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Breuer – Siemens Investigation (As to Individuals) Remains Open

Last week, Lanny Breuer (Assistant Attorney General – Criminal Division) testified before The Criminal Law Subcommittee of the Senate Judiciary Committee. During his Q&A exchange with Senator Arlen Specter, Breuer stated that “individuals, executives and others who were involved [in the Siemens bribery scandal], remain exposed and the matter is not closed.”

Why was Specter asking Breuer about the Siemens enforcement action?

A bit of background.

In December 2008, right in time for the holidays, the DOJ put a nice “bribery, yet no bribery” bow on the Siemens enforcement action.

According to the DOJ, for much of Siemens operations around the world “bribery was nothing less than standard operating procedure.” The egregious nature of Siemens conduct is set forth in the criminal information (see here).

Among other allegations, the information details how Siemens paid out, through various mechanisms, $805.5 million in “corrupt payments to foreign officials” including: (i) payments made by various subsidiaries, including those with offices in the U.S., to “purported business consultants, knowing that at least some or all of those funds would be passed along to foreign government officials;” (ii) money withdraw from “cash desks within Siemens’ offices” for “corrupt payments;” and (iii) “slush funds to generate cash for corrupt payments.”

As to the amount of business Siemens obtained or retained through these corrupt payments, the DOJ’s sentencing memorandum (see here) states that calculating a traditional loss figure under the Sentencing Guidelines “would be overly burdensome, if not impossible” given the “literally thousands of contracts over many years.”

Yet, Siemens was not charged with violating the FCPA’s anti-bribery provisions.

That would have hurt too much, a point made in the DOJ’s sentencing memorandum which notes that a key factor the DOJ considered in resolving the case against Siemens in the way it did was the “collateral consequences” that could have resulted from criminal antibribery charges including the “risk of debarment and exclusion from government contracts.”

All of this troubled Senator Specter who has “long been concerned about the acceptance of fines instead of jail sentences in egregious cases.” (see here). In a release, Senator Specter notes that “there are many illustrative cases but three will suffice to make the point. In each of these cases, I registered my complaint with the Department of Justice.”

One such case was the Siemens enforcement action.

As Senator Specter’s release notes:

“On December 15, 2008, Siemens AG entered guilty pleas to violations of the Foreign Corrupt Practices Act and agreed to pay $1.6 billion in fines, penalties and disgorgements with no jail sentences. Again, that amounts to a calculation as part of the cost of doing business for a company which had revenues of $104 billion and a net income of $2.5 billion in fiscal year 2008 after the penalty.”

Thus, the reason Senator Specter questioned Breuer about the Siemens enforcement action during last week’s hearing.

Set forth below is the exchange.

*****

SPECTER: Are you familiar with the Siemens prosecution, Mr. Breuer?

BREUER: I am, Senator, to a degree, I am familiar with the Siemens prosecution.

SPECTER: Well, that’s a — that’s a case where Siemens, according to the information provided to me, agreed to pay a total criminal fine of $450 million and a disgorgement of $350 million in profits. And nobody went to jail. Siemens’ income, according to the information I have, was $104 billion, and income in excess or approximately $2.5 billion in fiscal year 2008. Did that conviction arise during the course of the current administration?

BREUER: It did, Senator. It was in — it did, Mr. Chairman. It was an ongoing investigation. And you’re right. Let me just add a little to what you say. First, Siemens, its total monetary penalties were actually $1.6 billion. That would include both from the U.S. and in Germany. The company was incredibly cooperative and very, very — very, very helpful in the information it provided over an extensive period. In making Siemens’ plea, we made it as an absolute explicit provision that there was absolutely no protection for any of the individuals of Siemens, and therefore the individuals, executives and others who were involved, remain exposed and the matter is not closed. The matter — simply all that we have done is have a plea against the corporation, we have not closed out nor have we claimed to have closed out investigations with respect to individuals. They’re ongoing. And, Mr. Chairman, I agree with you, I think the hallmark of an effective criminal justice plan must be that we will prosecute individuals when appropriate and ongoing. And I should say in that vein, Mr. Chairman, just two weeks ago we received the longest sentence in an FCPA case in the history of the FCPA when we attained an 87-month sentence against a fellow who had violated and was convicted of the FCPA. So we will continue to pursue that.

