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When the Dust Settles

Documents used to resolve a typical FCPA enforcement action (whether a non-prosecution or deferred prosecution agreement, plea, or settled civil complaint) are often peppered with vague generalities.

This is not surprising given that there is little serious threat of defense challenges and/or judicial scrutiny.

One element that is often vaguely described is the “foreign official” recipient of the alleged bribe. (This is in contrast to what the U.K. SFO has been doing in some of its recent enforcement actions when it “names names” – see here and here).

For instance, in the recent Daimler action (see here), certain of the “foreign officials” are described simply as follows:

“Nigerian government officials,” “high-level members of the executive branch of the Nigerian government,” “high-level executive branch official of Nigeria,” and “a member of the Nigerian police force” and

“senior official of a [Egypt] government owned factory.”

Given the ease in which information now flows and the world-wide interest in corruption and bribery, FCPA enforcement actions are read around the world.

Not only by foreign government officials and law enforcement agencies, but also by foreign media, foreign-based non-governmental organizations, and just plain old people.

It is thus not surprising that when the dust settles on the U.S. FCPA enforcement action, many are left wondering … who are those “foreign officials”?

For the foreign government involved, it is potentially embarrassing to have “one of your own” (assuming that all “foreign officials” in FCPA enforcement actions are properly deemed as such) become the focus of a bribery investigation in the U.S. without doing something about it “at home.”

Thus, with increasing frequency, one sees stories such as this recent Reuters report which details how the Nigeria Economic and Financial Crimes Commission has begun to probe the alleged bribe payments to the Nigerian “foreign officials” mentioned above.

What about that “senior official of a [Egypt] government owned factory”?

I’ve been told that this issue has become sort of a guessing game in Egypt and that Egyptian authorities have launched an investigation (see here)

Whether such foreign government investigations are bona fide or merely politically expediate cover is a valid question.

However, the take-away point is that just because the U.S. Foreign Corrupt Practices Act enforcement action is over, does not necessarily mean that all the dust has settled. Often, other persons, for entirely different reasons, remain interested.

The Holder Memo and FCPA Enforcement

Attorney General Eric Holder recently issued a memo (here) regarding “Department Policy on Charging and Sentencing.”

There is little that is new is this memo; in fact Holder states that the purpose of the memo is “to reaffirm the guidance” provided by Title 9 of the U.S. Attorneys’ Manual, Chapter 27″ (see here) – a manual which has “guided federal prosecutors” for “nearly three decades.”

Nor is there anything FCPA specific in the memo.

Yet the memo, and the broad pronouncements Holder makes, call into question whether several recent Foreign Corrupt Practices Act enforcement actions contradict the guidance the Attorney General has reaffirmed.

In the memo, Holder states – “persons who commit similar crimes and have similar culpability should, to the extent possible, be treated similarly.”

Under the law, “persons” include both individuals and business entities, including corporations.

However, as explored in this post, a two-tiered justice system has seemingly developed in FCPA enforcement.

Certain corporations in certain industries, most often selling certain things to certain customers, can seemingly violate the FCPA’s anti-bribery provisions with very little consequence. In fact, with increasingly frequency, such companies are not even charged with FCPA antibribery violations and/or may not even have to plead guilty to anything. See here for the recent Daimler, here for the recent BAE, and here for the Siemens “bribery, yet no bribery” enforcement actions.

On the other hand, the DOJ seeks long prison sentences for individuals such as Charles Paul Edward Jumet, who make payments that pale in comparison to the payments made by the above corporations. In doing so, the DOJ usually trots out its get tough language (i.e. “bribery isn’t just a cost of doing business overseas [… but] a serious crime that the U.S. government is intent on enforcing”).

The Holder memo also states “in accordance with long-standing principle, a federal prosecutor should ordinarly charge ‘the most serious offense that is consistent with the nature of the defendant’s conduct, and that is likely to result in a sustainable conviction.”

Again, reference is made to the Daimler, BAE, and Siemens enforcement actions.

In Daimler, the DOJ release (here) notes that Daimler “brazenly offered bribes in exchange for business around the world” and that Daimler “saw foreign bribery as a way of doing business.” Yet, Daimler was not charged with FCPA anti-bribery violations. In fact, Daimler was not required to plead guilty to anything as it received a deferred prosecution agreement.

In BAE, the DOJ’s criminal information (here) alleges that “BAE provided substantial benefits to one KSA (Kingdom of Saudi Arabia) public official, who was in a position of influence regarding the KSA Fighter Deals (the “KSA Official”), and to the KSA Official’s associates.” The indictment alleges that BAE “provided these benefits through various payment mechanisms both in the territorial jurisdiction of the U.S. and elsewhere.” Yet, BAE was not charged with FCPA anti-bribery violations.

In Siemens, the DOJ release (here) states, among other things, that for “much of its operations across the globe, bribery was nothing less than standard operating procedure for Siemens.” Yet, Siemens was not charged with FCPA anti-bribery violations.

