In other words, the same legal violation ought to be sanctioned in the same way.
When the same legal violation is sanctioned in materially different ways, trust and confidence in law enforcement agencies is diminished.
The Foreign Corrupt Practices Act has always been a law much broader than its name suggests. The anti-bribery provisions are just one prong of the FCPA.
Indeed, most FCPA enforcement actions do not involve allegations of foreign bribery, but rather violations of the FCPA’s generic books and records and internal controls provisions. These provisions generally provide that issuers shall: (i) maintain books and records which, in reasonable detail, accurately and fairly reflect issuer transactions and disposition of assets (the books and records provisions); and (ii) devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are properly authorized, recorded, and accounted for by the issuer (the internal controls provisions).
For lack of a better term, let’s call such actions “non-FCPA FCPA enforcement actions.” By one estimate, since the FCPA’s enactment in 1977, there have been approximately 1,200 “non-FCPA FCPA enforcement actions.”
Such actions are not dissected in the FCPA space and do not appear on the DOJ or SEC’s FCPA websites (here and here). Yet such actions are deserving of analysis because they highlight a troubling aspect of FCPA enforcement: that being how the same alleged legal violations are sanctioned in materially different ways.
For instance, the SEC recently announced an enforcement action against Stein Mart for materially misstating its pre-tax income, including almost 30% in one quarter. According to the SEC:
“Stein Mart’s internal accounting controls over [...] markdowns were inadequate. For example – until at least the middle of 2011–the decision to characterize a markdown [a certain way] resided solely with Stein Mart’s merchandising department, which did not understand the impact that Stein Mart’s markdowns could have on inventory valuation accounting. As a reflection of the company’s inadequate internal accounting controls surrounding [...] markdowns, Stein Mart’s chief financial officer, who was hired in 2009, did not learn of Stein Mart’s treatment of [...] markdowns until the summer of 2011.”
According to the SEC’s order, Stein Mart also had inadequate internal accounting controls in the areas of software assets, credit card liabilities, and other inventory-related issues.
Based on the above findings, the SEC charged, among other things, violations of the FCPA’s books and records and internal controls provisions and ordered the company to pay a $800,000 civil penalty.
The SEC also recently announced an enforcement action against MusclePharm Corp. for failing to implement internal accounting controls for perks and other areas where the company committed accounting and disclosure violations. According to the SEC:
[Approximately] half-million dollars’ worth of perks [were] bestowed upon its executives, including approximately $244,000 paid to CEO Brad Pyatt related to automobiles, apparel, meals, golf club memberships, and his personal tax and legal services. Even after the company began an internal review of undisclosed executive perks and then-audit committee chair Donald Prosser became directly involved in the process, MusclePharm continued filing financial statements that failed to disclose private jet use, vehicles, and golf club memberships for its executives.
While the company focused on revenue growth, it failed to establish sufficient internal controls and keep proper books and records. As a result, between 2010 and 2013, engaged in a series of accounting and disclosure failures that resulted in the company filing materially false and misleading filings with the Commission from 2010 through July 2014. Specifically, as described further below, [MusclePharm] failed to disclose perquisite compensation to its executive officers, failed to disclose related party transactions, failed to disclose bankruptcies of its executive officers, and committed other financial statement, accounting, and disclosure failures.
Because [MusclePharm] improperly recorded and/or reported its perquisites, related parties, revenue, losses on settlement of accounts payable, sponsorship commitments, manufacturing concentration, leases, and international sales, its books, records and accounts did not, in reasonable detail, accurately and fairly reflect its transactions and dispositions of assets. In addition, [MusclePharm] failed to implement internal accounting controls relating to its perquisites, related parties, revenue, losses on settlement of accounts payable, sponsorship commitments, manufacturing concentration, leases, and international sales, which were sufficient to provide reasonable assurances that transactions were recorded as necessary to permit the preparation of financial statements in conformity with GAAP and to maintain the accountability of assets.”
Based on the above findings, the SEC charged, among other things, violations of the FCPA’s books and records and internal controls provisions and ordered the company to pay a $700,000 civil penalty.
Against the above backdrop, consider the recent $25 million FCPA enforcement action against BHP Billiton in which the SEC found that the company violated the FCPA’s books and records and internal controls provisions because it had “insufficient internal controls over [its] Olympic hospitality program.”
Also consider the recent $12 million FCPA enforcement action against Mead Johnson in which the SEC found that the company violated the FCPA’s books and records and internal controls provisions because a subsidiary’s “records were incomplete and did not reflect that a portion of Distributor Allowance was being used contrary to Mead Johnson’s policies” and because the company “failed to devise and maintain an adequate system of internal controls” concerning distributor allowances.
Also consider the recent $16 million FCPA enforcement action against Goodyear in which the SEC found that the company violated the FCPA’s books and records and internal controls provisions because certain alleged improper expenditures were “falsely recorded as legitimate business expenses” on subsidiary books and records and the company “failed to devise and maintain sufficient accounting controls to prevent and detect” the expenditures.
Did the conduct at issue in BHP Billiton, Mead Johnson, and Goodyear involve (liked in Stein Mart and MusclePharm) a material misstatement of income or lack of controls over core financial reporting issues at the parent company?
Most certainly not.
Yet, the settlement amounts in BHP Billiton, Mead Johnson, and Goodyear far exceeded the settlement amounts in the Stein Mart and MusclePharm enforcement actions even though all of the enforcement actions alleged the exact same legal violations.
The end result is an obvious lack of consistency and transparency.
The SEC has some explaining to do and owes the legal and compliance community an explanation for why FCPA books and records and internal controls violations are not sanctioned in similar ways.