RECORDS RETENTION AND LITIGATION: U.S. AND GLOBAL LEGAL ISSUES

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1 RECORDS & DOCUMENT MANAGEMENT EXPERTS RECORDS RETENTION AND LITIGATION: U.S. AND GLOBAL LEGAL ISSUES By: David O. Stephens, CRM, FAI Senior Vice President of Consulting 2013 Zasio Enterprises, Inc. All rights reserved.

2 RECORDS RETENTION AND LITIGATION: U.S. AND GLOBAL LEGAL ISSUES Page 2 of 9 Records retention has been the mainstay of records management practice in the United States for many years. However, how long business records are retained is not just an issue for companies based in the U.S. Indeed, it is relevant wherever records are kept. Multinational companies and other international organizations have business offices and records throughout the world. Too, governments throughout the world impose numerous laws and regulations requiring regulated parties to retain certain records for specified lengths of time, and regulated parties are obliged to comply with them fully, in letter, spirit and good faith. This issue is most acute in the U.S., but it exists in lesser degree in other parts of the world. These government-imposed retention requirements frequently add confusion and uncertainty to questions concerning what a multinational company s information retention policies should be. They must, however, be carefully considered by every global company that wishes to develop a formal program for the management of the information life cycle.

3 RECORDS RETENTION AND LITIGATION: U.S. AND GLOBAL LEGAL ISSUES Page 3 of 9 Moreover, businesses everywhere must conduct business in a litigation-intensive environment. This issue is somewhat less onerous in countries outside the U.S. Even so, records retention as a tool for minimizing the risks of the documents in litigation remains a valid strategy for multinational companies. For example, manufacturing operations conducted abroad do not necessarily render U.S.-based multinationals invulnerable to the risks of liability lawsuits. If products are made abroad and sold in global markets, and if their use causes harm to the user, the manufacturer can still be sued on account of the unsafe performance of the product. And, in the event of a lawsuit, records maintained in overseas jurisdictions are discoverable to the same extent and in the same manner as those stored in the United States, and failure to produce them may subject multinational companies to sanctions. The balance of this article contains recommendations for mitigating these risks through a global records retention strategy. COMPLYING WITH INTERNATIONAL RETENTION REQUIREMENTS First and foremost, records retention must be about complying with the law. When overseas companies establish plants or other business offices here in the United States, those facilities are obliged to comply with our laws. The reverse is also true: For business units of multinational corporations that are located outside the U.S., adherence to the laws of the country of domicile is usually required including records retention laws. However, as previously noted the main difference is the fact that the records retention regulatory climate is such that compliance is often somewhat simpler than it is in the U.S. This is because most countries have enacted only a few laws relative to records retention. This is in sharp contrast to the situation in the U.S., which has promulgated literally thousands of records retention statutes and regulations, thereby making compliance a difficult task. Except for the U.S., Canada, Australia and the United Kingdom, most countries have enacted only a few laws related to records retention; most of these apply to accounting and general business records and were imposed primarily for tax administration purposes.

4 RECORDS RETENTION AND LITIGATION: U.S. AND GLOBAL LEGAL ISSUES Page 4 of 9 LOCATING INTERNATIONAL RETENTION REQUIREMENTS Locating international retention requirements is the most challenging research task in all of records management. Conducting this type of research is a process of doing the easiest tasks first, followed by the harder and hardest tasks. While a researcher can spend literally months if not years in this research, the goal is to be practical do the best job you can using readily obtainable sources available here in North America, and then see whether any in-country research will be required in order to do an acceptable if not definitive job. First, multinational records managers should first see what can be obtained from in-company sources. If you have records personnel scattered in offices around the world, them and ask them to send you any retention laws and regulations in their possession. If your company has in-country lawyers, them and ask them to send you anything they have, and / or to recommend sources or areas of the law that need to be checked. Our experience in working with international lawyers has been that they will typically make a quick check and send whatever they can easily find, but this almost never yields anything close to definitive results. Most corporate attorneys specializing in international law have neither the time nor the inclination to perform research of this nature. They simply have too many other priorities. For these reasons, this type of research is usually best performed by a researcher who has experience in conducting legal records retention research, and who thus knows what to look for and how to evaluate the relevance of what is found. Finally, we recommend that attorneys with multinational companies participate in the research project, particularly in making decisions concerning its scope and methodology, and in reviewing the results and applying them to the company s information management policies and programs.

