"Audit Committees and the Foreign Corrupt Practices Act"
Reprinted from Directors Monthly with permission of the publisher: the National Association of Corporate Directors (NACD) • 1133 21st Street, NW, Suite 700, Washington, D.C. 20036 • 202-775-0509 • www.nacdonline.org Audit & Finance Audit Committees and the Foreign Corrupt Practices Act By Homer E. Moyer, Jr. treated as a substantial negative factor in imposing penalties and settlement terms. Issues relating to the provisions of Foreign 2. Do we need our own FCPA counsel? Corrupt Practices Act (FCPA) are demanding Although audit committees sometimes consult more and more attention from the audit com- with or retain separate counsel to advise them mittees of corporate boards. Payments to or on FCPA issues, doing so is a necessity only in enrichment of foreign government officials, certain situations. The audit committee may which may violate the FCPA, present issues that well want to assure itself, however, that the simultaneously raise the prospect of an unau- company has access to FCPA expertise and thorized dissipation of corporate assets, inac- experience, from either in-house or outside curate books and records entries, and a fail- counsel. Expertise that includes both substan- ure of internal financial controls. tive FCPA expertise and experience with As a result, many corporate audit commit- enforcement agencies is desirable. tees have recognized that when a possible FCPA 3. What is the best response to a viola- issue surfaces, they need to be informed, and pos- tion? When an internal report of a possible vio- sibly directly involved. And audit committees lation is inconclusive or incomplete, as is often have increasingly asked themselves the question, the case, it is essential that the company take “What must we do to discharge our responsi- immediate action to investigate further and bilities in today’s regulatory environment?” At make at least an initial assessment of the appar- least part of the answer is having an under- ent likelihood and seriousness of a violation. If standing of the dynamics of FCPA enforcement, one is discovered, the company must act deci- which continue to evolve at a remarkable pace. sively to stop any ongoing violations. Not only Among the questions that audit committees need may a slow response result in additional viola- to address in effectively dealing with possible tions, but dealing with a violation immediately FCPA issues are the following. is often the first test of a company’s good faith. 1. Do we have an effective FCPA com- Depending on the circumstances, corrective pliance program in place? FCPA enforce- action or discipline may also be appropriate; if ment officials now expect companies involved so, a failure to act may be viewed as a failure in international business to understand the by the company. And the discovery of any vio- FCPA and have a compliance program in place. lation should prompt a follow-up inquiry as to Although the program may be a part of a larger why and how the violation occurred and what set of ethics or business conduct policies, it can modifications or enhancements to the com- no longer ride the coattails of a general ethics pany’s FCPA compliance program would reduce program. A review of recent FCPA cases reflects the risk of a recurrence. not only that the “best practices” bar contin- 4. Should we disclose to enforcement ues to rise, but more importantly, that the officials, and how quickly? As a result of Sar- absence of an FCPA compliance program is banes-Oxley requirements and strong agency encouragement to disclose voluntarily and promptly, the pressure for doing so is stronger Director Summary: Audit committees need to be than ever. For these and other reasons, in some aware of the provisions in, and increased enforcement situations a “voluntary disclosure” is the clear of, the Foreign Corrupt Practices Act (FCPA), which pro- choice, even if possibly a misnomer. For exam- scribes payments to foreign government officials. Be ple, if a company is obliged to disclose a mat- prepared by formulating a plan for FCPA compliance, ter in its Form 10-Q or 10-K, then the issue of self-reporting to enforcement agencies becomes and disclosure of violations, should they occur. an obvious necessity. Moreover, a company or N AC D – D i r e c t o r s M o n t h l y Fe b r u a r y 2 0 0 6 – 5 Investigations in France, intense internal investigations costing well into the tens of millions of dollars. And as before, an indictment or set- Switzerland, Lesotho, and tlement also risks collateral penalties of loss of export Argentina have led to privileges or government-backed insurance or loans. 6. Might our company be required to retain a investigations in the “compliance monitor”? Seven of the last eight FCPA United States. settlements have required the company involved to retain an independent compliance advisor for a period of up to three years. Retained and paid by the company, monitors its audit committee may elect to disclose in any event— develop and implement their work plans in close con- because disclosure by the press or a whistleblower is sultation with enforcement agencies. Required consul- likely, because the company wants to resolve the matter, tants provide the government (and the company’s audit or because corporate philosophy so dictates. committee) with post-settlement oversight and a contin- Although immediate disclosure may reduce the risk uing source of information on the company’s behavior. that an audit committee could later be criticized, it may At the same time, they can impose considerable additional not be in the company’s best interests and may be pre- costs on the company, both in terms of committing or mature, particularly if the report proves to be based on diverting company resources to satisfy the monitor’s incorrect facts, a misunderstanding of the law, or ulterior requirements and in fees and costs, which in some cases motives. Many companies view initial investigation and may exceed the fine paid for the violation. assessment as an essential prior step. At the same time, 7. What preventive measures can audit commit- speed in making the initial review and any disclosure is tees employ before the fact? more important than ever. Today, enforcement officials • Assure that audit committee members are educated will likely view a disclosure following an initial investi- on the administration and enforcement of the FCPA gation of several months as tardy; delay also increases and periodically updated on new cases and on the sub- the chances that enforcement agencies will otherwise learn tle and not-so-subtle developments revealed in recent of the matter, which will diminish the credit the company enforcement actions. may receive for stepping forward. • Take steps to assure that the company’s internal audit A possible compromise step is a “placeholder” disclo- unit has been trained in the FCPA. sure by which a company advises agencies that it has • Insist that your company’s FCPA compliance program received a report of a possible violation and the company be updated on a regular basis. is now investigating the report and will report back. Such • Monitor how the company responds to possible vio- notice preserves the company’s early disclosure position, lations, often a better indicator of a company’s com- but creates some risk that if the issue proves inconsequen- pliance culture than the company’s written program. tial, the government’s interest may already have been piqued, • Conduct dry runs of possible FCPA violations, walk- which could lead to further government involvement. ing through the steps that the company would take to 5.What are the company’s downside risks? In the respond quickly and decisively to information sug- last two years, there has been an increase in the number gesting a possible violation. of enforcement actions, rising penalties, and active coop- eration between the Department of Justice and the SEC. The extent to which audit committees share respon- Less apparent is the increased level of cooperation among sibility and accountability with management has obvi- enforcement officials in different countries. Investigations ously expanded since Sarbanes-Oxley. With this broad- in France, Switzerland, Lesotho, and Argentina, for exam- ened responsibility and the increased prominence that the ple, have led to investigations in the United States, and FCPA continues to claim, boards of directors, and audit more of the same can be expected. committee members in particular, need more than ever Recent cases have seen not only the highest financial before to be conversant with the FCPA, current on its penalties in a decade ($28.5 million for Titan; $16 mil- recent developments, and prepared to deal decisively with lion for ABB), but settlements in recent cases have issues as they arise. ■ required disgorgement of profits, deferred prosecution agreements, criminal prosecutions of corporate execu- Homer Moyer began the 40-lawyer international depart- tives, and elaborate remedial compliance measures. More- ment at Miller & Chevalier in Washington and is a former over, the resolution of FCPA issues prior to the comple- general counsel of the United States Department of Com- tion of a pending merger has in some cases involved merce. He may be reached at firstname.lastname@example.org. 6 – Fe b r u a r y 2 0 0 6 N AC D – D i r e c t o r s M o n t h l y