and records and internal controls provisions as a means to tackle improper use of corporate funds, including bribery. He did not request that Congress enact a foreign bribery prohibition. Judge Sporkin explained that he thought such a provision would be difficult to prove and enforce. He was right.

Senator Proxmire from Wisconsin included a foreign bribery prohibition in the FCPA, notwithstanding Judge Sporkin’s view as the SEC’s enforcement director at the time. The rest is history.

The SEC’s continuing ability to enforce the internal controls and books and records provisions depends on how it exercises its discretion. Given the amount and number of improper expenditures in the Sands case, it is hard to argue that the SEC’s enforcement action was misguided. To the contrary, it appears that the SEC’s enforcement action was more than justified. If, on the other hand, the SEC stretches these provisions to encompass non-egregious cases, the SEC may face backlash on its use of these statutes. The SEC has to exercise its discretion carefully in this area.

SEC3Until now, the Justice Department has not brought a criminal circumvention of internal controls case. If the Justice Department brings such a case, it will be subject to scrutiny. The Justice Department has been very careful when conducting enforcement actions against individuals under the FCPA, and I am sure they will look for the “right set of facts” to bring such a precedent setting case.

A criminal prosecution of internal controls and books and records violations will raise the stakes on the wisdom and applicability of the provisions. It is one thing to bring a civil action – it is quite another to bring a criminal action, especially against individuals for violating so-called internal rules and regulations.

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1 Response

  1. July 13, 2016

    […] Read Full Article: The SEC’s Love Affair with Internal Controls – Corruption, Crime & Compliance […]