ANSWERS TO SUPPLEMENTAL QUESTIONS OF THE HONORABLE ALFONSE D'AMATO, CHAIRMAN, SENATE SECURITIES SUBCOMMITTEE

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1 ANSWERS TO SUPPLEMENTAL QUESTIONS OF THE HONORABLE ALFONSE D'AMATO, CHAIRMAN, SENATE SECURITIES SUBCOMMITTEE Question #1. Is the SEC's position that liability under the antibribery provisions of FCPA should be imposed upon a defendant if he has "reason to know" that a payment will be used for the purpose of influencing [a] public official or if a defendant has "reason to suspect" the nature of the payment? Answer to Question #1. Section 30A of the Securities Exchange Act of 1934, setting forth the antibribery provisions that the Commission administers civilly, provides that a defendant may be liable if he makes a payment to an agent "while knowing or having reason to know" that all or a portion of the money or thing of.^ V->.nar value will be used to influence a foreign official or political party improperly. The term "reason to know" has not been con strued by any court in an FCPA case. "Reason to know" has been defined, outside the FCPA, in various ways, however. For example, one court has held that [a] person has reason to know if he has information from which a person of ordinary intelligence, or of the superior intelligence which such person may have, would infer that the fact in question exists or that there is such a substantial chance of its existence that, if exercising reasonable care with reference to the matter in question, his action would be predicated upon the assumption of its possible existence. Von Gohren v. Pacific National Bank, 8 Wash. App. 245, 255, 505 P.2d 467, 472 (1973), citing Restatement (Second) of Agency 9 comment d (1958). Another court has held that "[s]uspicious

2 - 2 - characteristics of the transaction" may give an individual "reason to know." Colin v. Central Penn National Bank, 404 F. Supp. 638, 641 (E.D. Pa. 1975), aff'd, 544 F.2d 512 (3d Cir. 1976). Accordingly, depending on the particular facts of a case and the court's interpretation of the "reason to know" standards, suspicious characteristics of the circumstances could lead to a conclusion that a defendant had "reason to know." American businessmen have expressed great concerns over the "reason to know" test, stating that it is difficult to interpret and apply. In response to those concerns, S. 430 would eliminate that test. The Departments of Commerce and Justice have expressed support for replacing the "reason to know" standard with a more.objective test, to improve the clarity of the antibribery provisions. As we have previously stated, since S. 430 would eliminate the Commission's authority to enforce the antibribery provisions, the Commission defers to those agencies with respect to all of the S. 430 amendments to those provisions. Question #2. Is the existence of an "agreement" to make a payment sufficient to sustain a violation of the FCPA or must the government demonstrate actual payment and an intent to violate the Act to incur liability under FCPA? If intent and an actual payment need not be demonstrated, then couldn't liability flow from the unauthorized actions of an agent not controlled by a corporate defendant? Therefore, isn't it difficult to predict what actions will constitute violations of the antibribery provisions?

3 - 3 - Answer to Question #2. To establish a violation of the antibribery provisions, the government need not demonstrate that an actual payment has been made. Existing law expressly encompasses an "offer, * * * promise to pay, or authorization of * * * payment" along with an actual payment. However, in the situation you pose, there would be other preconditions to a successful prosecution. For example, the government must show use of an "instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value to" a foreign official or political party. The legislative history of the FCPA indicates the word "corruptly" requires that. -,. ' " ''..-» the offer, payment, promise, or gift be intended wrongfully to influence the recipient to misuse his official position. H.R. Rep. No. 640, 95th Cong., 1st Sess. 7-8 (1977); S. Rep. No. 114, 95th Cong., 1st Sess. 10 (1977). Moreover, in the case of payments to an agent, the issuer and its officers, directors, and employees may be liable if they knew or had "reason to know" that all or a portion of such money or thing of value would be offered, given, or promised to a foreign official or political party. Conversely, an issuer would not be liable for the unauthorized acts of an agent it does not control if it does not know or have "reason to know." As noted in the answer to Question #1 above, however, that standard has

4 - 4 - created interpretive difficulties for American businessmen. S. 430 would replace the "reason to know" standard with a more objective test. Question #3. Some critics of the FCPA contend that the Act's accounting provisions have greatly increased the cost of doing business for issuers. These critics also contend that the cost[s] of complying with the accounting provisions greatly exceed any benefits derived from them. How do you respond to these criticisms? Answer to Question #3. The Commission believes that accurate corporate recordkeeping and meaningful accounting controls are essential to the operation of any public company. As the Commis sion has previously stated, these are inherent obligations of the stewardship of a public corporation. The standards embodied in the Act's accounting provisions are, in effect, the cardinal principles of managing a business enterprise. Among members of the business community, few would dispute that acceptable management cannot be achieved absent such records and controls. Securities Exchange Release No (Jan. 29, 1981) ("1981 Policy Statement"). Thus, the costs of creating and maintaining effective recordkeeping and control systems are inherent in the operation of any large enterprise and, correspondingly, such systems generate significant corporate benefits. At the same time, the Commission recognizes that cor porations should not be forced to create internal controls that are unnecessarily expensive in light of the particular circumstances. In the 1981 Policy Statement, the

