President Trump signed on February 10 an executive order (the “Executive Order”)[1] directing the U.S. Attorney General over the next 180 days to (i) review the guidelines and policies governing investigations and enforcement actions under the Foreign Corrupt Practices Act (“FCPA”), (ii) review existing FCPA investigations and actions, and (iii) cease initiation of any new such investigations and actions.  According to a White House Fact Sheet, the president issued the Executive Order because “over enforcement … prohibit[s] U.S. companies from engaging in practices common among international competitors.”[2]

The focus of the Executive Order appears to be Justice Department enforcement of the FCPA’s criminal prohibitions on the making of certain payments intended, directly or indirectly, to reach foreign officials. The scope of the direction to the Attorney General could, however, be understood to sweep in all aspects of FCPA enforcement.  In addition to the ban on bribing foreign officials, the FCPA contains separate provisions that concern proper books and records and internal controls for publicly traded issuers.  These accounting provisions require SEC-registered companies to (a) make and keep books and records that accurately and fairly reflect the transactions of the corporation and (b) devise and maintain an adequate system of internal accounting controls.

We urge that the Executive Order should not lead to any lessening by the SEC in its efforts to secure compliance with these books and records and internal controls provisions, efforts that are essential to confidence in the financial condition and reporting of U.S. public companies.

We start by recalling the origins of the FCPA.  In the mid-1970s, the Office of the Watergate Special Prosecutor brought charges against the executive officers of a number of corporations for illegal domestic political contributions in connection with President Nixon’s 1972 reelection campaign.  These charges were followed up by an SEC inquiry and a report to Congress (the “SEC Report”).[3]  The inquiry revealed not just that many corporations had made illegal domestic political contributions of the sort charged by the Special Prosecutor. It found as well that many had made “questionable or illegal payments” intended to be received, directly or indirectly, by foreign officials.[4]

The revelation of these foreign payments prompted a reaction by members of both Congress and the executive branch.  A number of congressional hearings and proposed bills followed.[5] In the associated debate, many participants expressed distress over the impact of such payments on U.S. foreign relations.  There was distress as well concerning how these payments undermined the sense of integrity associated with the U.S. corporation – an important institution in American life – and the very legitimacy of the free enterprise system.  At the same time, fears were expressed that, to the extent that U.S. firms were prohibited from making such payments, they would be at a disadvantage vis-a-vis their foreign competitors. There was considerable debate concerning whether such payments should be subject to criminal prohibition at all, and, if so, what the scope of any prohibition should be.

In the end, Congress included in the FCPA criminal prohibitions on direct and indirect payments to government officials when made to obtain business or influence regulations or legislation. Reflecting the concern that such prohibitions could put U.S. firms at a competitive disadvantage, “facilitating” or “expediting” payments were excepted.  For companies trading on U.S. exchanges, these prohibitions were contained in a new Section 30A of the Securities and Exchange Act of 1934 (the “Exchange Act”).[6]   As the Executive Order attests, however, debate concerning how to balance the damage these payments cause to U.S. interests against the fear of competitive harm, [7]or indeed whether there even is such harm,[8] has never really ended.  After almost five decades, the waters surrounding these regulations remain unstill.

The FCPA’s books and records and internal controls provisions have their own story. According the SEC Report, the Commission’s inquiry revealed “falsifications of corporate financial records, designed to disguise or conceal the source and application of corporate funds misused for illegal purposes, as well as the existence of secret ‘slush funds’ disbursed outside the normal financial accountability system.”[9]  In one particularly spectacular example, Lockheed was found to have maintained an off-books fund of a size, though not precisely known, believed to be in the order of hundreds of millions of dollars.  This fund was so concealed that it was apparently beyond the control or even knowledge of key senior executives.  The SEC Report suggested that the corporate record falsifications and slush funds revealed in its inquiry “cast doubt on the integrity and reliability of the corporate books and records, which are the very foundation of the disclosure system established by the federal securities laws.”[10] The fictitious or unrecorded transactions necessary to make these payments required falsification of corporate financial records, and created the opportunity for all sorts of misuse of corporate funds including outright theft.  All this happened without the apparent knowledge of the outside board members of most of the corporations involved and showed an absence of internal accounting controls sufficient to assure that corporate transactions were subject to proper management authorization.[11]  In sum, the discovery of these contributions and payments represented a “canary in the coal mine” with regard to a larger problem of lack of accountability for corporate funds.  Hence, the genesis for the financial reporting provisions of the FCPA.

