Mendelsohn’s Defense of the Siemens Enforcement Action … A Contrarian View
Mark Mendelsohn (DOJ Deputy Chief, Fraud Section and the DOJ’s FCPA “top cop”)recently defended the 2008 Siemens enforcement action.
Given that Mendelsohn signed the Siemens charging documents and plea agreement, this is a rather unremarkable event and is sort of like me saying I defend the substantive content on this blog.
In any event, and in the interest of sparking thought within the FCPA community, this post takes issue with Mendelsohn’s defense of the Siemens enforcement action.
In an “exclusive interview with the International Bar Association towards the end of 2009,” (see here) Mendelsohn stated that the Siemens enforcement action sends a “very, very strong message” and a “strong deterrent message.”
Among other things, Mendelsohn notes that the overall total of $1.6 billion that Siemens paid to U.S. (DOJ and SEC) and German authorities is “only a fraction of the costs that Siemens incurred as a result of the bribery conduct.” Mendelsohn legitimately notes that Siemens also was subject to a debarment proceeding at the World Bank which required Siemens to pay $100 million to help fight corruption over a period of time. Mendelsohn points out that “the cost of the investigation for the company and the remediation” “probably exceeded the fines that were assessed” and he also cites the “costs of disruption to Siemens’ business,” the replacement of members of Siemens’ board, and the discipline of “lots of sales people.”
Based on the Siemens’ resolution documents, the DOJ’s own statements about the case, and other information in the public domain, I strongly disagree that the Siemens enforcement action sends a “strong deterrent message.”
For starters, since when is the cost of getting caught, the legal and professional fees associated with getting caught, and the remediation associated with getting caught in a bribery scheme “unprecedented in scale and geographic scope” (those are DOJ’s words – not mine) part of the deterrence conversation?
I think every company in the world probably already assumed prior to the Siemens enforcement action that engaging in a bribery scheme “unprecedented in scale and geographic scope” would no doubt entail substantial legal and professional fees, employee terminations and other internal remediation costs upon getting caught. Thus, it is difficult to see how these pieces of the Siemens enforcement action send a “very strong message” or a “deterrent message.”
In a prior post (see here), I took a look at some of the Siemens numbers per the DOJ’s resolution documents. Looking at these numbers again is instructive in light of Mendelsohn’s comments.
The criminal information (see here) 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. The criminal information, of course, does not charge Siemens with FCPA antibribery violations, so from the outset it is difficult to see how this case sends a “very strong message” or a “strong deterrent message.”
The Siemens resolution also included charges against certain of Siemens’ subsidiaries.
For instance, Siemens Argentina (see here) agreed to pay a $500,000 fine based on allegations that it made over $31 million in corrupt payments in exchange for favorable business treatment in connection with a $1 billion project in Argentina. Siemens Venezuela (see here) also agreed to pay 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 metropolitan mass transit projects in Venezuela. Likewise, Siemens Bangladesh (see here) agreed to pay 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?
When a fine amounts to a sliver of the improper payments allegedly made, and a sliver of a sliver of the business allegedly obtained or retained, since when does that send a “very strong message” or a “strong deterrent message?”
Finally, what sort of “very strong message” or “strong deterrent message” is sent when, on the same day a company settles a case for engaging in a bribery scheme “unprecedented in scale and geographic scope” the company also announces that it will be allowed to keep its coveted “responsible contractor” status with the U.S. government. It is further difficult to see the deterrence achieved by the Siemens enforcement action when, in the year since resolution, various U.S. government agencies, including the DOJ, continue to do substantial amounts of business with Siemens and its affiliate companies (see here for a prior post on this subject).
Far from sending a “very strong message” or a “strong deterrent message,” the Siemens enforcement action sends the message that corporate bribery, even if caught, can still result in a net positive.
BAE – The Circus Continues
Just when you think the final circus wagon has left the station, the BAE bribery, yet no bribery circus continues to keep on giving.
As I posted earlier this week (here), debarment issues clearly drove resolution of this prosecution as demonstrated by the DOJ’s sentencing memorandum. That post also noted that the U.S. Attorneys’ Manual specifically states that “where the corporation was engaged in fraud against the government […], a prosecutor may not negotiate away an agency’s right to debar or delist the corporate defendant” – a relevant fact given that both the DOJ release announcing resolution of the BAE matter, as well as the sentencing memorandum, expressly state that BAE “defrauded” the U.S.
Today’s circus act has to do with the magician’s uncanny ability to make things disappear and concerns the State Department’s treatment of BAE’s license applications.
The FCPA Blog today (see here) profiles a DefenseNews article (here) and notes that the” first debarment notice posted on the State Department’s website Monday was withdrawn and a second notice was changed at least once and then also withdrawn.”
