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Siemens … The Year After

One year ago this week, Siemens agreed to pay $800 million in combined U.S. fines and penalties to settle FCPA charges for a pattern of bribery the Department of Justice (“DOJ”) termed “unprecedented in scale and geographic scope.” (see here).

The charged conduct involved improper payments to obtain or retain (among other business) transportation, telecommunication, energy and health sector contracts in (among other places) Argentina, China, Mexico, Nigeria, Russia, and Venezuela.

According to the DOJ, for much of Siemens’ operations around the world, “bribery was nothing less than standard operating procedure.” Because Siemens (a German-based company) has shares listed on a U.S. stock exchange and because certain of the improper conduct had a U.S. nexus, the company was subject to the FCPA.

The Siemens matter easily remains the largest and most high-profile FCPA matter since the law was enacted in 1977.

Yet, on the same day Siemens agreed to resolve the FCPA matter, the company also announced that a U.S. government agency issued a formal determination declaring Siemens a “responsible contractor.” This designation assisted Siemens in continuing to do business with the U.S. government even though an entity found in violation of the FCPA may be barred from doing business with the federal government under Office of Management and Budget guidelines. (see here).

In the year since resolution of the Siemens FCPA matter, the U.S. government continues to do substantial business with the company it recently charged with engaging in a pattern of bribery “unprecedented in scale and geographic scope.”

This U.S. government business has helped Siemens outperform its competitors in a difficult recessionary environment and much of the company’s recent success is the direct result of government stimulus programs around the world.

Reacting to these government stimulus programs, Siemens executives stated that the company was in “an excellent position to generate additional business.” In June 2009, Siemens issued a press release noting that “the shares of the stimulus program that Siemens can address are the largest in the U.S.” (see here). Siemens’ executives proclaimed that the government stimulus programs should have a “stabilizing effect on our business.”

On such “stabilizing effect” on Siemens’ business has been the American Recovery and Reinvestment Act, the $787 billion stimulus bill passed by Congress and signed by President Obama in February 2009 to stimulate the American economy.

According to Recovery.gov (see here) (a U.S. government website designed “to allow taxpayers to see precisely what entities receive Recovery money ..”), Siemens’ business units have already been awarded several dozen contracts funded by U.S. taxpayer stimulus dollars. These contracts have been awarded by the following government agencies: Department of Defense, Department of the Air Force, Department of the Army, Department of Transportation, Department of Health and Human Services, Department of Energy, Department of Commerce, Department of Housing and Urban Development, and the General Services Administration.

According to Recovery.gov, even the DOJ (i.e. the same government agency that prosecuted Siemens less than 365 days ago for a pattern of bribery the agency termed “unprecedented in scale and geographic scope”) awarded a Siemens business unit a contract funded with stimulus dollars.

It is not just the federal government that continues to do business with Siemens in the immediate aftermath of its unprecedented bribery scandal. Since December 2008, Siemens’ business units have also been awarded: a $135 million service contract with the University of Pennsylvania Health System (see here); a $205 million order for light rail vehicles from the San Diego Metropolitan Transit System (see here); and a $140 million energy contract from the Northern California Power Agency (see here).

Siemens business with the U.S. government (and other units of government) in the immediate aftermath of its unprecedented bribery scandal raises several questions.

Does it even matter, aside from the fines/penalties and associated costs of getting caught, if a company violates the FCPA?

The above information suggests that the answer is no, so the question becomes should it matter? Should U.S. taxpayer dollars be awarded to a company which less than 365 days ago settled a bribery scandal “unprecedented in scale and geographic scope”?

The DOJ frequently speaks about deterrence as being a primary function of FCPA enforcement. But what deterrence is there when an FCPA violator (let alone the most egregious violator in the history of the FCPA) can immediately get U.S. government business, including from the same government agency that prosecuted it for violating the FCPA? Can FCPA enforcement ever be effective if Siemens is the template for future enforcement?

Siemens post-scandal business with the U.S. government also raises the question of whether Siemens secured the contracts at issue in the FCPA enforcement action, not because of the payments, but simply because Siemens offered the best products for the best prices?

Is this the reason the U.S. government continues to do business with Siemens in the immediate aftermath of its unprecedented bribery scandal? If so, what does this say about the rhetoric that accompanies a typical FCPA enforcement action (i.e. the company bribed to get business)?

A Trip Around the World

Grab your bags and your passport, it’s time for a quick trip around the world.

First stop, Germany.

