Senate Report Highlights Accounting Provision as Tool to Conceal Corporate Bribery

In the past, “corporate bribery has been concealed by the falsification of corporate books and records” and the accounting provisions “removel] this avenue of coverup.” Senate Report No. 95-114, at 3 (1977) What Is Covered by the Accounting Provisions? Books and Records Provision Bribes, both foreign and domestic, are often mischarac- terized in companies books and records. Section 13(b)(2)(A) of the Exchange Act (15 US.C. § 78m(b)(2)(A)), commonly called the “books and records” provision, requires issuers to “make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transac- tions and dispositions of the assets of the issuer.””!® The “in reasonable detail” qualification was adopted by Congress “in light of the concern that such a standard, if unqualified, might connote a degree of exactitude and precision which is unrealistic””!” The addition of this phrase was intended to make clear “that the issuer’s records should reflect trans- actions in conformity with accepted methods of recording economic events and effectively prevent off-the-books slush funds and payments of bribes.”*!8 The term “reasonable detail” is defined in the statute as the level of detail that would “satisfy prudent officials in the conduct of their own affairs.”””” Thus, as Congress noted when it adopted this definition, “[t]he concept of reasonable- ness of necessity contemplates the weighing of a number of relevant factors, including the costs of compliance.” Although the standard is one of reasonable detail, it is never appropriate to mischaracterize transactions in a company’s books and records.”! Bribes are often concealed under the guise of legitimate payments, such as commis- sions or consulting fees. In instances where all the elements of a violation of the anti-bribery provisions are not met—where, for exam- ple, there was no use of interstate commerce—companies nonetheless may be liable if the improper payments are inac- curately recorded. Consistent with the FCPA’s approach to prohibiting payments of any value that are made with a corrupt purpose, there is no materiality threshold under the books and records provision. In combination with the inter- nal controls provision, the requirement that issuers main- tain books and records that accurately and fairly reflect the corporation’s transactions “assure[s], among other things, that the assets of the issuer are used for proper corporate purpose[s].*? As with the anti-bribery provisions, DOJ’s and SEC’s enforcement of the books and records provision has typically involved misreporting of either large bribe pay- ments or widespread inaccurate recording of smaller pay- ments made as part of a systemic pattern of bribery. Bribes Have Been Mischaracterized As: * Commissions or Royalties " Consulting Fees # Sales and Marketing Expenses " Scientific Incentives or Studies " Travel and Entertainment Expenses « Rebates or Discounts » After Sales Service Fees # Miscellaneous Expenses = Petty Cash Withdrawals « Free Goods = |ntercompany Accounts * Supplier / Vendor Payments « Write-offs =» “Customs Intervention” Payments HOUSE_OVERSIGHT_022541