SPECTER: Well, you are saying that even though the case was concluded against the corporation that the matter is ongoing as to the individuals. Ordinarily a case is wrapped up once and for all and that before a corporation will pay a fine they want to know that that’s the limit of their liability.

BREUER: Right.

SPECTER: And there’s obviously a motivation to not have a jail sentence, for the corporation to pay a fine. And this morning we heard very extensive testimony — not that it was surprising — that fines are added into the cost of doing business. One testimony related to one defendant who paid $50 million and said if it had been a criminal prosecution he would have fought it to the teeth — tooth and nail. But you are saying that you’re really going to go after some people in this Siemens matter?

BREUER: Well, Mr. Chairman, what I’m saying is that I don’t want to say whether we are or not, for the reasons that I know you understand well. But I will say is the following. We’re not willing — and you’re absolutely right. Corporations do want to settle these cases. They do want to pay money, and they do want the assurance that the matters will be closed against the individuals of their company. We’re not — we’re not going to — we didn’t allow that to happen in that case, and we won’t let it happen, for the reasons you said. Now, in the Siemens case, I do want companies to feel an enormous incentive to come in and to disclose. And in Siemens, they did come in — they did come in. They did disclose. And they provided us with an enormous amount of information. And so there was a real judgment that there was a real merit to having closure with respect to that and for the company to be rewarded for providing us with almost unparalleled cooperation.

SPECTER: Did you (inaudible) the prosecution before they made the disclosures?

BREUER: I don’t think so, in that case. I think, Senator, I’ll have to go back. That’s a good question. So my — my colleague is right. In this case, of course, one of the challenges that I was going to go into is, in this particular case, the prosecution began in Germany. And then we, of course, as we try now, more and more, to deal with the challenges we have, are working closely with our international colleagues and partners. That was the case where it began with the German prosecutors. And, of course, many of the individuals involved are in Europe. But there — nonetheless, it began in Germany. The company — we reached out, I believe. The company provided us with an enormous amount of information.

SPECTER: Mr. Breuer, what I’m getting at is, did they provide you with information after you already had the case?

BREUER: No. I mean, Mr. Chairman, in a case like this, these are very complicated cases. And this, of course, was a massive example of — of violations of the FCPA in different countries. And so, there, there’s no question that the law firm providing us, and Siemens providing us with information, were able to provide us with information that we would not have had but for them giving us the information. It was all over the world. Frankly, we would not have had the resources to have investigated to the degree that the company provided us the information. And so they did get a benefit for that. The benefit they got was certainty in their — in the resolution of the corporate deal. What they did not get was closure for the individuals.

*****

As the above exchange demonstrates, Senator Specter also seems troubled that Siemens received cooperation credit even though the credit came after the company was busted.

The DOJ’s release (see here) states:

“The resolution of the U.S. criminal investigation of Siemens AG and its subsidiaries reflects, in large part, the actions of Siemens AG and its audit committee in disclosing potential FCPA violations to the Department after the Munich Public Prosecutor’s Office initiated searches of multiple Siemens AG offices and homes of Siemens AG employees.” (emphasis added).

If Senator Specter is troubled by this aspect of the Siemens enforcement action, he may want to take a close look at the Daimler enforcement action as well.

Daimler, like Siemens, was another “bribery, yet no bribery” case as to the parent entity that orchestrated the bribery scheme (per the DOJ’s own allegations). However, unlike Siemens, Daimler was not required to plead guilty to anything – it received a deferred prosecution agreement.

In arriving at a fine amount, Daimler, like Siemens, also received cooperation credit.

The DOJ’s sentencing memorandum (see here) notes that Daimler received a sentencing credit (a credit which reduces the overall fine amount) because the “organization fully cooperated in the investigation and clearly demonstrated recognition and affirmative acceptance of responsibility for its criminal conduct.”

This despite the fact that elsewhere in the sentencing memo the DOJ notes that the entire investigation started in March 2004 when a “former Daimler employee filed a whistleblower complaint with the U.S. Department of Labor Occupational Safety & Health Administration … allege[ing] that he was terminated for voicing concerns about Daimler’s practice of maintaining secret accounts, including accounts in its own books and records, for the purpose of bribing foreign government officials.”