5 RECORDS RETENTION AND LITIGATION: U.S. AND GLOBAL LEGAL ISSUES Page 5 of 9 CONDUCTING INTERNATIONAL LEGAL RETENTION RESEARCH With the spread of the Internet and the World Wide Web over the last ten years, most industrialized countries have made all or part of their legal content available free at government or university sponsored web sites. Other free Internet sources are from non-governmental institutions that specialize in a specific area of law such as environmental or labor. If a particular website has a robust search engine, search queries should be formulated consisting of words such as record(s); document; dossier; file; keep; retain; retention; year(s); life; permanent. While the Internet has indeed revolutionized international legal research, locating retention laws and regulations sometimes requires the use of traditional, library-based methods. Law libraries at large universities often collect paper copies of laws and regulations from a specific region and these can be researched, although not quite as readily as online sources. Further, there are active networks of international law librarians and region/country legal scholars; these sources can be very helpful in locating specific laws. Regardless of whether Internet-based or traditional sources are consulted, any search for international records retention laws and regulations should encompass the following areas of the law: Companies acts Commercial codes Tax codes Civil codes Labor codes Environmental codes Securities exchange / bourse rules To cite a few examples, the labor codes in civil law countries often have articles or sections concerning the keeping of workers wage and payment records or prescription periods specifying the time limitation when workers are permitted to bring actions against employers. The commercial codes will often contain provisions pertaining to the retention of books and records

6 RECORDS RETENTION AND LITIGATION: U.S. AND GLOBAL LEGAL ISSUES Page 6 of 9 that will apply to the organization s ledgers and journals, as well as other financial records and tax documentation. Retention requirements range between 5 and 15 years. The tax codes often contain specific retention requirements applicable to tax documentation maintained by corporate taxpayers. Retention requirements generally range between 5 and ten years. The tax codes also usually include limitations on assessment or prescription periods after which revenue authorities may no longer assess additional taxes. These provisions are of direct relevance to the retention of tax documentation. Again, these periods generally range between 5 and ten years. STATUTES OF LIMITATIONS / PERIODS OF PRESCRIPTION As is the case here in the U.S., statutes of limitations (or periods of prescription, as they are called in civil law countries) are a major factor in establishing retention periods for business records in countries throughout the world. And, as is true here, these laws are not requirements to retain records; they simply specify how long parties can sue or be sued concerning a certain matter. Multinational companies have a major interest in retaining such records as may be needed to institute legal proceedings against other parties, or defending themselves against unwarranted claims brought by other parties. Thus, they may define and limit risk and liability where the retention of records is concerned. These laws can be found in prescription or limit of action times that are contained in the civil, commercial, labor, and tax codes of all countries. Those pertaining to general contracts, taxation, product liability, and personal injury (tort) are of direct relevance to records retention. Once these laws have been discovered, multinational records managers should work with their legal counsel to incorporate them in all relevant retention policies of global coverage.

7 RECORDS RETENTION AND LITIGATION: U.S. AND GLOBAL LEGAL ISSUES Page 7 of 9 INTERNATIONAL RETENTION REQUIREMENTS: EXCEPTIONS FROM US NORM In terms of their duration, while many global retention requirements are substantially the same as they are here in the U.S., many others are not. In such cases, many of these tend to be longer than either law or prevailing practice. Thus, they may be thought of as exceptions from the U.S. norm. Let s review a few of these: Argentina Under the Commercial Code certain accounting records (financial statements, ledgers and journals) required to be retained until closure of business plus 10 years. Belgium Under the law relative to accounting and the yearly accounts of enterprises, accounting records / tax documentation required to be retained for 10 years. China Under Rules for the Implementation of the Law on the Administration of Tax Collection, accounting records / tax documentation are required to be retained for 10 years. Czech Republic Under the Accounting Act, pension records and wage records supporting pension benefits are required to be retained for 20 years. Germany Under the Commercial Code, certain accounting records are required to be retained for 10 years. Japan The Commercial Code requires accounting and certain other business records to be retained for 10 years. Mexico The Commercial Code requires certain accounting records to be retained for 10 years. Puerto Rico The Commercial Code requires merchants to preserve books, telegrams and correspondence of their business in general until closure (liquidation of all commercial transactions) plus 5 additional years.

