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Former Siemens Executives and Agents Charged

In December 2008, Siemens resolved the largest ever (in terms of fines and penalties) FCPA enforcement action.  See here and here.   A portion of the improper conduct focused on Argentina and allegations that Siemens S.A. (Argentina), and those acting on its behalf, engaged in a bribery scheme in connection with an Argentine government contract to produce national identity cards.

Since the 2008 enforcement action, U.S. enforcement authorities have been under pressure to charge culpable individuals.  See here for a prior post and here for the transcript of the November 2010 Senate FCPA hearing during which former Senator Specter again called for individual accountability, an occurrence which prompted him to ask me several questions after the hearing about the “most egregious examples of individual conduct associated with the Siemens prosecution.”  See here for my responses.

Today, the DOJ announced that “eight former executives and agents of Siemens AG and its subsidiaries have been charged for allegedly engaging in a decade-long scheme to bribe senior Argentine government officials to secure, implement and enforce a $1 billion contract with the Argentine government to produce national identity cards.”

The defendants charged in the indictment (here) are:  Uriel Sharef (a former member of the central executive committee of Siemens AG); Herbert Steffen (a former chief executive officer of Siemens Argentina); Andres Truppel (a former chief financial officer of Siemens Argentina); Ulrich Bock, Stephan Signer and Eberhard Reichert (former senior executives of Siemens Business Services); and Carlos Sergi and Miguel Czysch (who allegedly served as intermediaries and agents of Siemens in the bribe scheme).  None of the individuals are U.S. citizens and during a press conference today Assistant Attorney General Lanny Breuer indicated that none of the defendants are in U.S. custody.

The indictment, filed in the Southern District of New York, charges the defendants and their co-conspirators with conspiracy to violate the FCPA and the wire fraud statute, money laundering conspiracy and wire fraud.

In the DOJ release, Assistant Attorney General Lanny Breuer stated as follows.  “Today’s indictment alleges a shocking level of deception and corruption.  The indictment charges Siemens executives, along with agents and conduits for the company, with committing to pay more than $100 million in bribes to high-level Argentine officials to win a $1 billion contract.  Business should be won or lost on the merits of a company’s products and services, not the amount of bribes paid to government officials.  This indictment reflects our committment to holding individuals, as well as companies, accountable for violations of the FCPA.”  During the press conference, Breuer stated that today’s action is the “first time a former Board member of a Fortune 50 company” has ever been charged with FCPA violations.  Breuer also stated that  “Siemens was a remarkably cooperative and helpful party throughout our investigation.”

In a parallel civil enforcement action also announced today (here), the SEC charged seven former Siemens executives with violating the FCPA for their involvement in the same bribery scheme.  The following individuals are charged in the civil action:  Sharef, Bock, Signer, Steffen, Truppel, Sergi and Bernd Regendantz (a former chief financial officer of Siemens Business Services).  The civil complaint (here) alleges FCPA anti-bribery violations, aiding and abetting Siemens’ FCPA anti-bribery violations, as well as other charges.  Robert Khuzami (Director of the SEC’s Division of Enforcement) stated as follows.  “Business should flow to the company with the best product and the best price, not the best bribe.  Corruption erodes public trust and the transparency of our commercial markets, and undermines corporate governance.”  During today’s press conference, Khuzami called the action the “largest [SEC] action ever against individuals” in the FCPA’s history.

Additional analysis of the DOJ and SEC enforcement actions will follow.

Friday Roundup

ConocoPhillips is hit with an FCPA related shareholder proposal, add Wal-Mart to the list, and more on Embraer … it’s all here in the Friday Roundup.

ConocoPhillips Shareholder Proposal

Last week ConocoPhillips was hit with an FCPA shareholder proposal – see here.  In the letter, titled “Shareholder Proposal and Statement for Publication in 2012 Proxy Materials Recommending an Audit of Controls on U.S. Foreign Corrupt Practices Act Violations,” the shareholder – Roger Parsons, a former Conoco employee who runs a website “The Iran-Conoco Affair” (here) – recommends “that the Board commission a forensic audit of ConocoPhillips compliance controls that failed to identify violations of the United States Foreign Corrupt Practices Act of 1977 (“FCPA”) arising from James J. Mulva ‘s peddling influence with the Bush Administration to obtain Executive Order 13477 on behalf of Muammar al-Qadhafi.”   Mulva is currently ConocoPhillips Chairman and Chief Executive Officer.