In other words, even though the Daimler enforcement action was hatched by an internal whistleblower, the company still received a sentencing credit for cooperating in the eventual investigation.

The sentencing range set forth in the DOJ memo is $116 – $232 million.

The ultimate $93.6 million DOJ penalty was 20% below the bottom fine range of $116 million.

DOJ justified this reduction by stating that such a “reduction is appropriate given the nature and extent of Daimler’s cooperation in this matter, including sharing information with the Department regarding evidence obtained as a result of Daimler’s extensive investigation of corrupt payments around the world.”

The DOJ further stated, “indeed, because Daimler did not voluntarily disclose its conduct prior to the filing of the whistleblower lawsuit, it only receives a two-point reduction in its culpability.” However, in a rather odd statement, DOJ then said that it “respectfully submits that such reduction is incongruent with the level of cooperation and assistance provided by the company in the Department’s investigation.”

In other words, Daimler, like Siemens, received cooperation credit even though disclosure of the conduct at issue was involuntarily. Also, the DOJ gave Daimler cooperation credit greater than that allowed under the guidelines.

In conclusion, the DOJ noted that the disposition “promotes respect for the law, provides just punishment, and affords adequate deterrence to criminal conduct for Daimler and the marketplace generally.”

*****

Mr. Breuer had a busy week last week (see here for a prior post). During his Council of Foreign Relations speech, Breuer was asked about some of the DOJ’s “old cases.” See here for the Main Justice story and his response.

U.S. Congressman Alleges Bribery at Airbus

U.S. Representative Todd Tiahrt (R-Kan) (see here) has alleged that Airbus and its parent company European Aeronautic Defence and Space Company (“EADS”) pay bribes in order to get business.

In a recent article in Human Events Online (see here, scroll down a bit), Tiahrt states that “agents for the Airbus company have openly said that yes we do use bribery, in fact we budget for it.”

Tiahrt’s accusation follows an October 2009 letter (see here) he sent to the Deputy Secretary of Defense in which he stated that “[i]t is well documented that EADS has bribed foreign officials in buying products instead of American products.” Tiahrt states that “EADS has been subject to bribe-related scandals in Belgium, Canada, India, Kuwait, Switzerland and Syria.” He further notes that the “[t]he US intelligence community has characterized EADS as the most corrupt corporation in the world” and urges the Deputy Secretary of Defense to read the CIA briefing on EADS.

Tiahrt’s main concern appears to be that “[f]oreign companies, such as EADS, do not have to comply with the [FCPA].”

For the record, I am not so sure that Tiahrt is correct. For instance, EADS (the corporate parent of Airbus) has ADRs registered with the SEC. (see here). Further, Airbus has several business locations in the U.S. (see here).

******

Staying on the topic of foreign companies, a German court recently ordered two subsidiaries of MAN SE (see here) to pay $221 million in fines in connection with a wide-ranging investigation concerning bribes paid to secure sales of trucks and buses. MAN’s shares traded in the U.S. “over the counter” on the “pink sheets.” (see here).

If HR 2152 Were to Be Enacted … Part II

In September, I posted (see here) about H.R. 2152 – the Foreign Business Bribery Prohibition Act of 2009.

Big picture, under the proposed law, any “foreign concern” (defined to mean any person other than an issuer, domestic concern or U.S. person) that violates the FCPA’s anti-bribery provisions would be liable to any issuer, domestic concern or U.S. person for damages caused by the FCPA violation.

Under the proposed law, a plaintiff would need to prove that: (i) the “foreign concern” violated the FCPA’s anti-bribery provisions; and (ii) the violation prevented the plaintiff from obtaining or retaining business and assisted the foreign concern in obtaining or retaining business.

In other words, if a U.S. company can prove that it lost business because a “foreign concern” gained that same business by violating the FCPA, the U.S. company could bring a lawsuit seeking damages.

Under the proposed law, the damages would be the higher of the total amount of the contract or agreement that the “foreign concern” gained in obtaining or retaining the business or the total amount of the contract or agreement that the plaintiff failed to gain. To sweeten the pot, the proposed law requires treble damages along with attorneys fees and costs.

