Since August 2012, there has been a lot of discussion in anti-corruption circles about Oracle’s settlement with the SEC, including here. Much of the past discussion has focused on the fact that the SEC charged Oracle with books & records and internal controls FCPA violations without an attendant allegation of bribery. Rather, the SEC said in its complaint that “[f]rom 2005 to 2007, certain employees of Oracle's Indian subsidiary Oracle India Private Limited ("Oracle India") secretly "parked" a portion of the proceeds from certain sales to the Indian government and put the money to unauthorized use, creating the potential for bribery or embezzlement.” (emphasis added).
Thus, there is reason to explore what appears to some people to be an apparent expanded use of the statute by the SEC, without any evidence of a direct connection to bribery. This issue, in combination with the well-known and recognized absence of any sort of materiality threshold in the FCPA, has concerned people that such an interpretation allows the SEC even wider leeway than heretofore expressed.
Beyond that issue, though, in the same complaint there is an allegation that has not seen the same level of attention, but that is potentially indicative of a new regulatory expectation. Specifically, the complaint says that Oracle “failed to audit and compare the distributor's margin against the end user price to ensure excess margins were not being built into the pricing structure…” and “failed to seek transparency in or audit third party payments made by distributors…”
To date, many companies’ compliance officers, general counsel, and internal audit personnel – to the extent they have been focused on ‘auditing’ third parties at all – have paid the highest level of attention to sales agents and possibly government-facing vendors (e.g., customs brokers and the like). A typical justification for this approach has been that the companies treat sales to distributors as the same as sales to end-users, and that they are likely not even aware of the ultimate prices extended by distributors to end users.
The complaint, however, also seems to indicate that the SEC expects companies to know what those prices are, and to ‘seek transparency in or audit third party payments made by distributors.’ To a certain extent, this also seems to presuppose that the companies have anti-corruption audit rights in distributor contracts – rights at which many distributors balk, especially if they are not exclusive distributors for a single manufacturer.
Certainly, the SEC and DOJ have long expected companies to take actions to bolster anti-corruption compliance at distributors – but never before have they asserted in an FCPA claim, to my knowledge, that companies might be required to “audit” the difference between distributor prices and end user prices. So for now, are companies required to ask themselves: Do we know exactly what our distributors are doing, and do our contracts allow us to take a closer look?
Only time (and additional enforcement actions) will tell the tale…
Peter Viksnins is a Director in the Forensic Services practice at PwC in Washington, DC. Peter has been with PwC since 1998 and, in addition to other forensic accounting investigation experience, has extensive anti-corruption investigations, due diligence, and compliance consulting experience in Western and Eastern Europe, the Middle East, Latin America, and Asia.
He'll be co-presenting a webcast about “FCPA Compliance Audits” on November 26th at 1PM Eastern time – Blog readers can access a 50% discount via this link.
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