WHEN CONGRESS PASSED new corporate governance legislation last year, most company officers and directors believed that only publicly traded firms were covered.

“My company owns a fleet of waste collection trucks, a recycling facility, and two landfills,” said a Midwestern businessman. “This is a family-dominated business with investments from a few outsiders who are long-time friends but silent partners,” he added. “Our lawyer told me years ago that the federal securities laws don't apply to our company.”

However, this is no longer the case.

The Corporate Fraud Accountability Act of 2002, P.L. 107-204, commonly known as the “Sarbanes-Oxley Act,” was passed because of the unprecedented corporate and accounting scandals that emerged a couple of years ago. Although the law was intended to “protect investors by improving the accuracy and reliability of corporate disclosures made [under] the securities laws,” it reaches wider and farther than many people believe. In fact, one of several criminal provisions applies to many different organizations, including closely held businesses and nonprofit entities.

Traditionally, federal prosecutors have investigated and indicted individuals for destroying documents using veteran sections of the federal criminal code that forbid “obstruction of justice.” These seemingly potent provisions, however, have weaknesses. For example, the government often cannot prosecute someone unless he actually participated in document destruction and knew that a related government proceeding was afoot. Meantime, people who shredded documents while anticipating a government proceeding could not be prosecuted unless they “corruptly” persuaded others to do so.

Thanks to Sarbanes-Oxley, under 18 U.S.C. § 1519, it is a crime to knowingly alter, destroy, conceal or falsify any record or document intending to “obstruct or influence the investigation or proper administration of any matter within the jurisdiction of any [federal department or agency].”

The coverage is similar to the federal false statements law, 18 U.S.C. § 1001, which the courts have interpreted to reach every nook and cranny of potential federal government interest, as well as false statements to state authorities and private contractors that receive federal funds and manage delegated federal programs.

Notably, Section 1519 establishes criminal penalties for document destruction “in … contemplation of any such [federal department or agency] matter.” This could set the stage for criminal liability if a company official or employee suggested — say, in an internal office memo — that an ongoing or proposed activity, if not concealed, would generate heat from government regulators. If the activity fell within the ambit of a federal agency's jurisdiction and if the memo (not to mention project-related records and materials) were later destroyed, then the company and any number of individuals arguably could be subject to prosecution.

Sarbanes-Oxley proves that federal legislation, primarily aimed at curbing one type of abuse or scandal can have “stealth” provisions that affect businesses and entities throughout the economy. Organizations must assure their policies and operations are synchronized with these changes.