Siemens

In December 2008, Siemens (a global corporation organized under the laws of Germany with shares listed on the New York Stock Exchange since March 2001) agreed to pay $800 million in combined fines and penalties to settle FCPA charges for a pattern of bribery the Department of Justice (“DOJ”) termed “unprecedented in scale and geographic scope.” The combined fines and penalties were easily the largest ever levied against an FCPA violator.

This week, Siemens announced (see here) that it “has come to an agreement about settlements with six further former Board members against whom damages were claimed in connection with past cases of corruption in the company.” See (here) for press coverage.

Next stop, the U.K.

SFO Charges Former DePuy Executive

The U.K.’s Serious Fraud Office (“SFO”) (an enforcement agency similar to the U.S. DOJ), recently announced (see here) that Robert John Dougall, the former Vice President of Market Development of DePuy International Limited was charged with conspiracy for “making corrupt payments and/or giving other inducements to medical professionals working in the Greek public healthcare system.” The SFO has previously indicated (see here) that it seeks to generally model DOJ’s enforcement strategies, and that model now seems to include a broad interpretation of the potential universe of recipients of improper payments (i.e. not just core government officials, but also employees of public healthcare systems). There is greater cooperation between law enforcement agencies around the world in investigating cases of alleged improper payments, a fact highlighted by the SFO release which notes that the case “was referred to the [SFO] by the [DOJ] and accepted in March 2008.” Depuy (see here) is “part of the Johnson & Johnson family of companies.” In February 2007, Johnson & Johnson disclosed a potential FCPA issue and the company’s most recent announcement on the issue is in its November 2009 10-K filing (see here).

Next stop, Australia.

Money to Print Money

The Age of Melbourne has reported (see here) that Securency International (see here) and certain of its executives are being investigated by the Australian Federal Police for alleged breaches of Australia’s criminal code which prohibit payments to foreign government officials to obtain a business advantage. According to the article, Securency (according to its website – a world leader in secure polymer substrate technology and the supplier of a range of unique substrates which are used for the printing of banknotes and other security documents), is also under scrutiny in the U.K., Vietnam, and Nigeria. The article notes that the Securency matter could be Australia’s first prosecution for foreign bribery.

Final stop, the beaches of the Bahamas.

Kozeny Extradition Hearing

While Frederic Bourke (see here) prepares his appeal, Viktor Kozeny, the alleged master-mind of the bribery scheme, continues to enjoy life in the Bahamas as U.S. government attempts at extradition have thus far failed. This week, the U.S. government’s appeal hearing was heard in the Bahamas. See here for press coverage.

Holder to Corrupt Foreign Officials – We Are Coming After Your Money

This weekend, in Doha, Qatar, Attorney General Eric Holder spoke at the Sixth Global Forum on Combating Corruption and Safeguarding Integrity (see here for the full text of his speech).

The forum was a meeting of nations which have signed on to the United Nations Convention Against Corruption (see here).

One of the three “critical steps” Holder spoke of which all member nations should work together to ensure is that “corrupt officials do not retain the illicit proceeds of their corruption.”

Calling such asset recovery a “global imperative,” Holder announced a “redoubled commitment on behalf of the United States Department of Justice to recover” funds obtained by foreign officials through bribery.

As most readers of this blog know, the FCPA only applies to “bribe-givers” and not “bribe-takers.”

Notwithstanding the FCPA’s limitation, in recent years the DOJ has attempted to recover bribe proceeds.

Most notably, in January 2009, in the aftermath of the Siemens enforcement action, the DOJ filed a forfeiture action against bank accounts located in Singapore in the names of Zulfikar Ali, Fazel Selim, and ZASZ Trading and Consulting Pte Ltd. (“ZASZ”) (see here).

According to the DOJ’s complaint (see here), these accounts were used by Siemens and another company to bribe foreign officials in violation of the FCPA, specifically Arafat Rahman (“Koko”), the son of former Bangladeshi Prime Minister Khaleda Zia. The DOJ alleges that the illicit funds in these accounts flowed through U.S. financial institutions thereby subjecting them to U.S. jurisdiction.

In announcing the forfeiture action, a DOJ official said that the action “shows the lengths to which U.S. law enforcement will go to recover the proceeds of foreign corruption …” and that the DOJ will not only prosecute companies and executives who violate the FCPA, but will also use forfeiture laws “to recapture the illicit facilitating payments often used in such schemes.”