What got me thinking about H.R. 2152 back in September was a NY Times Article titled “China Spreads Aid in Africa, With a Catch for Recipients” (see here).

What has me thinking about H.R. 2152 again is a recent article in the Washington Post titled “Afghan Minister Accused of Taking Bribe” (see here).

The article alleges that the current Afghan Minister of Mines accepted an approximate $30 million bribe around December 2007 from China Metallurgical Group Corp. in exchange for awarding a $2.9 billion contract to extract copper from one of the largest unexploited deposits in the world.

The article mentions that U.S. officials worked on the bidding process for this project and that, because of the alleged bribe payment, the Minister did not give a “fair hearing to the proposals of Western firms.”

It would thus seem that a U.S. company was competing for this project and, in fact, other media reports have suggested that Phelps Dodge bid on the project.

If so, and if H.R. 2152 were to enacted, Phelps Dodge (or any other U.S. company that bid) would have a cause of action against China Metallurgical Group Corp.

Given the damages provision of H.R. 2152, a recovery could be north of $8.7 billion … plus attorney fees and costs. Ye gods that’s a lot of money!

If H.R. 2152 ever “gets out of committee,” supporters of the bill can now point to two recent examples demonstrating a need for the bill.

What I find most interesting about H.R. 2152 is that if enacted, I think it will be a “game-changer” in terms of FCPA enforcement.

Private plaintiffs will have to prove every element of an FCPA anti-bribery violation.

A private plaintiff will not carry the “big stick” that the enforcement agencies’ carry (which means in the corporate context, that nearly all FCPA enforcement actions are settled by way of a non-prosecution or deferred prosecution agreement or a consent decree) and FCPA case law will surely follow.

Which means that a court will actually be called upon to construe FCPA elements and legal theories of liability.

S. 1700 … A Bad Bill

[Warning – this post may cause your head to spin]

Bribery and corruption are bad.

That does not mean, however, that every attempt to curtail bribery and corruption is good.

Case in point – “The Energy Security Through Transparency Act of 2009” (S. 1700)(the “Act”) introduced in the Senate on September 23, 2009 by Richard Lugar (R-IN) and co-sponsored by several other senators – both Democrats and Republicans. (see here and here).

S-1700 seeks to amend Section 13 of the Securities Exchange Act of 1934 (15 USC 78m) (“Periodical and Other Reports”) by adding a new section (m) “Disclosure of Payment by Resource Extraction Issuers.”

Under this proposed new section, no later than 270 days after enactment of the Act, the SEC shall issue final rules that would require:

• a “Resource Extraction Issuer”( a defined term which means an issuer that:(i) is required to file an annual report with the Commission; and (ii) engages in the commercial development of oil, natural gas, or minerals”)

• to include in its annual report

• “information relating to any payment”

• made by the issuer, “a subsidiary or partner” of the issuer, “or any entity under the control of the issuer”

• to a “foreign government” (a defined term which means a “foreign government, an officer or employee of a foreign government, an agent of a foreign government, a company owned by a foreign government, or a person who will provide a personal benefit to an officer of a government if that person receives a payment, as determined by the [SEC].”

• for “the purpose of the commercial development of oil, natural gas, or minerals.”

The final rules to be issued by the SEC would require that the annual report include: (i) the type and total amount of such payments made for each project” of the issuer “relating to the commercial development of oil, natural gas, or minerals;” and (ii) “the type and total amount of such payments made to each foreign government.”

Thereafter, the Act requires that “to the extent practicable, the [SEC] shall make available online, to the public, a compilation of the information required to be submitted” under the above rules.

Wow, there is a lot here, so let me try to break this down a bit – to the extent I am able.

First, this much is clear. The disclosure/reporting requirement would apply to more than just U.S. “Resource Extraction Issuers” and, in this way, is really no different than the FCPA’s books and records and internal control provisions which apply to all issuers – not just U.S. issuers.

According to one analysis (see here), of the thirty largest internationally operating oil and gas companies, twenty-seven of the companies (including those in Europe, Canada, Russia, China and Brazil) would be covered by the Act based on their issuer status.

