Audit Analytics For Bribery Act Compliance

By Steve Biskie

While the Foreign Corrupt Practices Act has been around for decades, the newly enacted U.K. Bribery Act (July 1, 2011) enforces even more far-reaching and stricter penalties. If you’re involved in audit, finance, legal, risk management or compliance in an organization doing any business in the U.K., be it directly or via subsidiaries, agents or branches, you’re probably already under pressure to address Bribery Act compliance.

You may already know that you need to establish a Bribery Act compliance program. Maybe you’ve started monitoring Bribery Act regulations manually, and are realizing that emailing spreadsheets isn’t cutting it as a sustainable compliance program.

So, how do you become efficient and effective at addressing Bribery Act requirements? The direct answer: develop an audit analytics strategy for Bribery Act testing as an integral part of your compliance program.

A technology-enabled strategy using audit analytics is a keystone of an effective and efficient Bribery Act compliance program. It’s risky to rely on “policies” alone – companies need to actively monitor transactions to ensure compliance with policies and ensure potential issues can be quickly identified without relying on a lot of additional manual effort.

An audit analytics strategy can help assure compliance with the UK Bribery Act in the following ways:

•        Look for ‘red flags’

•        Develop an early warning system

•        Continuously monitor key internal controls

•        Create instant notification of potential problem areas

This contributes to creating a culture where employees know that their actions are being reviewed -- a proven deterrent to non-compliance.

Over time, use of audit analytics combined with a process to follow-up and resolution of red flags may itself become a control and provide evidence of having “adequate procedures” in place.

Audit analytics will allow you to perform detailed analysis of your business transaction data against red flag scenarios and enables repeatable testing -- essential steps in creating an effective compliance program.

To learn more about how to use audit analytics as part of a comprehensive UK Bribery Act compliance strategy, download the free eBook: Don’t Get Stung by the UK Bribery Act: Leveraging audit analytics for compliance testing.

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Steve Biskie, CPA, CITP, CISA, is the Director of Customer Solutions, ACL Services.

One Of The Great Ones

By Michael Volkov

Former federal judge Stanley Sporkin (left) is one of my heroes. Yes, I am biased. As an Assistant U.S. Attorney at the Justice Department in Washington, D.C., I tried several cases before him, and in private practice, I have collaborated with him on many projects.

My admiration, however, extends back to events surrounding the enactment of the FCPA. Judge Sporkin has told the story many times but it is a story worth retelling. Of course, he is too modest to remind everyone of his critical role in the creation of the FCPA. His role is not laid out in any legislative history -- which is all too often inaccurate and omits key behind the scenes conversations and contacts.

In the midst of the Watergate scandal hearings before the Senate Select Committee in the early 1970s, corporate executives testified about slush funds which were being used to fill the coffers of President Nixon’s re-election campaign, which prophetically had the acronym of CREEP (Committee to Re-Elect the President). Judge Sporkin -- who was then serving as the Director of Enforcement at the SEC -- wondered how companies were recording these transactions on their books.

He opened investigations and discovered that the companies were not accurately recording these transactions. He was shocked that public companies were not required to do so by any law or regulation. As his investigations proceeded, Judge Sporkin opened the government’s eyes to a vast network of corporate bribery and unrecorded funds used to pay foreign governments and conduct other improper activities.

In response to these discoveries, Judge Sporkin came up with the idea that publicly-traded companies should be required to keep accurate books and records. As he testified before Congress,

Most of all, I was amazed that there was no requirement that publicly traded corporations maintain honest books and records. My research of the various laws did reveal that such a “books and records” requirement was included in the laws governing this nation’s financial institutions. It occurred to me that if such a requirement was good enough for this nation’s brokerage and banking institutions, why not for its industrial concerns?

I became convinced that what was necessary was a simple law that would require corporations to keep accurate books and records. In my view, a corporation would think twice before it recorded a bribe for what it was. Since bribery is generally considered a crime, it would be virtually untenable for someone to admit in writing that the corporation is engaging in such activities on an ongoing basis. Bribery needs secrecy in order to flourish. Thus, I theorized that requiring the disclosure of all bribes paid would, in effect, foreclose that activity.

Judge Sporkin worked behind the scenes within the SEC and with Senator William Proxmire to design the FCPA, which was ultimately enacted in 1977. Interestingly, Judge Sporkin did not advocate for the foreign bribery prohibition because he thought it would be too difficult to detect and prove. But he viewed the accurate books and records requirement as an easier tool to deter companies from engaging in such behavior. Senator Proxmire ultimately insisted on putting a foreign bribery prohibition in the law and the rest is history, as the saying goes.

Judge Sporkin continues today to help companies navigate the FCPA to ensure compliance. He stands as one of the great ones and will forever hold a unique place in history.

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Michael Volkov is the primary contributor to Corruption, Crime & Compliance. He's a former federal prosecutor and now a partner at Mayer Brown LLP in Washington, D.C. He regularly counsels and represents clients on FCPA and UK Anti-Bribery Act issues. He can be contacted here.

 A version of this post recently appeared on Corruption, Crime & Compliance.

To Test Internal Controls, Ask: How Long?

The speaker was a national partner in a big accounting firm. What he said was simple and profound: "When it comes to internal controls, ask yourself how long it would take to detect an improper payment. Would it take a year, a quarter, or a month? That's how you test your company."

The room full of controllers, internal auditors, accountants, and lawyers was quiet.

The speaker continued: "Companies routinely go the extra mile vetting suppliers, agents, and joint venture partners. But when that's done and the decision is made to work with the third party, what then? Will the controls in place uncover improper payments the intermediary might make to government officials? Who's checking third-party invoices to confirm the services rendered are worth the amount of the invoice?"