As to other means of potentially punishing the “bribe takers,” the FCPA blog recently posted on Presidential Proclamation 7750 (Jan. 2004) (see here).

Was the DOJ’s FCPA Enforcement Action Against Siemens Award-Worthy?

That’s the question I have after reading that the DOJ recently awarded distinguished service awards to eight individuals involved in its Siemens FCPA enforcement action.

First, let me be clear. With the post, I mean no disrespect to the award recipients – I used to work with one recipient, and I congratulate all the recipients for the recognition received by their employer. Rather, my post is a commentary on DOJ’s enforcement of the FCPA.

With that out of the way, let’s return to the question – was the DOJ’s FCPA enforcement action against Siemens award-worthy?

The DOJ press release announcing the awards (see here) states that all DOJ award recipients (not just those receiving an award in connection with the Siemens matter) have “advanced the interests of justice on behalf of the American people.”

As to the recipients specifically receiving an award in connection with the Siemens FCPA enforcement matter, the press release states:

“The department’s investigation uncovered evidence of hundreds of millions of dollars of corrupt payments in dozens of countries spanning several decades, and in virtually every Siemens operating group and region. The Department’s prosecution was announced simultaneously and coordinated with a civil enforcement action by the Securities and Exchange Commission (SEC) and a criminal prosecution by the Munich Public Prosecutor’s Office, resulting in overall sanctions of more than $1.6 billion. The Department of Justice’s coordination of its settlement not only with the SEC, but also with a foreign regulator sets a new standard in international cooperation and coordination, and serves as a model for future global anti-corruption enforcement.”

In Attorney General Holder’s speech at the actual awards ceremony (see here), he said to the award recipients:

“… you have not just my sincere gratitude, but the knowledge that you have all truly done justice on behalf of the American people.”

Using Holder’s words to thus ask the question – did the DOJ’s FCPA enforcement action against Siemens “advance[] the interests of justice on behalf of the American people?”

In FCPA terms – did the DOJ’s FCPA enforcement action against Siemens represent a “red-letter” day (i.e. a good day for FCPA enforcement) or a “black-letter” day (i.e. a bad day for FCPA enforcement)?

Reasonable minds may differ as to the answer, but for the reasons stated below, I submit that DOJ’s FCPA enforcement action against Siemens was a “black-letter” day in the history of FCPA enforcement – a farcical facade of enforcement if ever there was such a thing. Surely not an award-worthy event.

First, some background.

In December 2008, Siemens (a global corporation organized under the laws of Germany with shares listed on the New York Stock Exchange since March 2001) agreed to pay $800 million in combined fines and penalties to settle FCPA charges for a pattern of bribery the Department of Justice (“DOJ”) termed “unprecedented in scale and geographic scope.” The combined fines and penalties were easily the largest ever levied against an FCPA violator.

Resolution of the FCPA charges against Siemens (and its affiliates) included both DOJ and Securities and Exchange Commission (“SEC”) enforcement actions.

Because this post is about the DOJ awards, and more broadly DOJ FCPA enforcement, the below background information relates only to the DOJ enforcement action. (See here for all DOJ material related to the enforcement action including the criminal informations against Siemens and its affiliates, the DOJ plea agreement and sentencing memo, the DOJ news release and a transcript of the DOJ press conference).

In the DOJ enforcement action, Siemens pleaded guilty to a two-count criminal information charging violations of the FCPA’s books and records and internal control provisions. The criminal information describes approximately $1.36 billion in payments Siemens made through various mechanisms, including approximately $555 million paid for unknown purposes (including approximately $341 million in direct payments to business consultants for unknown purposes) and approximately $806 million intended, in whole or in part, as corrupt payments to foreign officials.

According to the DOJ, for much of Siemens operations around the world “bribery was nothing less than standard operating procedure” and the criminal information details improper conduct in various of Siemens operating groups and subsidiaries around the world, several of which had offices in the U.S.

In conjunction with the filing of the Siemens’ criminal information, the DOJ also filed separate criminal informations against Siemens’ subsidiaries in Argentina, Bangladesh and Venezuela charging each with conspiracy to violate the FCPA’s anti-bribery provisions and books and records provisions in connection with projects in those countries.

The total criminal penalty was $450 million (a $448.5 million fine against Siemens and a $500,000 fine against each of the three subsidiaries).