Wal-Mart

Add Wal-Mart to the list of company’s under FCPA scrutiny.  In a 10-K filing yesterday, the company disclosed as follows.  “During fiscal 2012, the Company began conducting a voluntary internal review of its policies, procedures and internal controls pertaining to its global anti-corruption compliance program. As a result of information obtained during that review and from other sources, the Company has begun an internal investigation into whether certain matters, including permitting, licensing and inspections, were in compliance with the U.S. Foreign Corrupt Practices Act. The Company has engaged outside counsel and other advisors to assist in the review of these matters and has implemented, and is continuing to implement, appropriate remedial measures. The Company has voluntarily disclosed its internal investigation to the U.S. Department of Justice and the Securities and Exchange Commission. We cannot reasonably estimate the potential liability, if any, related to these matters. However, based on the facts currently known,
we do not believe that these matters will have a material adverse effect on our business, financial condition, results of operations or cash flows.”

Given the reference to permits, licenses and inspections in the disclosure, it is useful to review the holding of U.S. v. Kay, the only appellate court decision to directly address payments outside the context of directly securing a foreign government contract.  In Kay, the 5th Circuit said that such payments “could” violate the FCPA, but that “there are bound to be circumstances” in which such payments merely increase the profitability of an existing profitable company and thus, presumably does not assist the payer in obtaining or retaining business.  The court specifically stated as follows.  “If the government is correct that anytime operating costs are reduced the beneficiary of such advantage is assisted in betting or keeping business, the FCPA’s language that expresses the necessary element of assisting in obtaining or retaining business would be unnecessary, and thus surplusage – a conclusion that we are forbidden to reach.”

Embraer

Bloomberg has additional information (here) regarding Embraer’s FCPA scrutiny (discussed in this previous post).  The article suggests that the “probe started more than a year ago in Argentina with government-controlled Aerolineas Argentinas SA’s $700 million purchase of 20 E-190 jets in 2009.”  The airline has switched between private ownership and government ownership a number of times over the years.

*****

A good weekend to all.

The Stings Before The Sting

A post that will increase your chance of capturing the office FCPA Jeopardy title.

As frequently reported, the Africa Sting case was the first time in the FCPA’s history that undercover investigative techniques were used.   As detailed in this prior post, not true, undercover investigative techniques have been used in several other FCPA enforcement actions.

As frequently reported, the Africa Sting case was the first time in the FCPA’s history that a full-blown sting operation was used in connection with an enforcement action.  This too is not true as detailed in this post which provides an overview of prior DOJ FCPA sting operations.

Hebert Tannenbaum

In 1996 an FBI spent agent received information from a confidential informant that Tannenbaum (the principal of Long Island based Tanner Management Corporation – a garbage incinerator manufacturer) “had previously made payments to foreign government officials to induce them to purchase garbage incinerators from the defendant.” (See here for the complaint). The informant further advised the FBI that Tannenbaum “had offered to make payments to government officials of various foreign countries in order to sell garbage incinerators in those countries” and during a recorded meeting with the informant Tannenbaum confirmed that he “had previously made a $75,000 cash payment to an official of the Government of Barbados, as an inducement for the purchase by his government of a garbage incinerator.” Thereafter, the informant, acting at the FBI’s direction, recorded a call with Tannenbaum during which Tannenbaum “admitted that he was willing to make payments to sell his garbage incinerators” and the complaint references specific payments in Taiwan and Argentina. During a meeting at the Park Lane Hotel in New York, the informant introduced Tannenbaum to the FBI special agent who was posing “as an Argentine government procurement official who wanted to purchase a garbage incinerator.” During the meeting, Tannenbaum offered to sell the Argentine “procurement official” an incinerator and stated “that he was willing to make a payment to facilitate the deal.” According to the complaint, Tannenbaum, on the way to a bank to open an account to faciliate the deal, told the undercover FBI agent posing as the “procurement official” that “for all he knew [“procurement official”] could have been an FBI agent” and that Tannenbaum was “in his seventies, and did not want to get in trouble.”

Well, Tannebaum did get in trouble.

Based on the above information, Tannenbaum was charged in 1998 via a one count criminal information (here) with conspiracy to violate the FCPA. The information is signed by then U.S. Attorney for the S.D. of New York Mary Jo White currently a partner at Debevoise & Plimpton (here).

Tannenbaum pleaded guilty (see here and here for the DOJ release) and was sentenced to 366 days plus three years of supervised release.

