The Securities and Exchange Commission (“SEC”) recently penalized a public company for violating U.S. economic sanctions. The violation cited the “books and records” and “internal controls” provisions of Securities Exchange Act of 1934 (the “Exchange Act”). With this unprecedented action, the SEC has put companies on notice that the Department of Justice (the “DOJ”) and the Office of Foreign Assets Control (“OFAC”) are not the only sanctions enforcers in Washington.
It is well known that under Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act – enacted as part of the Foreign Corrupt Practices Act (“FCPA”) – public companies must keep accurate books and records and maintain internal controls sufficient to ensure that transactions are executed in accordance with management directives and accurately recorded for reporting in the company’s financial statements. The SEC often cites public companies for violations of these provisions in cases involving allegations of foreign bribery. In this context, the SEC often will assert that a public company violated these provisions by disguising the illicit transactions in its books and records and by failing to maintain internal controls capable of detecting and preventing such transactions.