Criminal records: under the sarbanes-Oxley Act, you'd better think twice before destroying those business documents

Entrepreneur, May, 2003 by Steven C. Bahls, Jane Easter Bahls

LAST MONTH, WE DISCUSSED THE WHISTLE-blower provisions of the Sarbanes-Oxley Act, signed into law last summer to address corporate misconduct. Here's another provision business owners should be aware of: It's now a federal crime to intentionally destroy documents that might be evidence in a federal investigation.

If your business is the subject of a federal investigation, destroying documents that make the company look bad can get you in worse trouble than the original investigation. But the new law reaches beyond that provision to include companies that may have nothing to do with the suspected misconduct.

Suppose your business is a supplier for a company with a big government contract. If a government agency starts investigating that company for fraud, you might have documents that could be evidence in the investigation or an ensuing trial. If you intentionally destroy these documents--perhaps as a favor to your biggest customer--you could be subject to steep fines and imprisonment for up to 20 years.

"I think people [misunderstand) the scope and nature of this law," says Michael Nolan, an attorney with Lowenstein Sandler in Roseland, New Jersey. Nolan explains that many people assume it applies only to huge corporations, when it actually applies to every company--public or private.

The good news is that the crime requires "intent to impede, obstruct or influence" the investigation. "I think it'll be hard for the feds to prove intent if they can't prove you knew about the investigation," Nolan says. But if the investigation has been on the evening news, it may be difficult to prove that you didn't know. So be on the safe side. "If you know an entity you deal with is under investigation, freeze the documents," he advises.

While large companies typically have document retention policies spelling out what to keep and for how long, small ones are more likely to have an ad-hoc arrangement. When the filing cabinets get full, you toss out some papers.

As a rule of thumb, Nolan advises keeping equipment leases, real estate leases, customer lists, contracts and financial documents (anything you'd use to prepare your tax returns). "You can't hold on to everything, but hold on to underlying documents that define the relationship," Nolan says.

There's a seven-year statute of limitations on federal crimes, so after seven years, it's safe to dispose of it. Until then, it's better to pay for document storage than to risk jail time. "Before you throw anything away, make sure there's no one out there being investigated," Nolan says. "It's better to have the document than to explain why you don't have it."

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STEVEN C. BAHLS, dean of Capital University Law School in Columbus, Ohio. teaches entrepreneurship law. Freelance writer JANE EASTER BAHLS specializes in business and legal topics.