Anti-Bribery Compliance and Internal Controls of Subsidiaries

In terms of subsidiaries’ internal controls and anti-bribery compliance, the recent resolution by the Securities and Exchange Commission (SEC) of its investigation of Stryker Corporation is instructive.  As pointed out in the SEC’s cease and desist order, violations of both the accounting and record-keeping provisions were involved. All of the violations related to foreign subsidiaries of Stryker and all related in one way or another to bribing foreign officials whereby the books and records of the subsidiaries were falsified to conceal the improper inducements. Expenses were recorded “as legitimate consulting and service contracts, travel expenses, charitable donations, or commissions, when in fact the payments were improperly made . . . to obtain or retain business.”

Neither the parent corporation nor any of its U.S. subsidiaries were alleged to have engaged in any such practices.  Although bribery of foreign officials was involved on the part of the foreign subsidiaries whose practices formed the basis of the cease-and-desist order, no violations of the anti-bribery provisions of the FCPA were alleged.  Foreign subsidiaries of U.S. entities, including issuers, are not subject to the anti-bribery provisions.  However, foreign subsidiaries of issuers are subject to the accounting and record-keeping provisions when the results of the subsidiaries are consolidated into the financial statements of the parent.

In this particular situation, the parent was deemed to have effective anti-corruption policies at the corporate level.  “[B]ut these policies were inadequate and insufficiently implemented on the regional and country level.”  The significance of the holding in the cease-and-desist order is that, regardless of whether a foreign subsidiary may be subject to the anti-bribery provisions of the FCPA, the internal control provisions of the FCPA require that foreign subsidiaries of issuers have adequate anti-bribery compliance policies and procedures in place to “provide reasonable assurance that the company maintained accountability for its assets and that transactions were executed in accordance with management’s authorization.”

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