In agreeing to fines and penalties below the maximum $2.7 billion available under the advisory U.S. Sentencing Guidelines, the DOJ noted that resolution of the matter reflected, in large part, Siemens’ actions in disclosing the conduct at issue to U.S. enforcement agencies after German authorities searched its offices and after Siemens conducted an extensive internal investigation. The DOJ specifically noted, among other things, the company’s “extraordinary” cooperation in connection with its investigation (and the investigations of foreign law enforcement agencies), the “unprecedented” scope of the company’s internal investigation which included virtually all aspects of its worldwide operations, and the significant remedial measures the company has undertaken.

With that background out of the way, and before returning to the ultimate question, is it really accurate for the DOJ to say that it “uncovered evidence of hundreds of millions of dollars of corrupt payments in dozens of countries spanning several decades, and in virtually every Siemens operating group and region?”

Use of the self-congratulatory term “uncovered” would seem a bit distorted given that the DOJ itself noted that “[t]he 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.” (see here at p. 3).

Whether DOJ “uncovered” Siemens conduct or not is besides the point. The question remains – was the DOJ’s FCPA enforcement action against Siemens award-worthy?

An initial reaction is most likely – “why of course, handing down the largest ever criminal penalty under the FCPA is indeed award-worthy and a good day for FCPA enforcement.”

But, is agreeing to a $450 million criminal penalty when the advisory U.S. Sentencing Guidelines set forth a penalty range of $1.35 – $2.7 billion based on the alleged conduct award-worthy? (See DOJ Sentencing Memo here at p. 12). Is agreeing to a criminal penalty approximately 33% of the amount available under the guidelines (on the low end) and approximately 16% of the amount available (on the high end) “advanc[ing] the interests of justice on behalf of the American people?” If the answer is yes, what then does this say about the guidelines’ formula for calculating criminal fines?

But, regardless of the guidelines, is agreeing to a $450 million criminal penalty when, per the DOJ, Siemens’ corrupt or questionable payments totaled $1.36 billion award-worthy? Is agreeing to a criminal penalty approximately 33% of the amount of the actual improper or questionable payments “advanc[ing] the interests of justice on behalf of the American people?”

But, is agreeing to a $500,000 fine based on allegations of making over $31 million in corrupt payments in exchange for favorable business treatment in connection with a $1 billion project in Argentina award-worthy? Is agreeing to a criminal penalty approximately 2% of the amount of the actual corrupt payments “advanc[ing] the interests of justice on behalf of the American people?”

But, is agreeing to a $500,000 fine based on allegations of making over $18 million in corrupt payments in exchange for favorable business treatment in connection with two major metropolitian mass transit projects in Venezuela award-worthy? Is agreeing to a criminal penalty approximately 3% of the amount of the actual corrupt payments “advanc[ing] the interests of justice on behalf of the American people.”

But, is agreeing to a $500,000 fine based on allegations of making over $5 million in corrupt payments in exchange for favorable treatment during the bidding process on a mobile telephone project in Bangladesh award-worthy? Is agreeing to a criminal penalty approximately 10% of the amount of the actual corrupt payments “advanc[ing] the interests of justice on behalf of the American people?”

Numbers, schulmbers you may be saying.

OK fine, but here is the real-kicker in my mind. Despite the DOJ’s rhetoric – that Siemens engaged in bribery that was “unprecedented in scale and geographic scope” and that Siemens was a company where “bribery was nothing less than standard operating procedure” you will not find anywhere in the DOJ’s enforcement action against Siemens FCPA anti-bribery charges!

If ever facts were deserving of an FCPA anti-bribery charge, would it not be the Siemens facts? Per the DOJ’s information charging Siemens with FCPA books and records and internal controls only, the essential elements of an anti-bribery charge would seem to be present. Among other relevant facts, beginning in March 2001, Siemens became an “issuer” and thus subject to the FCPA’s anti-bribery provisions and certain of its subsidiaries involved in the improper payments had offices in the U.S.

Yet, one will not find FCPA anti-bribery charges in the DOJ’s enforcement action against Siemens despite the company being engaged in a bribery scheme that was “unprecedented in scale and geographic scope” and Siemens being a company where “bribery was nothing less than standard operating procedure.”

Is the exercise of prosecutorial discretion in this instance, in the face of these facts, award-worthy and an example of “advanc[ing] the interests of justice on behalf of the American people?”

I submit that the answer to all of these above questions is a resounding NO and that DOJ’s FCPA enforcement action against Siemens was a “black-letter” day in the history of FCPA enforcement – a farcical facade of enforcement if ever there was such a thing. Surely not an award-worthy event.