It is difficult to reconcile the charging decisions in these recent enforcement actions with the language of the Holder memo.

As to sentencing, the Holder memo states – “in a typical case” the appropriate sentence should be reflected by the “applicable guidelines range, and prosecutors should generally continue to advocate for a sentence within that range.”

Apparently, neither Siemens and Daimler were “typical” cases, because in both enforcement actions the DOJ advocated for a sentence significantly below the guidelines range.

In Siemens, the guidelines range (see here) was $1.35 billion – $2.7 billion. However, the ultimate DOJ fine was $448.5 million. Siemens did not voluntarily disclose the conduct at issue, nevertheless, the DOJ gave Siemens greater sentencing credit than allowed for under the guidelines because the guidelines calculation was “incongruent with the level of cooperation and assistance provided by the company in the Department’s investigation.” For more on Siemens’ fine, see here and here.

In Daimler, the guidelines range (see here) was $116 million – $232 million. However, the ultimate DOJ fine was approximately $94 million. Again, Daimler did not voluntarily disclose the conduct at issue, nevertheless, the DOJ gave Daimler greater sentencing credit allowed for under the guidelines. The DOJ 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, the DOJ “respectfully submit[ed] that such reduction is incongruent with the level of cooperation and assistance provided by the company in the Department’s investigation.”

As demonstrated above, three of the DOJ’s most high-profile FCPA or “FCPA like” enforcement actions seemingly contradict many of the guiding principles in the Holder memo.

With Attorney General Holder now re-affirming these principles, it will be interesting to see if future FCPA enforcement actions comply more closely with these principles or if the future holds more facade enforcement actions.

*****

Speaking of Attorney General Holder, while most of us were enjoying the Memorial Day barbeque, he was delivering remarks at the OECD Conference in Paris. See here for a copy of his remarks.

Congressman Towns Is Asking The Right Questions

One interesting, surprising, and controversial aspect of FCPA enforcement is that the U.S. government remains a lucrative customer for many FCPA violators, including some of the most egregious violators.

Last December, on the one-year anniversary of the record-setting Siemens enforcement actions, I ran this post – “Siemens … The Year After.”

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

Using www.recovery.gov, the post then identifies many of the hundreds of government contracts awarded to Siemens’ business units with funds made available from the American Recovery and Reinvestment Act, the $787 billion stimulus bill passed by Congress and signed by President Obama in February 2009.

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 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. Because these are just government contracts awarded with stimulus money, they represent merely the tip of the iceberg.

Siemens is not alone.

In February, BAE settled “FCPA-like” charges. Since the enforcement action, the company has been inking contracts with U.S. government agencies left and right.

Last week it was a $10.7 million contract with the U.S. Army (see here). The week before it was a $5.5 million contract and a $10 million contract with U.S. government agencies (see here and here).

Numerous other FCPA violators could be listed as well.

Against this backdrop, Congressman Edolphus Towns (D-NY), Chairman of the House Committee on Oversight and Government Reform, is asking the right questions.

In a May 18th letter to Attorney General Eric Holder (see here) the Committee expresses its concern “that settlements of civil and criminal cases by DOJ are being used as a shield to foreclose other appropriate remedies, such as suspension and debarment, that protect the government from continuing to do business with contractors who do not have satisfactory records of quality performance and business ethics.”

The letter specifically mentions Kellogg, Brown & Root (KBR), including its 2009 FCPA enforcement action (see here and here).

The letter notes that “remarkably, neither the criminal [FCPA] conviction” nor KBR’s other legal woes “have precluded KBR from continuing to receive new government contracts.”

The letter then correctly notes, as detailed above, that “KBR does not appear to be an isolated example of this inconsistent policy whereby DOJ pursues fines and criminal sanctions for illegal actions by government contractors, yet the negotiated resolution of these cases does not have any effect on the company’s eligibility to continue to receive new contracts. In fact, an agreement by DOJ to intervene on the company’s behalf in any collateral proceedings, such as suspension and debarment, is a staple of deferred prosecution agreements.”

The letter continues:

“This type of clause, in which DOJ agrees to take the company’s side in suspension and debarment proceedings, has become standard and continues to this day. In a settlement just last month in which Daimler paid $185 million to settle criminal and civil charges that it violated the Foreign Corrupt Practices Act, DOJ “agrees to cooperate with Daimler” “[w]ith respect to Daimler’s present reliability and responsibility as a government contractor.” (See here for the Deferred Prosecution Agreement – para 21).

The letter concludes by the Committee asking for answers to the following questions by May 28th.

1. Does DOJ consider resolution of charges to foreclose action by other government agencies to suspend or debar companies from contracting?

2. In view of the fact that suspension and debarment is not a penalty, but is an important means for government agencies to protect themselves from unscrupulous and poorly performing contractors, please provide a detailed explanation of whether the Justice Department believes it is in the government’s best interest to continue to award contracts to those with a record of violations of law.

