Bates Research - 11-02-16

SIGTARP Proposes Crime And Fraud Certification For Top Executives

Guest Post by Expert Geoff Winkler.


On October 26th, the Special Inspector General for the Troubled Asset Relief Program (“SIGTARP”), Christy Goldsmith Romero, issued her fourth quarter 2016 report in which she proposed a reform designed to “bring accountability” to high-level executives by requiring a crime and fraud certification that is modeled after the annual Sarbanes-Oxley certification requirements.

The Sarbanes-Oxley Act requires:

“…an issuer's principal executive and financial officers each to certify the financial and other information contained in the issuer's quarterly and annual reports. The rules also require these officers to certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of the issuer's internal controls; they have made certain disclosures to the issuer's auditors and the audit committee of the board of directors about the issuer's internal controls; and they have included information in the issuer's quarterly and annual reports about their evaluation and whether there have been significant changes in the issuer's internal controls or in other factors that could significantly affect internal controls subsequent to the evaluation. In addition, we are adopting previously proposed rules to require issuers to maintain, and regularly evaluate the effectiveness of, disclosure controls and procedures designed to ensure that the information required in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported on a timely basis.” [SEC Rule Summary]

Any misstatement or omission in the certification may lead to civil and/or criminal penalties for the signee.

The Office of SIGTARP is an independent federal law enforcement agency tasked with investigating and overseeing financial institutions and individuals that borrowed funds as part of the Troubled Asset Relief Program ("TARP"). Since its inception in 2008, SIGTARP has been involved in 259 criminal convictions and has recovered over $10 billion, at mostly medium and small financial institutions, while also making 251 recommendations for improving government operations that will result in $2.2 billion in cost savings once implemented.

Romero’s proposal would require “the CEO, CFO and certain other senior executives to sign an annual certification that they have conducted due diligence within their organization and can certify that there is no criminal conduct or civil fraud in their organization.” She believes that this proposal will create incentive for top executives to institute “strong anti-fraud internal controls” and motivate lower level executives and managers to open lines of communications between staff and management to report fraud if it is occurring within the organization.

Romero also believes that this new reform will “benefit large financial institutions by giving the CEO and other leaders the opportunity and accountability to stop fraud, fix it, and report it to law enforcement.” It would lead to executive liability only in cases where leadership fails to act upon known issues, furthers the wrongdoing by knowingly filing false statements, or does not know about the fraud but should have, given the size, complexity or knowledge among subordinates.

At this point, Romero’s proposal has only been submitted to Congress as part of SIGTARP’s quarterly report and will not be considered by Congress until after the election when the new Congressional term starts in late January 2017. Bates Research will continue to follow this proposal and will report on any significant changes.

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