No Smoke and No Fire: The Rise of Internal Controls Absent Anti-Bribery Violations in FCPA Enforcement

Abstract

The Foreign Corrupt Practices Act prohibits bribery of foreign public officials in order to obtain or retain business. It is, for all intents and purposes, an anti-bribery statute. In order to detect bribery, the FCPA contains accounting provisions related to bookkeeping and internal controls. The books and records provision requires issuers to make and maintain accurate books, records and accounts; likewise, the internal controls provision requires that issuers devise and maintain reasonable internal accounting controls aimed at preventing and detecting FCPA violations. If one considers the analogy that bribery is the “fire” in FCPA enforcement actions, and books and records violations are the “smoke,” internal controls are the “smoke detectors.”

The government is increasingly punishing, or threatening to punish, companies for the potential ineffectiveness of these “smoke detectors.” Internal controls violations arguably are not substantive violations, but instead are violations arising out of the potential for other violations. The recent increase in the number of enforcement actions alleging violations of the internal controls provision in the absence of any correlating anti-bribery provision violations suggests that enforcement of the Act has (d)evolved to a place well beyond its stated purpose. Additionally problematic is that the internal controls required by the FCPA are not a fixed standard but instead a fairly ambiguous set of recommendations and guidelines that depend on the characteristics of each company and industry. The result of this is overcriminalization and overenforcement of the statute by the government, and overcompliance by the private sector. This Article addresses the alarming shift in the interpretation of the breadth of the statute by the Securities and Exchange Commission ("SEC") and the Department of Justice ("DOJ"), and discusses the vast theoretical ramifications of this overcriminalization and overenforcement.

Keywords: FCPA, internal controls, anti-bribery, anti-corruption, SEC