FCPA Accounting Provisions and Enforcement Actions Highlight Corporate Liability for Bribery in China and Other Jurisdictions

43 to companies whose stock trades in the over-the-counter market in the United States and which file periodic reports with the Commission, such as annual and quarterly reports. Unlike the FCPA’s anti-bribery provisions, the accounting provisions do not apply to private companies.“ Although the FCPA’s accounting requirements are directed at “issuers,” an issuer’s books and records include those of its consolidated subsidiaries and affiliates. An issu- er’s responsibility thus extends to ensuring that subsidiaries or affiliates under its control, including foreign subsidiar- ies and joint venture partners, comply with the accounting ptovisions. For instance, DOJ and SEC brought enforce- ment actions against a California company for violating the FCPA’s accounting provisions when two Chinese joint ven- tures in which it was a partner paid more than $400,000 in bribes over a four-year period to obtain business in China.” Sales personnel in China made the illicit payments by obtain- ing cash advances from accounting personnel, who recorded the payments on the books as “business fees” or “travel and entertainment” expenses. Although the payments were made exclusively in China by Chinese employees of the joint ven- ture, the California company failed to have adequate internal controls and failed to act on red flags indicating that its affili- ates were engaged in bribery. The California company paid $1.15 million in civil disgorgement and a criminal monetary penalty of $1.7 million. Companies may not be able to exercise the same level of control over a minority-owned subsidiary or affiliate as they do over a majority or wholly owned entity. Therefore, if a parent company owns less than 50% of a subsidiary or affiliate, the parent is only required to use its best efforts to cause the minority-owned subsidiary or affiliate to devise and maintain a system of internal accounting con- trols consistent with the issuer’s own obligations under the FCPA. In evaluating an issuer’s good faith efforts, all the circumstances—including “the relative degree of the issuer’s ownership of the domestic or foreign firm and the laws and practices governing the business operations of the country in which such firm is located”—are taken into account.2”” Civil Liability for Individuals and Other Entities Companies (including subsidiaries of issuers) and individuals may also face civil liability for aiding and abet- ting or causing an issuer’s violation of the accounting pro- visions.”** For example, in April 2010, SEC charged four individuals—a Country Manager, a Senior Vice President of Sales, a Regional Financial Director, and an International Controller of a U.S. issuer—for their roles in schemes to bribe Kyrgyz and Thai government officials to purchase tobacco from their employer. The complaint alleged that, among other things, the individuals aided and abetted the issuer company’s violations of the books and records and internal controls provisions by “knowingly provid[ing] substantial assistance to” the parent company.?! All four executives settled the charges against them, consenting to the entry of final judgments permanently enjoining them from violating the accounting and anti-bribery provisions, with two executives paying civil penalties.°? As in other areas of federal securities law, corporate officers also can be held liable as control persons.?* Similarly, in October 2011, SEC brought an admin- istrative action against a U.S. water valve manufacturer and a former employee of the company’s Chinese subsidiary for violations of the FCPA’ accounting provisions. The Chinese subsidiary had made improper payments to employ- ees of certain design institutes to create design specifications that favored the company’s valve products. The payments were disguised as sales commissions in the subsidiary’s books and records, thereby causing the US. issuer’s books and records to be inaccurate. The general manager of the subsid- iary, who approved the payments and knew or should have known that they were improperly recorded, was ordered to cease-and-desist from committing or causing violations of the accounting provisions, among other charges.” Additionally, individuals and entities can be held directly civilly liable for falsifying an issuer's books and records or for circumventing internal controls. Exchange Act Rule 13b2-1 provides: “No person shall, directly or indirectly, falsify or cause to be falsified, any book, record or account subject to [the books and records provision] of the Securities Exchange Act.”?* And Section 13(b)(5) of HOUSE_OVERSIGHT_022545