Those who frequent this blog are well aware of my frequent criticisms of DOJ/SEC FCPA enforcement as being too aggressive most often where DOJ/SEC advance untested legal theories resulting in an enforcement action being settled even though it is questionable as to whether the elements of an anti-bribery violation are even met.

However, I submit that the FCPA is a fundamentally sound statute when enforced by DOJ/SEC in a way that is consistent with Congressional intent (i.e. when the facts applied to the law results in all the elements of an anti-bribery violation being met).

In these cases, an FCPA violator ought to be punished and punished aggressively to deter others from engaging in bribery “unprecedented in scale and geographic scope” and operating a company where “bribery [is] nothing less than standard operating procedure.”

I understand that cooperation means something in corporation criminal resolutions and I understand that Siemens, in addition to paying an SEC fine, paid fines in other jurisdictions (most notably in Germany).

I also understand that justice is probably not served when criminal fines and penalties force a company into bankruptcy.

Nevertheless, given the figures above, it is disturbing to see how Siemens ended up paying significantly less in DOJ criminal fines than the actual amount of the corrupt or questionable payments. In other words, even after payment of the $450 million DOJ criminal fine, Siemens appears to have profited, rather handsomely, from the bribery scheme that was “unprecedented in scale and geographic scope.”

And consider this.

During the five year period (2004-2008), a period which does not even cover the entire time frame of Siemens’ “unprecedented” bribery scheme, its net income was approximately $28.3 billion (after a currency conversion) (see here). Given these numbers, is a $450 million criminal fine even noteworthy, let alone award-worthy?

The final act in this comedy would seem to be this.

Earlier this year, a few weeks after DOJ termed Siemens’ bribery “unprecedented in scale and geographic scope” and Siemens as a company where “bribery was nothing less than standard operating procedure” the company issued a new release (see here) announcing that:

“the lead agency for U.S. federal government contracts, the Defense Logistics Agency (DLA), issued a formal determination that Siemens remains a responsible contractor for U.S. government business.”

If Siemens is a “responsible” contractor, I can’t imagine a set of facts which would lead the DLA to conclude that a company is an “irresponsible” contractor for U.S. government business!

So what do you think – was the DOJ’s FCPA enforcement action against Siemens award-worthy or did it represent a farcical facade of enforcement?

Welcome to the Club

Initial Public Offerings (IPO’s) were back in the news this week. Leading the way was Shanda Games Ltd. By raising $1.04 billion, Shanda’s IPO was the largest since April 2008.

Shanda is a Beijing, China based online computer game company and its listing is the latest example of a foreign issuer (frequently a Chinese company) electing to trade its shares (or a portion of its shares) on a U.S. Exchange.

By becoming an “issuer” Shanda becomes subject to the FCPA.

Presumably, Shanda had experienced securities counsel advising it on its listing and the consequences that flow from such a listing. If not, and if you are listening, welcome to the club Shanda.

Your potential FCPA exposure is not just limited to the books and records and internal control provisions. The FCPA’s anti-bribery provisions also apply to you.

Don’t take my word for it, listen to the Department of Justice.

In 2006, the Department of Justice announced an FCPA enforcement action against Statoil ASA, a Norwegian company, for making improper payments to Iranian foreign officials – the first time DOJ brought criminal FCPA charges against a non-U.S. company. (See here for the deferred prosecution agreement).

The U.S. prosecuting a Norwegian company for making improper payments to Iranian foreign officials … how did that happen?

Statoil had shares traded on a U.S. exchange and was thus an “issuer” subject to the FCPA.

In announcing the settlement, the DOJ had this to say – “Although Statoil is a foreign issuer, the Foreign Corrupt Practices Act applies to foreign and domestic public companies alike, where the company’s stock trades on American exchanges” (see here).

And this – “This prosecution demonstrates the Justice Department’s commitment vigorously to enforce the FCPA against all international businesses whose conduct falls within its scope.”

The Statoil FCPA enforcement action is certainly not the only FCPA enforcement action against a foreign issuer. In fact, the largest FCPA enforcement action ever was settled in December 2008 involving Siemens AG, a German company (see here and here).

Despite these, and other, enforcement actions, there is still a common misperception that the FCPA is “the law that applies to only U.S. companies.”

With the IPO market showing signs of life again, with foreign companies (like Shanda) increasingly turning to U.S. capital markets, and with many of these companies doing business in FCPA high-risk countries, the number of FCPA enforcement actions against foreign issuers is likely to increase.

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