On February 24, 2015, the U.S. Securities and Exchange Commission (“SEC”) announced that it had reached an agreement with Goodyear Tire & Rubber Co. (“Goodyear”) under which Goodyear would disgorge more than $16 million to settle charges of Foreign Corrupt Practices Act (“FCPA”) accounting violations.1 Unlike traditional FCPA cases, the charges against Goodyear notably stem both from instances of commercial bribery and official corruption by Goodyear’s subsidiaries in Kenya and Angola.
Goodyear was charged under the so-called “books and records” provisions of the FCPA. These twin provisions require that issuers2 “make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer”3 and also “devise and maintain a system of internal accounting controls” sufficient to reasonably ensure that: (i) transactions are executed in accordance with management’s authorization, (ii) transactions are recorded as necessary, (iii) access to assets is permitted only in accordance with management’s authorization, and (iv) records of assets are compared with existing assets and action is taken to address any differences.4
Notwithstanding the FCPA’s extensive focus on official corruption, this resolution serves as a reminder that instances of commercial bribery can also be sanctioned through the books and records provisions of the FCPA. Whereas the anti-bribery provisions apply only to corrupt payments to certain types of foreign officials, a company can violate the books and records provisions through accounting that conceals bribes paid to private entities with no government affiliation. Goodyear’s case involves both official and commercial corruption, and the charges are consistent with the position taken by the SEC and the U.S. Department of Justice (“DOJ”) in their 2012 FCPA Resource Guide that books and records cases can be brought involving a wide range of “misconduct, such as financial fraud, commercial bribery, export controls violations, and embezzlement or self-dealing by company employees” if it results in a failure to accurately maintain company accounts.5
In Kenya, managers of a majority-owned subsidiary of Goodyear paid over $1.5 million in bribes to employees of both private companies and state-owned enterprises and then falsely recorded the payments in the company’s books as expenses for promotional products. In Angola, the general manager of a wholly-owned Goodyear subsidiary paid over $1.6 million in bribes—again to employees of both private companies and state-owned enterprises—and concealed the scheme by falsely marking up prices of tires with additional “freight and clearing” costs.
Goodyear’s resolution principally reflects over $14 million in disgorged profits resulting from the corrupt African subsidiaries. In accepting that penalty on a “neither admit nor deny basis,” the SEC noted that Goodyear had made substantial efforts both to assist the investigation and to remedy its compliance control problems. Goodyear self-reported the bribes to the SEC and voluntarily produced the results of an internal investigation. In addition, Goodyear is in the process of divesting its ownership interests in both African subsidiaries involved, as well as taking disciplinary action against executives with oversight responsibility for FCPA training and controls. Perhaps most importantly, consistent with the FCPA’s requirement of an effective “system of internal accounting controls,” Goodyear is undertaking an extensive revamping of its internal processes, providing for additional training of employees, regular audits focused on corruption risk, and technological enhancements to better link subsidiaries with global management. Goodyear has also agreed to submit its compliance program for oversight from the SEC for a three-year period.
The books and records provisions of the FCPA are an issue for any public company with securities traded on a U.S. exchange. As the Goodyear case illustrates, it is not sufficient to simply take at face value the accounting of foreign subsidiaries. Even if bribes are made only on a commercial basis, if they are misreported as promotional or other expenses, they can be the basis for FCPA liability–including both financial penalties and intrusive government oversight of internal compliance functions. The FCPA itself makes clear that the best solution for U.S. issuers is a strong system of internal controls that is regularly updated to protect against emerging risks. Among the best means to avoid potential problems with accounting violations—and with corruption in general—is a strong set of internal procedures for documenting expenses that most frequently arouse the attention of regulators addressing corruption issues, including commissions or royalties, consulting fees, marketing expenses, travel and entertainment for potential customers, and petty cash.6 Employees must then be trained to follow these procedures and educated about the potential FCPA exposure that results from noncompliance, and regular audits of these records should be conducted to ensure that procedures are being followed.
1 In the Matter of The Goodyear Tire & Rubber Company, SEC Release No. 74356 (Feb. 24, 2015), http://www.sec.gov/litigation/admin/2015/34-74356.pdf.
2 For purposes of the FCPA, an “issuer” is any entity that has “a class of securities registered pursuant to section 12 of [Title I of the Securities Exchange Act of 1934]” and “is required to file reports pursuant to section 15(d) of [Title I of the Securities Exchange Act of 1934].” Essentially, the term “issuer” refers to any public company with shares traded on a U.S. exchange. Securities Exchange Act of 1934, § 13(b)(2), ch. 404, 48 Stat. 894 (as amended through Pub. L. No. 111-72 (2009)) (codified as amended at 15 U.S.C. § 78m(b)(2) (1998)). Note that this is not limited to U.S.-listed companies, but can also include foreign companies that are knowingly trading American Depository Receipts (“ADRs”) on U.S. exchanges.
3 Securities Exchange Act of 1934, § 13(b)(2)(A) (codified as amended at 15 U.S.C. § 78m(b)(2)(A)).
4 Securities Exchange Act of 1934, § 13(b)(2)(B) (codified as amended at 15 U.S.C. § 78m(b)(2)(B)).
5 A Resource Guide to the U.S. Foreign Corrupt Practices Act, U.S. Department of Justice and U.S. Securities and Exchange Commission at 41 (Nov. 2012), www.justice.gov/criminal/fraud/fcpa/guidance/guide.pdf (“FCPA Resource Guide”).
6 FCPA Resource Guide at 39 (2012).
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