18 U.S.C. § 1350 - Failure of Corporate Officers to Certify Financial Reports
Under federal law, corporate officers are responsible for ensuring the accuracy and reliability of financial reports. Title 18 U.S.C. 1350 imposes stringent requirements on corporate executives to certify the correctness of their company's financial statements.
Failure to do so can result in excessive fines and prison time. Specifically, if you're a senior corporation officer (e.g., CEO or CFO) and falsely certify financial reports to the government, you could face up to 20 years in prison, depending on how well prosecutors can prove your willful failure.
Title 18 U.S. Code 1350 says, "(a) Certification of Periodic Financial Reports.-
Each periodic report containing financial statements filed by an issuer with the Securities Exchange Commission pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)) shall be accompanied by a written statement by the chief executive officer and chief financial officer (or equivalent thereof) of the issuer.
(b) Content.-
The statement required under subsection (a) shall certify that the periodic report containing the financial statements fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act pf [1] 1934 (15 U.S.C. 78m or 78o(d)) and that information contained in the periodic report fairly presents, in all material respects, the financial condition and results of operations of the issuer.
(c) Criminal Penalties. -Whoever-
(1) certifies any statement as set forth in subsections (a) and (b) of this section, knowing that the periodic report accompanying the statement does not comport with all the requirements outlined in this section shall be fined not more than $1,000,000 or imprisoned not more than ten years, or both; or
(2) willfully certifies any statement as outlined in subsections (a) and (b) of this section knowing that the periodic report accompanying the statement does not comport with all the requirements outlined in this section shall be fined not more than $5,000,000, or imprisoned not more than 20 years, or both."
What is the Background of 18 U.S.C. 1350?
18 U.S.C. 1350 outlines the federal crime of corporate officers failing to certify financial reports. This statute mandates that senior corporate officers, specifically CEOs and CFOs, must certify the accuracy and completeness of financial reports filed with the Securities and Exchange Commission (SEC).
Any officer who certifies such a report, knowing that the report does not comply with federal rules or falsely represents the company's status, may be subject to huge fines and extended time in prison.
The law ensures transparency and accountability in corporate governance, holding top executives responsible for truthfulness in their company's financial disclosures.
This statute originates with the Sarbanes-Oxley Act of 2002 (SOX), a landmark legislation enacted in response to several high-profile corporate scandals, most notably those involving Enron and WorldCom.
These scandals eroded public confidence in the integrity of corporate financial statements and underscored the need for stringent regulatory measures to protect investors.
SOX was introduced to enhance corporate responsibility, improve financial disclosures, and combat corporate and accounting fraud. One critical component of SOX is the requirement for CEOs and CFOs to personally certify the accuracy of financial statements, now codified in 18 U.S.C. 1350.
What are Related Federal Laws?
18 U.S. Code Chapter 63, mail fraud and other fraud offenses has several federal statutes related to 18 U.S.C. 1350 failure of corporate officers to certify financial reports, such as the following:
- 18 U.S.C. 1341 - Frauds and swindles.
- 18 U.S.C. 1342 - Fictitious name or address.
- 18 U.S.C. 1343 - Fraud by wire, radio, or television.
- 18 U.S.C. 1344 - Bank fraud.
- 18 U.S.C. 1345 - Injunctions against fraud.
- 18 U.S.C. 1346 - Definition of "scheme or artifice to defraud."
- 18 U.S.C. 1347 - Health care fraud.
- 18 U.S.C. 1348 - Securities and commodities fraud.
- 18 U.S.C. 1349 - Attempt and conspiracy.
- 18 U.S.C. 1351 - Fraud in foreign labor contracting.
What Are the Penalties for Violating 18 U.S.C. 1350?
Violating 18 U.S.C. 1350 carries severe penalties. Suppose you are a corporate officer accused of knowingly certifying a financial report that does not comply with all applicable SEC regulations. In that case, you can face substantial fines and imprisonment if convicted.
Specifically, for certifying a report knowing it is non-compliant, you could face:
- A fine of up to $1 million, and
- Imprisonment for up to 10 years.
For willfully certifying a false report, the penalties are even harsher:
- A fine of up to $5 million and
- Imprisonment for up to 20 years.
"Certifying" vs. "Willfully Certifying" an Incorrect Report
One of the most contentious aspects of 18 U.S.C. 1350 is the distinction between "certifying" and "willfully certifying" an incorrect financial report.
The term "certifying" implies that the officer has reviewed the report and believes it to be accurate and complete based on the information available.
However, "willfully certifying" suggests a deliberate intention to mislead or deceive stakeholders by affirming the accuracy of a report known to be incorrect.
However, the penalties imposed for "certifying" versus "willfully certifying" an incorrect report both indicate the officer knows the report is erroneous at the time of certification, creating confusion about how the factor of "willfulness" is different between the two.
This ambiguity can be pivotal in legal defenses, and some have even suggested the law could be challenged for its constitutionality under these conditions.
What Are the Possible Defenses?
If you're accused of violating U.S.C. 1350, a skilled federal criminal defense attorney may employ several potential defenses. These include, but are not limited to:
- Lack of Knowledge: Demonstrating that you lacked actual knowledge of the inaccuracies in the financial report. This defense emphasizes that you relied on information provided by others in good faith.
- Due Diligence: You exercised due diligence in reviewing and certifying the financial report. This involves proving that reasonable steps were taken to ensure the accuracy of the information.
- Reliance on Professional Advice: Arguing that you relied on the advice and work of external auditors or legal counsel. If the officer reasonably relied on professionals, this can mitigate your responsibility for inaccuracies.
- Absence of Willfulness: Emphasizing the lack of intent to deceive. The defense can argue that inaccuracies were unintentional and not part of a deliberate scheme to defraud investors.
- Errors and Omissions: Highlighting that the inaccuracies were minor and not material to the company's overall financial condition. This defense seeks to minimize the significance of the errors in question.
Content our federal criminal defense law firm for additional information. Eisner Gorin LLP has offices in Los Angeles, California.
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