Thus, a concern one often hears expressed with the FCPA … that it puts U.S. companies at a disadvantage … would not seem credible if made in connection with this Act. (Of course, because the FCPA – including both its anti-bribery provisions and books and records and internal control provisions – apply to more than just U.S. companies, that argument is not credible in the FCPA context either; but that is an issue for another day).

Beyond the fact that the Act will apply to more than just U.S. “Resource Extraction Issuers,” not much else about the Act is clear.

Therein lies the problem.

Not sure, if your company is a “Resource Extraction Issuer” because you are unclear what “commercial development of oil, natural gas, or minerals” means?

No problem, as the Act provides this crystal clear definition – “the term ‘commercial development of oil, natural gas, or minerals’ includes the acquisition of a license, exploration, extraction, processing, export, and other significant actions relating to oil, natural gas, or minerals, as determined by the [SEC].

In other words, if you are an issuer, and you engage in “significant actions relating to oil, natural gas, or minerals” you just may have some huge, new reporting / disclosure requirements imposed on you!

Still confused? Join the club.

Is selling equipment to a core resource extraction company, which is then used to explore for oil, natural gas, or minerals a “significant action relating to oil, natural gas, or minerals?” Is selling exploration software to a core resource extraction company, which is then used to explore for oil, natural gas, or minerals a “significant action relating to oil, natural gas, or minerals?”

What is a payment? That’s an easy one and the Act provides this crystal clear definition – the term payment means:

(i) a payment that is (I) made to further commercial development of oil, natural gas, or minerals; and (II) not de minimis; and

(ii) includes taxes, royalties, fees, licenses, production entitlements, bonuses, and other material benefits, as determined by the [SEC].”

Ignoring for the moment the imperfect and imprecise definition of “Resource Extraction Issuer,” it is one thing to perhaps require such issuers to disclose royalties paid to a foreign government, and if that is viewed as providing transparency and eliminating bribery and corruption (however dubious that view may be), well then perhaps the Act is a good piece of legislation.

But the Act seeks disclosure and reporting of much, much more and could conceivably require disclosure of every single dollar a “Resource Extraction Issuer” makes to, well, just about anybody in connection with the “commercial development of oil, natural gas, or minerals” if the money ultimately makes its way to a foreign government, an officer or employee of a foreign government, a company owed by a foreign government, or any person who will provide a personal benefit to an officer of a government.

What’s the knowledge requirement in the Act?

There isn’t one!

So if a “Resource Extraction Issuer” makes a payment to person who then unbeknownst to the “Resource Extraction Issuer” makes a payment to a person “who will provide a personal benefit to an officer of a government” there is a disclosure obligation.

But how the heck is the “Resource Extraction Issuer” supposed to disclose something it doesn’t know about?

Here is the real kicker though. The Act requires all payments (meeting the above definitions – if indeed you can figure out what those definitions are) to be disclosed, including perfectly legitimate and legal payments!

Here is another mind bender. Say you are one of those foreign “Resource Extraction Issuers” such as Petrobras (Brazil) that also doubles as a so-called “company owned by a foreign government.” Under this Act, because the SEC already considers all Petrobras employees to be “foreign officials,” such companies would presumably be required to disclose the salaries and benefits provided to all of its employees.

How silly is that?

To those who support this Act, I’ve got this to say – “we’ve been down this road before.”

It’s called the FCPA (and the various versions of the statute before it was enacted). Years of congressional hearings were had as to this very same disclosure issue and we don’t need to repeat this exercise.

Here is some background.

The FCPA, of course, as enacted, contained (and still contains) an outright prohibition on improper payments (the anti-bribery provisions) as well as books and records and internal control provisions – but not disclosure provisions.

The original versions of what became the “FCPA” (i.e. the “Foreign Payments Disclosure Act” and other similar bills) however, started out with disclosure provisions, including provisions requiring all U.S. companies to disclose all payments over $1,000 to any foreign agent or consultant and any and all other payments made in connection with foreign government business.

As to these disclosure provisions, many people, including, most notably Senator Proxmire (D-WI – a Congressional leader on the “FCPA” issue), were concerned that the disclosure obligations were too vague to enforce and would require the disclosure of thousands of payments that were perfectly legal and legitimate.

