Size Doesn’t Matter: SEC Targets Small, Newly Formed Public Companies in their Crusade Against Corruption

July 9, 2010

As the Obama Administration ramps up its efforts against corruption, the new Foreign Corrupt Practices Act unit at the Securities and Exchange Commission (SEC) is aggressively prosecuting perpetrators, sending a loud-and-clear message that they will be found, prosecuted and punished. The SEC wants to make clear that newly public companies doing business overseas will be held to the same compliance standards as larger and more established public companies. The law does not distinguish based on company size or experience; consequently, in the SEC’s view, all public companies should establish appropriate policies and procedures to prevent a culture of corruption.

The recent settlement between the SEC and the California-based telecommunications company Veraz Networks, Inc. highlights the SEC’s expectations vis-à-vis smaller public companies. On June 29, 2010 the SEC filed a settled court action against Veraz, alleging that it violated the books and records and internal control provisions of the FCPA. According to the SEC, Veraz failed to accurately record payments and failed to prevent illegal payments to foreign officials in China and Vietnam. The SEC also uncovered what they referred to as a “gift scheme”. These actions weren’t cheap. While Veraz settled for a relatively modest penalty of $300,000 resulting from $40,000 of alleged improper gift giving, to reach this settlement figure, Veraz likely incurred higher cost to investigate and remediate the alleged FCPA violations.

Compared to many other FCPA cases, Veraz is a relatively young and small company that went public only three years ago. Yet Veraz is only one from a list of smaller telecommunications companies to recently resolve FCPA enforcement actions. These cases may demonstrate that in addition to the big-ticket, high-profile cases we are accustomed to seeing in the headlines, the SEC is also beginning to proliferate its efforts in targeting smaller companies in sectors it has observed as being vulnerable to corruption, such as the telecommunications sector.

The SEC has shown that it will hold smaller, newly formed public companies to the same standards as larger, more established companies. Therefore, it is imperative that all companies invest in creating and maintaining effective compliance programs capable of detecting and deterring bribery.

Attorneys at McGuireWoods can help companies evaluate and improve their anti-corruption programs to ensure that all the essential elements are in place in order to avoid being the next company, large or small, to make the headlines.