Richard Novak

In 2006, Richard Novak was charged (here) with, among other counts, violating the FCPA. It remains one of the more unusual FCPA enforcement actions ever. Novak and others owned and operated several internet businesses using the names “Saint Regis University,” “Robertstown University” and “James Monroe University.” According to the superseding information “they were diploma mills in that these ‘universities’ had no legitimate faculty members; offered no legitimate academic curriculum or services; required no course work or class work; and were not recognized by the United States Department of Education.” According to the superseding information, Novak made a bribe payment to the “Consult and First Secretary at the Liberian Embassy in Washington D.C. in order to assist Saint Regis University and its owners in fraudulently selling diplomas through their internet businesses.” Elsewhere, the superseding information states that “various foreign government officials who received the bribes held various positions at the Liberian Embassy in Washington, D.C., the Liberian Embassy in Accra, Ghana, and at the Ministry of Education for the Republic of Liberia in Monrovia, Liberia” and that these individuals, among other things, “were in a position to: issue certificates of accreditation and recognition; issue notarial certificates; issue letters claiming that Saint Regis University was fully accredited and recognized by the Ministry of Education in the Republic of Liberia; and cause staff at the Liberian Embassy in Washington D.C. to answer the telephone calls in a positive way when inquiries regarding the legitimacy [of the Universities] were made.”

Although not specifically mentioned in the superseding information, a component of the original indictment (here) against Novak and several others was U.S. Secret Service agents posing as high school dropouts seeking degrees.

Novak pleaded guilty (see here) and was sentenced to three years probation.

Ball Corporation Quietly Resolves FCPA Enforcement Action

Magic has returned to the Butler campus for a second straight March. Perhaps it is not magic. Just hard work, a bend-but-don’t-break attitude, and poise under pressure. Whatever it is, Butler basketball continues to be an amazing story and teaches lessons beyond the hardwood.

*****

Last week, Ball Corporation (here), a publicly traded company with divergent business segments including an aerospace and technologies segment that derived 96% of 2010 sales from contracts funded by various agencies of the U.S. federal government (see here), resolved an SEC enforcement action.

In an administrative cease and desist proceeding (here) the SEC found, in summary fashion, as follows.

“From July 2006 through October 2007, Ball, through its Argentine subsidiary Formametal, S.A., offered and paid at least ten bribes, totaling at least $106,749, to employees of the Argentine government to secure the importation of prohibited used machinery and the exportation of raw materials at reduced tariffs.”

“Although certain accounting personnel at Ball learned soon after Ball acquired Formametal in March 2006 that Formametal employees may have made questionable payments and caused other compliance problems before the acquisition, the Company failed to take sufficient action to ensure that such activities did not recur at Formametal after Ball took control of the Argentine company. Within months of Ball’s acquisition of Formametal, two Formametal executives—the then-Formametal President and then-Formametal Vice President of Institutional Affairs (hereinafter the “President” and “Vice President of Institutional Affairs,” respectively)—authorized improper payments to Argentine officials. The true nature of the payments was mischaracterized as ordinary business expenses on Formametal’s books and records and went undetected for over a year.”

As set forth in the SEC’s findings, Ball acquired Formanmetal in March 2006 and the wholly-owned subsidiary’s (a manufacturer of aerosol cans) financial results are reported on a consolidated basis in Ball’s financial statements.

According to the SEC’s findings, the improper payments were in connection with equipment imports, copper scrap export waivers.

As to equipment imports, the SEC found as follows.

“Formametal paid bribes totaling over $100,000 in 2006 and 2007 to secure the importation of equipment for use in its manufacturing process. Formametal’s President authorized at least two of these payments. In most cases, the bribes were paid to induce government customs officials to circumvent Argentine laws prohibiting the importation of used equipment and parts. The bribes often appeared on invoices from a non-governmental customs agent for Formametal. The payments were invoiced as separate line items described inaccurately as “fees for customs assistance,” “customs advisory services,” “verification charge,” or simply “fees,” were invoiced in addition to other customs-related fees, and were sometimes in rounded peso amounts. To further obscure that the payments were really bribes, Formametal posted the payments inaccurately identified as “customs advice” or “professional fees” to an “Other Expenses” account or in some instances to an account named for the related equipment.”

As to copper scrap export waivers, the SEC found as follows.

“Formametal paid a bribe that its President authorized in October 2007 in an attempt to bypass high government duties imposed on copper scrap exports. These duties, which were generally 40 percent of the value of the copper, were imposed by Argentina in an effort to discourage export sales of domestically produced copper and copper scraps. The President estimated the additional profit from exporting this copper scrap with the export duty waivers versus selling it inside Argentina would be approximately $1.5 million annually.”