5 - 5 - Commission addressed those concerns: Thousands of dollars ordinarily should not be spent conserving hundreds. Further, not every procedure which may be individually cost-justifiable need be implemented; the Act allows range of reasonable judgments. * * * * * * * * * [Considerable deference properly should be afforded to the company's reasonable business judgments in this area * * *. Importantly, the selection and implementation of particular control procedures, so long as they are reasonable under the circumstances, remain management prerogatives and responsibilities. In those statements, the Commission reflected Congress 1 antici pation that management may "evaluate the cost/benefit relation ship of the [internal control] steps to be taken." S. Rep. No , 95th Cong. 1st Sess. 8 (1977). The Commission remains of the same view. S. 430 would amend the Act to require a system of controls that would "satisfy prudent individuals in the conduct of their own affairs, having in mind a comparison between benefits to be obtained and costs to be incurred in obtaining such benefits." This test is consistent with Congressional intent, with the 1981 Policy Statement and with auditing standards, which recognize that "the cost of internal control should not exceed the benefits expected to be derived." Statement on Auditing Standards No. 1, Section Question #4. What is the SEC's position regarding the standard needed to determine an accounting violation of the FCPA does the mistake have to be material to impose liability under the Act? Must "scienter" be demonstrated to impose liability under the Act's accounting provisions?

6 - 6 - Answer to Question #4. The provisions of the FCPA do not require that an inaccuracy be "material" to trigger liability. As the Commission has previously indicated, a traditional materiality test would be inappropriate as a standard for an internal control system, since it is too high a threshold. See 1981 Policy Statement. Rather, the FCPA requires that, a public company's records must, "in reasonable detail, accurately and fairly reflect" disbursements of its assets, and its internal accounting controls must be "sufficient to provide reasonable assurances" that the Act's objectives will be satisfied. Section 13(b)(2) of the Securities Exchange Act of 1934 (emphasis added). This standard allows flexibility in responding to particular facts and circumstances. Scienter need not be demonstrated to establish a violation of the FCPA's accounting provisions. SEC v. World-Wide Coin Investments, Ltd., 567 F. Supp. 724, 749 (N.D. Ga. 1983). As the Commission has previously testified, however, inadvertent recordkeeping mistakes will not give rise to Commission enforcement proceedings. Statement of the Honorable John Shad, Chairman, Securities and Exchange Commission, before Joint Hearings of the Subcommittee on Securities and the Subcommittee on International Finance and Monetary Policy of the Senate Committee on Banking, Housing and Urban Affairs concerning S. 708, June 16, 1981 ("1981 Testimony") at 26.

7 - 7 - Question #5. Could the falsification of accounting records by a low level employee without management's knowledge or acquiescence trigger liability under the FCPA? Answer to Question #5. As the Commission previously has made clear, it is inappropriate to hold a corporation liable for recordkeeping or internal controls violations by low or middle level employees, without any involvement by senior officials. Statement of the Honorable John Shad, Chairman, Securities and Exchange Commission, before Joint Hearings of the Subcommittee on Securities and the Subcommittee on International Finance and Monetary Policy of the Senate Committee on Banking, Housing and Urban Affairs concerning S. 414 (February 24, 1983) at 7; 1981 Testimony at Rather, the Commission looks to the adequacy of the internal control system of the issuer, the involvement of top management in the violation, and the corrective actions taken once the violation was uncovered. If a violation was committed by a low level employee, without the knowledge of top management, with an adequate system of internal control, and with appropriate corrective action taken by the issuer, [the Commission does] not believe that any action against the company would be called for Policy Statement. Question #6. Does the SEC seek out violations of the FCPA account ing provisions for their own sake or will it bring enforcement actions only where other violations of the securities laws are involved? Answer to Question #6. In investigating putative violations of the Act, the Commission's Enforcement Division does not discriminate

8 - 8 - among violations to be sought or to be charged. To date, the Commission has brought 73 actions to enforce the accounting provisions of the Act. The violations of the accounting provisions in all of those cases were uncovered in connection with inquiries into other possible violations of the securities laws. In all but three of the Commission's enforcement actions, other violations of the securities laws were charged.