8 RECORDS RETENTION AND LITIGATION: U.S. AND GLOBAL LEGAL ISSUES Page 8 of 9 Russia The Labor Code requires employee accident and injury records to be retained for 45 years. South Africa Regulations pertaining to the retention and preservation of company records requires certain accounting records to be retained for 15 years. Venezuela The Commercial Code requires the retention of certain accounting records for 10 years. FORMULATING GLOBAL RETENTION POLICIES: SUGGESTED PRACTICE GUIDELINES In developing retention policies of global coverage, the best advice is to ensure that your retention schedules comply with all applicable laws and regulations, and that the retention periods can be demonstrated to meet the test of reasonableness and good faith. Moreover, in cases where a particular type of record is likely to be used in litigation, regulated parties may feel at liberty to establish short retention periods (assuming all relevant statutory and regulatory requirements have been satisfied), but not so short so as to raise questions of bad faith. This means that, in cases where multinational companies knew or should have known that a given set of records is likely to encounter usage in resolving legal disputes, the retention period should be established with such usage in mind. Thus, the retention period should be long enough so that opposing parties cannot impute bad faith, in cases where the records have been discarded in an otherwise lawful manner. The following suggested practice guidelines are designed to achieve these objectives. Absent other guidance, standardize on US rules In cases where a particular type of record is not governed by foreign retention requirements, multinational companies should simply adhere to their current U.S. retention periods as their global default standard. Where global norms exceed US practice, adopt them In globalizing its retention policies, it is a given that many U.S.-based retention periods will have to be lengthened in order to accommodate global requirements. Perhaps the most prominent example of this scenario

9 is finance and accounting records. As discussed earlier, most U.S.-based multinational companies retain many accounting and general business records for retention periods ranging from five to seven years. However, as indicated above, many global retention requirements applicable to these records specify ten-year retention periods. We generally recommend that multinational firms adopt a tenyear retention period for most finance / accounting records, unless law and practice necessitate a longer period. Consider limitations of action, but apply judiciously As was discussed earlier, while the implications of these laws should be considered as one factor in setting global retention periods, multinational firms should not let these laws drive the decisions concerning how long certain affected records should be retained. It should be remembered that, while these laws do that implications for how long certain records should be retained, they are not themselves retention requirements (they only indicate how long parties have to bring a lawsuit or other legal action against another party). Thus, multinational firms are under no obligation to retain records until the expiration of the longest statute of limitation / period of prescription for all countries in which they conduct business, nor should they necessarily do so. For excessively long single-country requirements, issue exception policies For excessively long retention requirements of a single country, multinational companies should make reasoned decisions as to their approach for complying with them. Two prominent examples are the laws of Argentina and Puerto Rico, which require accounting records to be retained until closure of business plus 10 and 5 years, respectively. In these cases, the best strategy is to issue single-country exception retention policies which mandate compliance for the business operations located there. Acknowledgements The author wishes to extend special thanks to Mr. Roderick C. Wallace, CRM, longtime colleague and friend, for contributing to the research for this paper. RECORDS & DOCUMENT MANAGEMENT EXPERTS Zasio Enterprises, Inc. is one of the nation s leading records management software and consulting companies. The firm was founded based on one vision: to provide organizations in both the public and private sector with affordable computer software that establishes total life cycle management and control over their records. In 1995, the company extended the range of its records management services when it established its Records Management Consulting Division. The strategic objective behind this decision was to offer a total solution both software and high-level expertise to those clients that require it. Call the experts at Zasio to discuss your Records Information Management questions and challenges today , Opt. 1 sales@zasio.com