“For six months prior to August 2007, Formametal unsuccessfully sought to gain government approval to export the scrap without the customarily high duties. After giving up on obtaining the waiver legitimately, on October 18, 2007, Formametal disbursed $4,821, representing the first of five bribe installments authorized by its President to obtain an export duty waiver. The payment was funneled through Formametal’s third party customs agent. Obscuring that the transaction was a bribe, Formametal inaccurately recorded the payment as “Advice fees for temporary merchandise exported” in an “Other Expenses” account. Although the President believed that the payments were requested by a customs official and would result in a copper scrap export duty waiver, no copper scrap export shipments were made pursuant to the improper payment.”

As to Ball’s internal controls, the SEC found as follows.

“Ball’s and Formametal’s weak internal controls, which included importing equipment into Argentina in 2006 and 2007 without appropriate invoices and documentation, made it difficult to detect that the subsidiary was repeatedly violating Argentine law through the payment of bribes. Ball’s weak internal controls also factored into the Company’s failure to prevent further abuses at Formametal, after Ball accountants learned of a bribe paid by Formametal to import machinery for use in its manufacturing process. As a result, Formametal continued to make improper payments during 2007.”

“Further, Ball lacked sufficient internal controls to bring about effective changes after information available to Ball’s executives indicated anti-bribery compliance problems at Formametal. For example, key personnel responsible for dealing with customs officials remained at Formametal, even though external due diligence performed on Formametal suggested that Formametal officials may have previously authorized questionable payments.”

Based on the above findings, the SEC found that Ball violated the FCPA’s books and records and internal control provisions.

The SEC’s order notes that the “Commission considered remedial acts promptly undertaken by Respondent, Respondent’s voluntary disclosure of these matters to the Commission, and cooperation afforded the Commission staff.”

Without admitting or denying the SEC’s findings, Ball agreed to a cease and desist order prohibiting future FCPA book and records and internal controls violations and agreed to pay a $300,000 civil penalty.

The last paragraph of the SEC order states “that the Commission is not imposing a civil penalty in excess of $300,000 based upon [Ball’s] cooperation in a Commission investigation and related enforcement action.”

Charles Smith (Skadden – here) represented Ball.

SEC FCPA enforcement actions, including administrative actions, are often announced with a SEC press release. However, there was no SEC press release issued last week as to the Ball enforcement action.

Ball’s most recent annual report, filed February 28, 2011, stated as follows.

“As previously reported, the company investigated potential violations of the Foreign Corrupt Practices Act in Argentina, which came to our attention on or about October 15, 2007. The Department of Justice and the SEC were also made aware of this matter, on or about the same date. The Department of Justice informed us in 2009that it had completed its investigation and would not bring charges. The SEC’s staff has concluded its investigation and a resolution is expected during 2011. Based on our investigation to date, we do not believe this matter involved senior management or management or other employees who have significant roles in internal control over financial reporting.”

A Look Back (and Forward)

This week marks not only the end of a year, but also a decade.

So let’s take a look back at FCPA enforcement circa 2000.

In 2000, the FCPA was indeed “on the books” (the statute was enacted in 1977), yet there was little in terms of FCPA news or enforcement actions.

A “U.S. newspapers and wires” search for the FCPA in the 2000 picks up 64 “hits” and among the more noteworthy stories from that year were the following:

(1) BellSouth corporation disclosed that the SEC launched a probe into whether one of its Latin American subsidiaries violated the FCPA and the company also disclosed that its outside counsel had already investigated the conduct and found that no violations had occurred; and

(2) BF Goodrich Company announced that it was using a web-enabled training system to educate its employees about work-related legal issues including the FCPA.

One could even attend a few FCPA training sessions in 2000 as the search picked up programs sponsored by both the City of New York Bar and the Washington DC Bar.

There was even one FCPA enforcement action in 2000!

In December 2000, the SEC announced (here) the filing of a settled cease-and-desist proceeding against International Business Machines Corporation (“IBM”).

According to the SEC order (here), IBM violated the books and records provisions of the FCPA based on the conduct of its indirect, wholly-owned subsidiary, IBM-Argentina, S.A. The conduct involved “presumed illicit payments to foreign officials” in connection with a “$250 million systems integration contract” between Banco de la Nacion Argentina (“BNA”) (an apparent “government-owned commercial bank in Argentina) and IBM-Argentina.

The SEC order finds that, in connection with the contract, IBM-Argentina’s Former Senior Management (without the knowledge or approval of any IBM employee in the U.S.) caused IBM-Argentina to enter into a subcontract with an Argentine corporation (“CCR”) and that “money paid to CCR by IBM-Argentina in connection with the subcontract was apparently subsequently paid by CCR to certain BNA officials.”