Throughout the process of congressional hearings leading up to passage of the FCPA, the SEC took the position that it was uninterested in policing corporate morality.[12]  Its concern, instead, was with what its inquiry revealed concerning gaps in the SEC’s primary mission: promoting full and fair disclosure.[13]  The SEC therefore sought that any legislation include provisions requiring that every publicly traded issuer maintain books and records accurately reflecting its transactions and disposition of assets, and internal controls sufficient that its transactions are authorized and properly recorded.[14]  The FCPA, as it was finally adopted, included such provisions, adding them as Section 13(b)(2) to the Exchange Act.[15]

President Trump’s Executive Order was addressed to the Justice Department, not to the SEC.  As noted, it was prompted by longstanding concerns about how to balance the damage to U.S. interests caused by U.S. corporation payments to foreign officials against the need of these corporations to compete effectively against foreign rivals.  Regardless of how that debate should be resolved, the review by the Attorney General should not lead to any lessening by the SEC of its efforts to secure compliance with Section 13(b)(2), a provision that goes to the Commission’s central role: promoting full and fair disclosure.  Much more is at stake here beyond any effect of Section 13(b)(2) at deterring payments to foreign officials.  The books and records and accounting controls requirements of the FCPA are important not simply because these requirements make it more likely that the anti-bribery provisions will be effective, but because they help provide the foundations of reliable financial reporting.

First, by requiring an effective control system, the FCPA reinforces basic corporate governance in which the board of directors is responsible for overseeing corporate expenditures and reduces the risk of “agency costs” in the form of the unauthorized use of corporate assets. Examples of weak controls that have been discovered in enforcement proceedings include allowing an individual employee the ability to expend significant amounts without any review or approval by a second employee or supervisor. Companies with inadequate controls have been found to have engaged in many misuses of corporate funds beyond illegal bribes to foreign or domestic officials.[16] Such companies have been found to have made unauthorized payments to senior officers,[17] to have engaged in deceptive “round-trip” transactions with third parties that inflate trading volumes and revenues,[18] and to have had employees misuse extensive amounts of funds for personal and unauthorized purposes, such as luxury travel.[19]

Second, by requiring accurate books and records, the FCPA helps provide a reliable foundation for the preparation of financial statements and reports to shareholders and the public. Audits by independent auditors of those financial statements also depend on accurate underlying books and records. Examples of failures to comply with this component of the FCPA include inflating revenues by failing to account for customer rebates,[20] falsely underreporting tax liabilities,[21] or fraudulently overbilling customers.[22] SEC rules adopted under the Exchange Act to implement Section 13(b)(2) extend to any person with control over public companies’ books and records and accounts and creates a deterrent against employees falsifying basic components of the U.S. financial reporting system.[23]

As a matter of enforcement, too, the FCPA is an important part of the SEC’s toolkit, because its requirements do not require proof of “scienter,” or intent by companies or employees.[24] For companies, it suffices to show that accounts were falsified, even without clear proof that anyone intended that result, or that the controls over assets did not exist or were inadequate to prevent unauthorized uses; and for individuals, failure to take reasonable steps to comply suffice. Because intent is frequently a difficult element to prove in enforcement cases, the ability of the SEC to investigate misuse of corporate assets without regard to proving willfulness or specific intent helps give companies appropriate and efficient incentives to safeguard investor assets from negligent or unintended but unauthorized actions of employees.

Without the basic elements of financial reporting required by the FCPA, investors could not be sure of the value or even the basic activities of public companies were as reported. Financial misreporting would be more common and significant, asset pricing would be less accurate, and capital markets would function less effectively. The FCPA’s books and records and accounting controls requirements should continue to be vigorously enforced by the SEC.

ENDNOTES

[1] Pausing Foreign Corrupt Practices Act Enforcement to Further American Economic and National Security (February 10, 2025), available at https://www.whitehouse.gov/presidential-actions/2025/02/pausing-foreign-corrupt-practices-act-enforcement-to-further-american-economic-and-national-security/.

[2] Fact Sheet: President Donald J. Trump Restores American Competitiveness and Security in FCPA Enforcement (February 10, 2025), available at https://www.whitehouse.gov/fact-sheets/2025/02/fact-sheet-president-donald-j-trump-restores-american-competitiveness-and-security-in-fcpa-enforcement/.

