This time it's personal: Senior management liability in “books and records” offences


Introduction

“Senior managers who choose to turn a blind eye towards the corrupt practices of their companies and the employees they supervise may find themselves personally liable for allowing the company’s books to be altered to conceal the corrupt nature of the payments made – even if it could not be shown that they had actually engaged in the payment of bribes.”

Corruption is by nature a secretive economic crime that is both difficult to detect and prove. As both the bribe giver and recipient are liable for the offence of bribery, there is little incentive for any party to a corrupt transaction to report the offence to the authorities or to fully cooperate in any investigation. Conversely, the parties may be more inclined to collude and conceal their involvement in the corrupt transaction. The difficulty in detecting and proving corruption is further complicated where a corporate entity is involved. In such cases involving the corporatisation of bribery, complex corporate structures and creative accounting practices may be employed to conceal the involvement of the individuals, especially those occupying senior positions in the company.

Nevertheless, recent cases in Singapore have shown that Singapore authorities are prepared to deploy a range of prosecutorial techniques so as to bring senior managers to account for their role in corrupt schemes through false accounting and money-laundering offences. This approach shows a striking similarity with the US-style “books and records” offences often used by US prosecutors in complex bribery schemes, and the new false accounting offences recently enacted in Australia which will bolster the anti-bribery toolbox of the Australian Federal Police.

ST Marine

In PP v Han Yew Kwang, Han Yew Kwang (Han), a former deputy president at ST Marine, was prosecuted for conspiring with a number of colleagues, who were all senior executives at ST Marine at the material time, to pay bribes to employees of ST Marine’s customers in order to obtain business from these customers. An integral part of this scheme involved disguising the bribes as bogus entertainment expenses which were paid out from petty cash vouchers as approved by the senior management of ST Marine, i.e. the accused and his co-conspirators. It is pertinent to note that Han and his colleagues were not the ones who carried out the payment of the bribes. Rather, they approved the fraudulent petty cash vouchers, which they knew were not genuine entertainment expense claims, that were presented to them.

Even though Han and a number of his co-accused admitted their involvement and cooperated in the course of investigations, it was evident that proving the individual acts of bribery was difficult. This was because investigations were hampered by the fact that key witnesses and the receivers of the bribes were mainly located overseas.

Nevertheless, this difficulty was surmounted by the use of section 477A of the Penal Code Cap. 224 (section 477A), which criminalises the falsification of a company's accounts by a clerk or servant of the company with intent to defraud. Given that the bribes were essentially paid out of petty cash payment vouchers falsely recorded as "entertainment expenses", this approach had the effect of bringing the accused and his conspirators to account for their role in the corrupt scheme, i.e. for approving the individual fraudulent payments, in addition to the general conspiracy to pay bribes.

Questzone

The authorities adopted a similar tactic in the prosecution of Thomas Philip Doerhman (Doerhman) and Lim Ai Wah (Lim), who were sentenced to 60 and 70 months jail respectively on 1 September 2016, for falsifying accounts under section 477A and money laundering offences under the Corruption, Drug Trafficking and other Serious Crimes (Confiscation of Benefits) Act Cap. 65A (CDSA). Doerhman and Lim, who were both directors of Questzone Offshore Pte Ltd (Questzone), were prosecuted for conspiring with a third individual, Li Weiming (Li), in 2010 to issue a Questzone invoice to a Chinese telecommunications company seeking payment of US$3.6 million for a fictitious sub-contract on a government project in a country in the Asia-Pacific. Li was the chief representative for the Chinese company in that country. A portion of the monies paid out by the Chinese company to Questzone pursuant to its invoice was then subsequently redistributed by Doerhman and Lim to Li and the then Prime Minister of that Asia-Pacific country in 2010.

Even though no corruption charges were brought under the Singapore Prevention of Corruption Act against the parties, it is plainly conceivable that Questzone functioned as a corporate conduit for corrupt payments to be made. On the facts, some key witnesses were overseas – with Li having absconded soon after proceedings against him commenced. The use of section 477A and money-laundering charges under the CDSA allowed the prosecution to proceed against Doerhman and Lim as they only needed to prove that the invoice was false, in respect of the section 477A charge; and that the monies paid out pursuant to the invoice – which would be proceeds of crime or property used in connection with criminal conduct – were transferred to Li and the then Prime Minister of the Asia-Pacific country, in respect of the money-laundering offences.

