FCPA Internal Controls: Minority-Owned Subsidiaries

In terms of internal controls and anti-bribery compliance, for attorneys, international lawyers, in-house counsel, accountants, consultants and others providing advice to issuers, it must always be kept in mind that there are situations where the accounting and record-keeping provisions apply to minority-owned subsidiaries.  In general, issuers are foreign and domestic publicly-held companies listed on an exchange in the United States or foreign companies with ADRs listed on an exchange.  In context of the bribery of foreign officials, through the application of the FCPA’s accounting and record-keeping provisions, the SEC has taken action where an issuer has less than 50 percent control in terms of ownership of a subsidiary.

In the SEC’s 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, the wife of the Necaraguan legislator 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.  It was also determined that BellSouth International officials “knew or should have known that the attorney lacked sufficient experience or training to enable him properly to opine on the matter.”  In that same proceeding, BellSouth was also found to have violated the record-keeping provisions for actions on the part of its Venezuela subsidiary, Telcel, C.A., for recording payments totaling $10.8 million to six offshore companies based on fictitious invoices for services rendered.

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