[3] U.S. SEC. & EXCH. COMM’N, REPORT OF THE SECURITIES AND EXCHANGE COMMISSION ON QUESTIONABLE AND ILLEGAL CORPORATE PAYMENTS AND PRACTICES (1976).

[4] Id. at 2-3.

[5] A detailed history concerning the actions of members of Congress and the executive during the period from the revelation of the Watergate illegal political contributions to the enactment of FCPA can be found in Mike Kohler, The Story of the Foreign Corrupt Practices Act, 73 Ohio St. L. J. 929 (2012).

[6] Prohibitions against such payments on U.S. issuers not traded on a U.S. exchange were added in 1988. 15 U.S.C. Section 78dd-2.

[7] One approach to dealing with the fear of competitive harm has been to encourage governments of other countries to prohibit their issuers from making such payments.  In this connection, Congress in 1998 amended the FCPA to extend to foreign corporations its prohibitions against making payments when a foreign corporation or its agent undertakes acts within the territory of the United States.  This was the result of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions  (OECD Convention), entered into in 1997, which required the United States and the 33 other signatories to adopt such legislation. There have been complaints, however, that because of lax enforcement, the legislation adopted by other countries pursuant to the OECD Convention has not solved the competitive disadvantage problem. See, e.g., New York City Bar Association, Committee on International Business Transactions, The FCPA and Its Implications on International Business Transactions: Should Anything be Done to Minimize the Consequences of the U.S.’s Unique Position on Combating Offshore Corruption 3 (2011); Rachel Brewster, The Domestic and International Enforcement of the O.E.C.D Anti-Bribery Convention, 15 Chicago J. Int’l. L. 84, 87-88 (2014).

[8] Rebecca Perlman and Alan Sykes, for example, point to the fact that despite the political power of large corporations in the United States, the legislation has remained on the books for many decades and has been the object of vigorous enforcement. A possible explanation, they suggest, is that although the payment prohibitions may lead to some lost opportunities for U.S. firms, the many deals that they still obtain are more profitable because the FCPA payment prohibitions tend to protect them from extortion. Rebecca Perlman & Alan Sykes, The Political Economy of the Foreign Corrupt Practices Act: An Exploratory Analysis, 9 J. L. Analysis 153, 156-57 (2017).

[9] SEC Report, 3.

[10] Id.

[11] Joel Seligman, The Transformation of Wall Street: A History of the Securities Exchange Commission and Modern Corporate Finance 539-544, 547-548 (revised ed. 1995).

[12] See, e.g., The Activities of American Multinational Corporations Abroad: Hearings Before the Subcomm. on Int’l Econ. Policy of the H. Comm. on Int’l Relations, 94th Cong. 2 (1975) at 59–60 (statement of Raymond Garrett, Chairman, U.S. Sec. & Exch. Comm’n).

[13] Id., Kohler, supra note 5, at 961-964.

[14] SEC Report, 13.

[15] These requirements were revisited in the landmark Sarbanes-Oxley Act of 2002, which built on the FCPA by calling for executive certification in SEC filed reports attesting, among other things, that the financial reporting system is not flawed by a material deficiency in internal controls.  Today, such certification is further attested to by the firm’s auditor if the issuer’s revenues exceed $100 million.

[16] Such illegal payments to officials have been found as well. https://www.sec.gov/newsroom/press-releases/2014-285; SEC v. Li, 2022 WL 2304174 (2022).

[17] SEC v. Black, 2008 WL 4394891 (2008) (unauthorized payments to CEO).

[18] SEC v. Hopper, 2006 WL 778640 (2006).

[19] SEC v. Das, 723 F.3d 943 (8^th Cir. 2013) (misuse of funds for personal travel and maintenance of yacht).

[20] https://www.sec.gov/newsroom/press-releases/2016-25.

[21] https://www.sec.gov/newsroom/press-releases/2017-29.

[22] https://tinyurl.com/2phjta9h.

[23] https://www.journalofaccountancy.com/issues/2019/oct/fraud-risk-bribes-in-financial-accounts-expense-categories/

[24] SEC v. Das, 723 F.3d 943 (8^th Cir. 2013) (SEC required only to show negligence in the falsification of records).

This post comes to us from The Shadow SEC, whose members are professors John Coates at Harvard Law School, John C. Coffee, Jr. at Columbia Law School, James D. Cox at Duke University School of Law, Jill E. Fisch at the University of Pennsylvania Law School, Merritt B. Fox at Columbia Law School, and Joel Seligman at Washington University School of Law.