According to the Order, IBM-Argentina paid CCR approximately $22 million under the subcontract and “at least $4.5 million was transferred to several BNA directors by CCR.”

According to the Order, the former Senior Management “overrode IBM procurement and contracting procedures, and hid the details of the subcontract from the technical and financial review personnel assigned to the Contract.” The Order finds that IBM-Argentina “recorded the payments to CCR in its books and records as third-party subcontractor expenses” and that IBM-Argentina’s financial results were incorporated into IBM’s financial results filed with the Commission.

Based on the above conduct, the SEC concluded that “IBM violated [the FCPA’s books and records provisions] by failing to ensure that IBM-Argentina maintained books and records which accurately reflected IBM-Argentina’s transactions and dispositions of assets with respect to the Subcontract.” IBM consented to a cease and desist order and consented to entry of a judgment ordering it to pay a $300,000 penalty.

A Washington Post article about the IBM action notes that it “is the SEC’s first in three years involving overseas bribery.”

In 2000, there were no DOJ FCPA prosecutions (against corporations or individuals).

The first DOJ corporate FCPA prosecution of this decade did not occur until 2002.

In that action (here) Syncor Taiwan, Inc. (a wholly-owned, indirect subsidiary of Syncor International Corporation) pleaded guilty to a one-count criminal information charging violations of the FCPA. According to the DOJ release, “[t]he company admitted making improper payments [approximately $344,110] to physicians employed by hospitals owned by the legal authorities in Taiwan for the purpose of obtaining and retaining business from those hospitals and in connection with the purchase and sale of unit dosages of certain radiopharmaceuticals.”

The release further notes that the company “made payments [approximately $113,000] to physicians employed by hospitals owned by the legal authorities in Taiwan in exchange for their referrals of patients to medial imaging centers owned and operated by the defendant.”

Based on this conduct, the release notes that the company agreed to a $2 million criminal fine – “the maximum criminal fine for a corporation under the FCPA” (as noted in the release). The release also notes that “Syncor International has consented to the entry of a judgment requiring it to pay a $500,000 civil penalty, the largest penalty ever obtained by the SEC in an FCPA case.”.

From this retrospective, two issues jump out.

First, as demonstrated by the IBM action, the notion that an issuer may be strictly liable for a subsidiary’s (even if indirect) violations of the FCPA books and records is nothing new. (See here for a prior post on this issue).

Second, as demonstrated by the Syncor action, DOJ’s interpretation of the “foreign official” element to include non-government employees employed by state-owned or state-controlled entities stretches back to earlier this decade. (See here for prior posts on this issue).

This retrospective also highlights just how significantly FCPA enforcement has changed this decade.

For starters, the same “U.S. newspapers and wires” search for the FCPA (year to date) picks up nearly 700 “hits” (a ten-fold increase from ten years ago). In addition, if one wanted to, one could attend (it seems) an FCPA seminar, training session, bar event, etc. every week in a different state.

Further, I bet my Jack LaLanne Power Juicer received this holiday season that if the IBM enforcement action were to have recently occurred, the SEC would have also charged FCPA internal control violations as well as sought a significant disgorgement penalty given that the alleged improper payments in that matter helped secure a $250 million contract.

Moreover, the $2 million “maximum criminal fine for a corporation under the FCPA” (as noted in the Syncor DOJ release) seems laughable when viewed in the context of the $450 million Siemens criminal fine (Dec. 2008) or the $402 million Kellogg Brown & Root criminal fine (Feb. 2009). Also laughable is the $500,000 “largest penalty ever obtained by the SEC in an FCPA case” (as noted in the Syncor release) when viewed in the context of the $350 million Siemens penalty or the $177 million KBR/Halliburton penalty.

Has the conduct become more egregious during this decade or have enforcement theories and strategies simply changed? I doubt it is the former.

Why have enforcement theories and strategies changed? One of the best, candid explanations I’ve heard recently is that FCPA enforcement for the government “is lucrative.” (See here).

One of the great legal “head-scratchers” of this decade is how DOJ and SEC’s enforcement of the FCPA against business entities has taken place almost entirely outside of the normal judicial process due to the fact that corporate FCPA prosecutions are resolved through non-prosecution or deferred prosecution agreements, settled through SEC cease and desist orders, or otherwise resolved informally. The end result is that in many cases, the FCPA means what DOJ and SEC says it means.

My hope for the New Year and decade is that many of the untested and unchallenged legal theories which are now common in FCPA enforcement will actually be subject to judicial scrutiny and interpretation.

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