In terms of FCPA compliance, it is often misunderstood that, in addition to majority-owned foreign subsidiaries of an issuer, the accounting and record-keeping provisions may also apply if the issuer holds an interest of 50 percent or less in the foreign entity.1 When an issuer holds an interest of 50 percent or less in the foreign entity, the issuer remains obliged to “proceed in good faith to use its influence to the extent reasonable under the circumstances to cause [the subsidiary] to devise and maintain a system of internal accounting controls” consistent with the requirements of the accounting and record-keeping provisions.2 In such circumstances, an issuer will be “conclusively presumed” to have fulfilled its statutory obligations when it can demonstrate its good-faith efforts to influence its subsidiary.3
In determining whether good-faith efforts are exercised, the relevant circumstances “include the relative degree of the issuer’s ownership of the domestic or foreign [entity] and the laws and practices governing the business operations of the country in which such [entity] is located.”4 The degree of effective control can be expected to bear directly on the evaluation of whether an issuer’s efforts are sufficient to demonstrate good faith on its part.5 An issuer’s duty to influence a subsidiary’s behavior increases directly with the degree to which it can exercise effective control over the subsidiary.6
115 U.S.C. § 78m(b)(6) (2012).
2Id.
3Id., § 78o(d).
4Id., § 78m(b)(6).
5The House Conference Report associated with the 1988 amendments to the FCPA in the Omnibus Trade and Competitiveness Act of 1988, explained,
[I]t is unrealistic to expect a minority owner to exert a disproportionate degree of influence over the accounting practices of a subsidiary. The amount of influence which an issuer may exercise necessarily varies from case to case. While the relative degree of ownership is obviously one factor, other factors may also be important in determining whether an issuer has demonstrated good-faith efforts to use its influence.
H.R. Rep. No. 576, at 917 (1988), reprinted in 1988 U.S.C.C.A.N. 1547.
6The SEC has taken action where an issuer has less than 50 percent control in terms of ownership. In Sec. & Exch. Comm’n v. BellSouth Corp., BellSouth consented to the entry of judgment for violating the FCPA’s record-keeping and internal controls provisions. Sec. & Exch. Comm’n v. BellSouth Corp., Litig. Release No. 17,310, 2002 WL 47178 (Jan. 15, 2000). In the accompanying administrative proceeding, in re BellSouth Corp,,Exchange Act Release No. 45,279 (Jan 15. 2002), BellSouth was found to have violated the internal control provisions. BellSouth’s Nicaraguan subsidiary, Telefonia Celular de Nicaragua, S.A. (Telefonia), improperly recorded payments to the wife of a Nicaraguan legislator who chaired a committee with oversight over the legislation that would enable BellSouth to acquire a majority interest in Telefonia. Initially, BellSouth purchased a 49 percent interest in Telefonia with an option to purchase another 40 percent interest. However, Nicaraguan law prohibited foreign ownership of 50 percent or greater interest in telecommunication companies. In spite of her lack of legislative experience, she was retained and ultimately paid $60,000. Bellsouth International, indirectly a wholly-owned subsidiary of BellSouth International, knew that payments to the lobbyist could implicate the FCPA. Nonetheless, a BellSouth International attorney approved Telefonia’s retention of the legislator’s wife. BellSouth was found to have “held less than 50 percent of the voting power of Telefonia, but through its operational control, had the ability to cause Telefonia to comply with the FCPA’s books and records and internal controls provisions.” BellSouth was found to have failed to devise and maintain a system of internal accounting controls at Telefonia sufficient to detect and prevent FCPA violations.
