Porphyry is a type of stone that was much favored in the Roman world. In a review of several books in the New York Review of Books, entitled “The Purple Stone of Emperors”, Peter Brown looked into the history of the lithic in the context of Byzantium as the true heir of the Roman Empire. He theorized that if “porphyry was the blood of ancient empire, then it must be to Constantinople that we should look (and not to Western Europe) if we wish to understand the heritage of Rome in the Middle Ages.” I found that an appropriate way to think about an apparent anomaly in the recent Alstom Foreign Corrupt Practices Act (FCPA) enforcement action. In Part III of my series on the Alstom natter I consider the accounting records violations that the French parent, Alstom SA, agreed to in this enforcement action.
The FCPA Professor noted in his second blog post on this matter, entitled “Issues to Consider from the Alstom Action”, “The charges against Alstom S.A. are a real head-scratcher. The conventional wisdom for why the Alstom action involved only a DOJ (and not SEC) component is that Alstom ceased being an issuer in 2004 (in other words 10 years prior to the enforcement action). Yet, the actual criminal charges Alstom pleaded guilty to – violations of the FCPA’s books and records and internal controls provisions – were based on Alstom’s status as an issuer (as only issuers are subject to these substantive provisions). In other words, Alstom pleaded guilty to substantive legal provisions in 2014 that last applied to the company in 2004.”
The Professor had also raised this issue in his first blog post on the resolution, entitled “All About the Alstom Enforcement Action”. After considering his thoughts on this issue, I decided to look into it a bit more deeply. Alstom SA was charged with several different FCPA violations including the following, 15 U.S.C. 78m(b)(2)(A), 15 USC §78m(b)(2)(B) and 78m(b)(5) which read in whole,
15 U.S.C. § 78m [Section 13 of the Securities Exchange Act of 1934]
(b) Form of report; books, records, and internal accounting; directives…
(2) Every issuer which has a class of securities registered pursuant to section 78l of this title and every issuer which is required to file reports pursuant to section 78o(d) of this title shall—
(A) 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;
(B) devise and maintain a system of internal accounting controls sufficient
to provide reasonable assurances that—…
(5) No person shall knowingly circumvent or knowingly fail to implement a system of internal accounting controls or knowingly falsify any book, record, or account described in paragraph (2).
These provisions are generally referred to as the ‘accounting provisions’ of the FCPA. As stated in the FCPA Guidance, “In addition to the anti-bribery provisions, the FCPA contains accounting provisions applicable to public companies. The FCPA’s accounting provisions operate in tandem with the anti-bribery provisions and prohibit off-the-books accounting. Company management and investors rely on a company’s financial statements and internal accounting controls to ensure transparency in the financial health of the business, the risks undertaken, and the transactions between the company and its customers and business partners. The accounting provisions are designed to “strengthen the accuracy of the corporate books and records and the reliability of the audit process which constitute the foundations of our system of corporate disclosure.””
Moreover, these accounting provisions, including both the books and records and internal control provisions, are defined to apply to “issuers”. As set out in the FCPA Guidance, “The FCPA’s accounting provisions apply to every issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act or that is required to file annual or other periodic reports pursuant to Section 15(d) of the Exchange Act.244 These provisions apply to any issuer whose securities trade on a national securities exchange in the United States, including foreign issuers with exchange traded American Depository Receipts. They also apply to companies whose stock trades in the over-the-counter market in the United States and which file periodic reports with the Commission, such as annual and quarterly reports. Unlike the FCPA’s anti-bribery provisions, the accounting provisions do not apply to private companies.”
Charging Box Score
|Alstom Entity||Charges||Time of Criminal Conduct||Issuer Status|
|Alstom SA||15 USC §78m(b)(2)(A)15 USC §78m(b)(2)(B)15 USC §78m(b)(5)
15 USC §78ff(a)
18 USC §2
|1998-2004||Issuer until 2004|
|Alstom Power Inc.||18 USC §371-conspiracy to violate the FCPA||2002-2009||Subsidiary of Issuer until 2004|
|Alstom Grid Inc.||18 USC §371-conspiracy to violate the FCPA||2000-2010||Subsidiary of Issuer until 2004|
|Alstom Network Schweiz AG||18 USC §371-conspiracy to violate the FCPA||2000-2011||Subsidiary of Issuer until 2004|
While I agree with the above, I do disagree with the Professor’s final statement that “This free-for-all, anything goes, as long as the enforcement agencies collect the money nature of FCPA enforcement undermines the legitimacy and credibility of FCPA enforcement.” The reason I disagree is that this was a negotiated settlement, not a dictat or court proceeding. With no doubt excellent FCPA defense counsel involved, Alstom must have had its own reasons for agreeing to such a settlement. Without any further comment by the company, we will have to speculate as to some of the reasons for this component of the resolution.
First and foremost is that clearly Alstom did engage in conduct which substantially violated the FCPA. It would further appear that the conduct reached right up into the corporate home offices in France. By agreeing to the books and records and internal control violations, Alstom may have avoided any direct admission of guilt under French law, which we now know from the Total FCPA enforcement action is significant for a French company, because what is illegal bribery and corruption under US law is not necessarily illegal under French law.
Other than the anomalous French law issue, there may be another important consideration going on here. Alstom is under acquisition by General Electric (GE). Not only does GE pride itself and very publicly inform about its anti-corruption compliance program, GE has a large number of contracts with the US and other governments which might looks askance at doing business with a business unit that admitted to substantive FCPA violations of bribery and corruption. While I do not think that GE would be in danger of being debarred, it might well be that certain governments might not want to do business with a new subsidiary which made such a court admission. I find this to be more than simply a distinction without a difference. Consider the trouble that Hewlett-Packard (HP) is in north of the border in Canada regarding potential debarment by the Canadian government for its FCPA violations as set forth in its FCPA resolution of last April. So perhaps from Alstom’s perspective, the company believed it received benefits from settling based upon accounting violations.
But whatever the reason, it is clear that Alstom did engage in substantive FCPA violations. It’s settlement is that, a settlement of outstanding issues, which the company was a willing participant. It may not have been what the company wanted but I do not find that by charging Alstom for books and records and internal controls violations for the time frame it was clearly liable in any way demeans, degrades or lessens FCPA enforcement going forward. But just as we need to look to Byzantium to determine the heritage of Rome through the Middle Ages, by looking at the facts and circumstances around Alstom’s FCPA from the Alstom perspective and what it hoped to obtain in the settlement, we might be able to glean some insights.
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© Thomas R. Fox, 2015