Proxmire said during congressional hearings, “I would think they [the corporations subject to the disclosure requirements] would want some certainty. They want to know what they have to report and what they don’t have to report. They don’t want to guess and then find themselves in deep trouble because they guessed wrong.”

The final House Report (see here) on what would become the “FCPA” is even more clear. It states (when discussing the various disclosure provisions previously debated, but rejected):

“Most disclosure proposals would require U.S. corporations doing business abroad to report all foreign payments including perfectly legal payments such as for promotional purposes and for sales commissions. A disclosure scheme, unlike outright prohibition, would require U.S. corporations to contend not only with an additional bureaucratic overlay but also with massive paperwork requirements.”

The words of the late Senator Proxmire and the reasoned conclusion reflected in the House Report are equally applicable here.

The Act (while however noble its intended purpose) is akin to “swatting a fly with a bazooka.”

The FCPA already criminalizes improper payments made to the “foreign government” recipients targeted in the Act to the extent those payments are made to “obtain or retain business.” Do we really now need a law that requires “Resource Extraction Issuers” to disclose ALL such payments, even perfectly legitimate and legal payments?

For the record, S-1700 has been referred to the Senate Banking, Housing, and Urban Affairs Committee.

For the record, similar legislation was introduced in Congress in 2008, but no action was taken on the bills.

For the record, this post has left me dizzy just thinking through the ramifications. I can’t imagine being a corporate counsel actually tasked with ensuring compliance with this Act.

If H.R. 2152 Were to Be Enacted …

There is little in terms of substantive FCPA case law. Yet this much is clear – there is no private right of action under the FCPA – enforcement of the law is in the hands of the DOJ and the SEC (as to issuers).

However, Representative Ed Perlmutter (D-CO) would like to change that (at least a bit). In April, 2009, Perlumutter introduced H.R. 2152 – the Foreign Business Bribery Prohibition Act of 2009 (see here).

Big picture, under the proposed law, any “foreign concern” (defined to mean any person other than an issuer, domestic concern or U.S. person) that violates the FCPA’s anti-bribery provisions would be liable to any issuer, domestic concern or U.S. person for damages caused by the FCPA violation. Under the proposed law, a plaintiff would need to prove that: (i) the “foreign concern” violated the FCPA’s anti-bribery provisions; and (ii) the violation prevented the plaintiff from obtaining or retaining business and assisted the foreign concern in obtaining or retaining business.

In other words, if a U.S. company can prove that it lost business because a “foreign concern” gained that same business by violating the FCPA, the U.S. company could bring a lawsuit seeking damages. Under the proposed law, the damages would be the higher of the total amount of the contract or agreement that the “foreign concern” gained in obtaining or retaining the business or the total amount of the contract or agreement that the plaintiff failed to gain. To sweeten the pot, the proposed law requires treble damages along with attorneys fees and costs.

Certainly, lots to think about here.

But alas, with two foreign wars, government bailouts and debates about financial regulation, and now, the health care debate, H.R. 2152 remains buried in Congress. The last reported activity is from June 12, 2009 when the bill was reported to the House Subcommittee on Crime, Terrorism, and Homeland Security.

It’s been a few months since I thought about H.R. 2152.

But I was reminded of the law and its potential application last night while reading an interesting front-page article in the New York Times titled “China Spreads Aid in Africa, With a Catch for Recipients” (see here).

The article talks about business activity by Chinese companies around the globe, and how, according to quoted sources, Chinese companies may be securing contracts through improper payments, kickbacks and the like.

A good portion of the article is about Nuctech Company Ltd. (a Beijing-based scanner company) and its questionable activity in Namibia. The article quotes the Vice President of Nuctech’s “American rival, Rapiscan Systems.”

I trust you are now thinking about the potential application of H.R. 2152 as well?

Let’s go through the elements – “foreign concern” check, potential violation of the FCPA check, a domestic concern damaged by the “foreign concern’s” violation check.

Before FCPA lawyers start dusting off their copy of the rules of civil procedure and daydreaming about H.R. 2152’s promise of treble damages and attorney fees, H.R. 2152 needs to at least get “out of committee.”

In any event, for those in favor of H.R. 2152, the article would seem to present a poster-child of sorts.

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