US and Australian approach: “books and records”

The use of false accounting offences to prosecute senior management for their involvement in corrupt transactions is well established in the US. The Securities and Exchange Commission (SEC) is known to utilise the “books and records” provision in the Foreign Corrupt Practices Act (FCPA) to prosecute senior managers in listed entities for their role in the corrupt transactions. The relevant provision requires listed entities in the US to keep books and records that fairly and accurately reflect the transactions of the corporation. Therefore, a scheme involving the doctoring or manipulating of company records in order to conceal the corrupt transactions would cause the company to be in violation of this provision. Senior management who engage in or otherwise permit such conduct could be found similarly liable.

As far back as 2009, the SEC has used the books and records provisions aggressively to charge individuals. In the Nature’s Sunshine case, the CEO and CFO of the company were charged with FCPA violations for failure to adequately supervise employees to make and keep accurate books and records and implement an adequate set of internal controls, despite not having direct knowledge or involvement in the bribery scheme. In a more recent example, the SEC charged Ignacio Cueto Plaza (Cueto), the former CEO of LAN Airlines S.A. (LAN), for his role in authorizing US$1.15 million in payments to a consultant pursuant to a sham consulting contract. The SEC alleged that Cueto “understood that it was possible the consultant would pass some portion of the [payment] to union officials” in an effort to resolve a dispute between LAN and its employees. Although unable to prove that a bribe payment occurred, the SEC stated:

“The payments were made pursuant to an unsigned consulting agreement that purported to provide services that Cueto understood would not occur. Cueto authorized subordinates to make the payments that were improperly booked in the Company’s books and records, which circumvented LAN’s internal accounting controls.”

In another recent example, the SEC charged Jun Ping Zhang (Zhang), the former CEO and Chairman of Harris Corporation's (Harris) Chinese subsidiary CareFx China, for his role in facilitating a bribery scheme that provided illegal gifts to Chinese officials in exchange for business. Pursuant to the scheme, Zhang authorized and approved false expense claims that were used to provide gifts to officials. The SEC charged Zhang with violations of both the anti-bribery and accounting provisions of the FCPA, alleging:

“[Zhang] was Harris’ gatekeeper at CareFx China, but he nonetheless authorized false expense claims that he knew were going to be used to provide gifts to government officials. Moreover, Ping helped his subordinates at CareFx China hide the bribe scheme from Harris auditors and employees.”

In a move that will bring the Australian anti-corruption regime closer to the US and Singapore approach, new offences involving false dealing with accounting documents came into effect on 1 March 2016. Under the new law, it is an offence for an individual or corporation to intentionally or recklessly facilitate, conceal or disguise in their accounting documents an occurrence of bribery, corruption or loss to a person that was not legitimately incurred. Importantly, proof that a benefit (not legitimately due) was actually received or given by the accused or another person is not required. This overcomes an evidentiary limitation that has historically been difficult for prosecutors to overcome.

It’s personal: liability of senior executives under scrutiny

Senior managers who choose to turn a blind eye towards the corrupt practices of their companies and the employees they supervise may find themselves personally liable for allowing the company’s books to be altered to conceal the corrupt nature of the payments made – even if it could not be shown that they had actually engaged in the payment of bribes.

The approach adopted by the SEC, which focuses on the complicity of senior executives and their failure to ensure that the company maintains accurate books and records and implements appropriate internal controls, should not be surprising in light of the memorandum titled “Individual Accountability for Corporate Wrongdoing” issued in September 2015 by the US Assistant Attorney General, Sally Yates, to all US Department of Justice (DOJ) prosecutors and civil litigators. The “Yates Memo” is largely seen as a signal of intent by the DOJ to pursue and punish individuals for their role in corporate crime, in response to prior criticism that not enough had been done to hold individuals to account for their decisions which led to the financial crisis of 2007-2009.

This approach of targeting individuals in general, and senior executives in particular, was echoed in Singapore by Attorney-General VK Rajah SC (A-G Rajah) in an opinion editorial in November 2015, where he urged corporates to adopt a culture of compliance in order to combat commercial crime. In a portentous statement threatening to pierce the corporate veil, A-G Rajah warned that there was “no certainty of escape from liability” for those seeking to hide behind complex corporate structures.

Senior management cannot act in conscious disregard or be wilfully blind to corrupt practices in their organisations. The specific targeting of individuals by the authorities, through the use of “books and records” type and anti-money laundering offences, puts senior executives on notice of the need for them to prevent, detect and properly respond to corporate wrongdoing – and to set the right tone from the top.

As far as liability is concerned, this time it’s personal.

An earlier version of this article was first published on Thomson Reuters Accelus Regulatory Intelligence and Compliance Complete.

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