Internal Controls: State-Owned Issuers

Sufficient attention is not always given to the unique characteristics of issuers that are also state-owned or state-controlled entities or otherwise classified as parastatals.  A surprising number of parastatals raise capital by listing in U.S. capital markets.  In doing so, they and their subsidiaries become directly subject to the accounting and record-keeping provisions of the FCPA.  One of the most famous parastatals is Petrobras, the Brazilian petroleum company that is one of the sources of the massive investigations currently taking place in Brazil.

Depending upon the country and the particular situation, many parastatals are subject to procurement rules and regulations.  The process by which goods and services are secured or projects undertaken are likely to be subject to a regulated bid process that may include considerable governmental oversight.  Particularly in certain parts of the world, the risks of corruption may, at times, be inherently greater when procurement processes are involved.

For issuers that may be largely stated-owned or controlled, or otherwise a parastatal, their internal controls and compliance officials must ensure that their procurement practices are fully compliant and not subject to improper influences.  Otherwise, there may be untold consequences to an entity.  Among others, the entity may become ensnarled in a corruption scandal that may have long-term implications in terms of disruptions, legal and related costs of an investigation, and shareholder lawsuits.

It must always be kept in mind that internal controls are not solely limited to concerns associated with foreign bribery.  They relate to whatever may lead to material misstatements of an entity’s financial statements.  Commercial bribery or kickbacks, whereby an entity may actually be the victim, should always be a focus of internal controls and compliance officials.  In a similar way, issuers that are parastatals need to be equally sensitive to the degree to which the procurement practices associated with their entities may be improperly influenced.