3. Does DOJ consult with federal government contracting authorities when entering into settlement agreements with companies that compete for government contracts?

4. Identify all instances in which DOJ officials intervened in a suspension and debarment proceeding on behalf of government contractors since 2005 and explain the basis for the DOJ intervention.

These are all the right questions to ask of the DOJ.

I’ve noted in numerous other posts (and elsewhere) that DOJ’s deterrance message will not fully be heard until an FCPA violator is debarred from receiving lucrative government contracts.

For a copy of the Committee’s news release (see here).

The FCPA and Reputational Damage

Nearly every FCPA presentation one sees or hears seems to talk about collateral sanctions which flow from an FCPA enforcement action, including the reputational harm companies “suffer” when disclosing FCPA issues or settling FCPA enforcement actions.

But is it true?

Do companies that disclose FCPA issues or settle FCPA enforcement actions actually suffer any reputational damage?

For companies, reputation is traditionally measured by stock price performance and business revenue.

Do companies that disclose FCPA issues or settle FCPA enforcement actions have a decrease in stock price or lose business?

How does one even measure such an issue?

Stock price movement upon the market first learning of a potential FCPA issue? Stock price movement upon settlement of an FCPA enforcement action? Something in between? Business revenue during the period of uncertainty (i.e. from disclosure to settlement)? Business revenue in the year after settlement of an FCPA enforcement action?

Whatever the metric, the answer to whether companies suffer reputational damage upon disclosing an FCPA issue or settling an FCPA enforcement action seems to be inconclusive.

That was the conclusion of a January 2009 study by Nera Economic Consulting (see here). Among other things, the study concluded that “the extent of the fallout from the relatively recent trend of increased FCPA enforcement actions remains uncertain.” For some companies “there was no statistically significant price reaction” yet for other companies there was a “negative price reaction.”

The below examples also seem to support the inconclusive answer.

Last month, (see here) Hewlett-Packard Co.’s (HP) Moscow offices were raided in connection with an investigation focusing on whether company executives made millions in payments to the prosecutor general of the Russian Federation to secure contracts. It was front page news in several publications, including the Wall Street Journal. This week HP (see here) disclosed second quarter results (the same quarter the issue surfaced). The results … stellar. “Second quarter net revenue of $30.8 billion, up 13%, or $3.5 billion, from a year earlier.” HP’s Chairman and CEO said “HP had an exceptional quarter with strong performance across every region,” – “we’ve built the best portfolio in the industry, and our customers are responding. We’re winning in the marketplace, investing for the future and confident in the enormous opportunity that lies ahead.” What about the company’s performance in Russia? Even better. The HP release notes “revenue from outside of the United States in the second quarter accounted for 66% of total HP revenue, with revenue in the BRIC countries (Brazil, Russia, India and China) increasing 25% while accounting for 10% of total HP revenue.”

Front page press coverage of HP’s potential FCPA issues seems to have had no affect on the company’s reputation when viewed through the prism of financial performance.

What about Siemens?

In the 365 days after the Siemens enforcement action, Siemens outperformed its competitors and received mounds of new business from the U.S. government, including taxpayer funds from the $787 billion stimulus bill passed by Congress and signed by President Obama in February 2009 (see here). This despite the fact (according to DOJ statements) that Siemens engaged in a pattern of bribery “unprecedented in scale and geographic scope” and for much of Siemens operations around the world “bribery was nothing less than standard operating procedure.” Siemens surely paid a hefty fine/penalty amount, but did its reputation suffer? It would appear not.

What about BAE?

When the BAE “FCPA-like” enforcement action was announced, the company’s stock rose. Since the February 2010 enforcement action, the company has been inking contracts with the U.S. and U.K. governments (the prosecuting governments) left and right. This week it was a $10.7 million contract with the U.S. Army (see here). Last week it was a $5.5 million contract and a $10 million contract with U.S. government agencies (see here and here). Throw in a recent £111 million contract from the UK’s Ministry of Defence (see here) and one would be justified in concluding that it matters very little if a company is caught engaging in bribery and corruption.

However, just when one is set to reach such a conclusion, along comes a company like Avon. Last month, the company shares dropped 8% upon news that its previously disclosed FCPA issues appear to have escalated. (see here, here and here). It sure looks like Avon’s reputation (viewed through the prism of its stock price) has suffered because of the FCPA escalation.

*****

Somewhat “on topic” is the recent news that Daimler AG, after a 17 year listing on the New York Stock Exchange, has decided to delist. Purely coincidence that this delisting is occuring approximately one month after Daimler resolved its FCPA case?

Daimler agreed to enter into a deferred prosecution agreement for conspiring to violate the FCPA’s books and records provisions and knowingly falsifying books, records and accounts, provisions which only apply to “issuers”.

(The DOJ’s allegations as to Daimler also allege use of U.S. bank accounts and U.S. entities – an independent basis by which a foreign company like Daimler can become subject to the FCPA). For more on the Daimler enforcement action (see here and here).

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.

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