Someone in the audience asked how deep into the invoices the review needs to go. What are best practices for internal controls?

"There's no easy answer," the speaker said. "But again, ask yourself how long it would take to discover improper payments by your suppliers. The longer the time, the weaker your argument that the company didn't act 'knowingly' in paying bribes indirectly through the third party."

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The internal control provisions at 15 U.S.C. Section 78m(b)(2)(B) require issuers to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that--

(i) transactions are executed in accordance with management's general or specific authorization;

(ii) transactions are recorded as necessary (I) to permit preparation of financial statements in conformity with generally accepted accounting principles or any other criteria applicable to such statements, and (II) to maintain accountability for assets;

(iii) access to assets is permitted only in accordance with management's general or specific authorization; and

(iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

Maxwell Settles China Bribes Case [Updated]

California-based Maxwell Technologies Inc. agreed with the DOJ to pay $8 million to resolve criminal FCPA charges and with the SEC to pay $6.3 million in disgorgement and prejudgment interest to resolve civil charges.

The DOJ gave the company a three-year deferred prosecution agreement. Maxwell can pay the $8 million criminal penalty in three installments over two years.

The energy-storage company admitted bribing Chinese government officials to win sales to state-owned manufacturers of electric-utility infrastructure in several Chinese provinces. It was charged in a two-count information with one count of violating the FCPA’s anti-bribery provisions and one count of violating the books-and-records provisions.

A Swiss subsidiary of Maxwell paid at least $2.5 million in bribes from 2002 through May 2009 for contracts that generated more than $15 million in revenues. A Maxwell executive approved sales contracts with the Chinese state-owned entities knowing that the purchase orders were inflated by 20% to cover the bribes.

The bribes were made with the knowledge and tacit approval of certain former Maxwell officials, the SEC said. "For example, the complaint alleges that former management at Maxwell knew of the bribery scheme in late 2002, when an employee indicated that a payment made in connection with a sale in China appeared to be 'a kick-back, pay-off, bribe, whatever you want to call it, . . . . in violation of US trade laws.' A U.S.-based Maxwell executive replied that 'this is a well know[n] issue" and he warned '[n]o more emails please.'"

In the books and record count of the criminal information, the DOJ said Maxwell "knowingly falsified and caused to be falsifibd books, records, and accounts required to, in reasonable detail, accurately and fairly reflect the transactions and disposition" of the company and its assets.

The Chinese customers mentioned in the information included Pinggao Group Co. Ltd. in Henan Province, New Northeast Electric Shenyang HV Switchgear Co., Ltd. in Liaoning Province, and Xi-an XD High Voltage Apparatus Co. in Shaanxi Province.

Maxwell Technologies Inc. trades on NASDAQ under the symbol MXWL.

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View the DOJ January 31, 2011 release here.

Download a copy of the criminal information in U.S. v. Maxwell Technologies, Inc. here.

Download a copy of Maxwell's deferred prosecution agreement here.

View SEC's Litigation Release No. 21832  and Accounting and Auditing Enforcement Release No. 3236 (both dated January 31, 2011) in U.S. Securities and Exchange Commission v. Maxwell Technologies Inc., Civil Action No. 1:11-CV-00258 (DDC) (BAH) here.

View the SEC's civil complaint against Maxwell here.

Where Is Canada, Really?

Canada has the Corruption of Foreign Public Officials Act (CFPOA). It has signed three international anti-corruption treaties -- the OECD Convention, the OAS Inter-American Convention Against Corruption, and the U.N. Convention Against Corruption. And it has incorporated its international obligations into Canadian law.

Despite all that, there's only been one case decided under the CFPOA, and that's Hydro Kleen Group. There's one case known to be pending involving Nazir Karigan. And Niko Resources, a publicly listed firm,  disclosed it's being investigated under the CFPOA.

That's it.

So why does it appear Canada is moving against international graft at barely a crawl?

The answer, according to a great post yesterday by Cyndee Todgham Cherniak on the Trade Lawyers Blog, may be found not in the similarities between U.S. and Canadian enforcement, but in the differences.

Among the facts she mentioned were these:

1. Canada's CFPOA was enacted in 1999 and therefore is only 11 years old. The first 11 years of the FCPA also saw a small number of prosecutions. [Editor's note: By our count, there were about six DOJ and / or SEC enforcement actions per year on average from 1978 through 1989.]

2. Canada has a population of about 34 million; the U.S. about 310 million. The volume of Canada's business in foreign jurisdictions is proportionately lower than U.S. business overseas.

3. The CFPOA doesn't contain internal controls and accounting requirements like those in the FCPA. Cases don't arise from company reports to Canada's equivalent of the SEC.

4. Canada doesn't have voluntary disclosure for companies and company officials. There isn't a mechanism to negotiate the payment of a fine without going through a prosecution.

5. When there's a Canadian investigation, the Royal Canadian Mounted Police, International Anti-Corruption Unit (RCMP, IACU) don't talk about it. And they don't organize "perp walks" or publicize active investigations.

6. Canada's criminal justice system doesn't include grand juries. The RCMP gather information and the Crown decides whether to prosecute.

7. Canadian law doesn't permit tax authorities to share information received during an income tax, sales tax, or other tax audit.

8. The CFPOA doesn't apply where the bribery has no "real and substantial connection" to Canada. In 2009, the Minister of Justice tabled legislation (Bill C-31) to incorporate a nationality principle in Canada's CFPOA. It didn't pass and hasn't been re-introduced.

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Cyndee Todgham Cherniak's post was adapted from an October 2, 2010 presentation she gave at the University of Windsor, Center for Transnational Law and Justice. Our special thanks to her for allowing us to summarize it.

She can be reached by email here.