Defense News quoted a Washington trade lawyer as saying:
One notice Monday, another one Tuesday, and now they’re both down. Which is it, guys? What State has done sends a terrible message. It makes it seem like State does not have a handle on what it wants to do – or that it’s being manipulated by outside interests.
***
For Christopher Matthews’ (Main Justice) first-hand account of how the judge, prosecution and defense all carefully avoided talking about the FCPA bribery element in the room at Monday’s hearing, see here. Matthews notes that BAE’s lawyer specifically requested “that the record reflect that BAE did not know payments would be used for bribes, only that there was a high probability they might be used in that fashion.”
BAE – Every Circus Has A Final Act
Today in a Washington D.C. courtroom, U.S. District Judge John D. Bates had authority, pursuant to Rule 11 of the Federal Rules of Criminal Procedure, to reject the BAE plea agreement (see here).
However, as district court judges often do, Judge Bates “rubber-stamped” the plea agreement according to this first-hand account by Christopher Matthews at Main Justice.
In allowing the BAE “bribery yet no bribery” circus to leave town, Judge Bates reportedly said that the plea agreement was “fully reflective” of BAE’s crimes. This is surely subject to debate and for prior acts in this circus (see here).
According to the DOJ’s Release (see here), BAE pleaded guilty today to “conspiring to defraud the United States by impairing and impeding its lawful functions, to make false statements about its FCPA compliance program, and to violate the Arms Export Control Act and International Traffic in Arms Regulations” and was sentenced to “pay a $400 million criminal fine, one of the largest criminal fines in the history of DOJ’s ongoing effort to combat overseas corruption in international business and enforce U.S. export control laws.”
The DOJ’s release continues to reference BAE’s non-bribery, bribery allegations. See here for a prior post.
So too does the government’s sentencing memorandum (see here). Should you be wondering whether national security and/or debarment issues drove resolution of this prosecution, you may want to check it out.
One immediately sees that the National Security Division (“NSD”) played a role in the BAE case. According to its website: “[t]he mission of the National Security Division is to carry out the Department’s highest priority: to combat terrorism and other threats to national security.” (see here).
Among other things, the Sentencing Memorandum repeats the government’s non-bribery, bribery allegations.
Relevant quotes include: “BAE made some third party payments while aware that there was a high probability that part of the funds would be passed on to a foreign government official to influence a decision in favor of BAES” and that “BAES made other payments aware that there was a high probability that the payments would be used to influence government decision makers in the purchase of defense materials.”
In addressing relevant factors under the Principles of Federal Prosecution of Business Organizations (see here), the government notes that these payments: were “a major and longstanding business strategy replete with corruption risk; “were pervasive across the Company, covered numerous markets, and lasted for decades; “were tolerated or condoned up to the highest corporate levels; and that “corporate leadership created the structures” for the payments “in order to frustrate investigations and avoid identification of those payments to and through marketing advisers.”
And then there is this relevant paragraph regarding collateral consequences:
– “Europen Union Directive 2004/18/EC, which has recently been enacted in all EU countries through implementing legislation, provides that companies convicted of corruption offenses shall (emphasis in original) be mandatorily excluded from government contracts.”
– “BAES’s business is primarily from government contracts, including with several EU customers.”
– “Mandatory exclusion under EU debarment regulations is unlikely in light of the nature of the charge to which BAES is pleading. Discretionary debarment will presumably be considered and determined by various suspension and debarment officials.”
– “The Department will communicate with U.S. debarment and regulatory authorities, and relevant foreign authorities, if requested to do so, regarding the nature of the offense of which BAES has been convicted, the conduct engaged in by BAES, its remediation efforts, and the facts relevant to an assessment of whether BAES is presently a responsible government contractor.”
The Sentencing Memorandum also notes that “[i]ndividuals responsible for criminal activities may be beyond reach of U.S. authorities based on U.S. statute of limitations or jurisdictional limitations.”
Now that the curtain has closed on this circus and the elephants and monkeys are back in their cages, it is worthwhile to take a step back and analyze how DOJ prosecutors are supposed to resolve corporate criminal liability through plea agreements.
The Principles of Prosecution, part of the U.S. Attorneys’ Manual, state: “[i] negotiating plea agreements with corporations, as with individuals, prosecutors should generally seek a plea to the most serious, readily provable offense charged.”
Additional commentary states that a “corporation should generally be required to plead guilty to the most serious, readily provable offense charged;” that a “corporation should be made to realize that pleading guilty to criminal charges constitutes an admission of guilt and not merely a resolution of an inconvenient distraction from it business;” and that “where the corporation is a government contractor, permanent or temporary debarment may be appropriate” and “where the corporation was engaged in fraud against the government […], a prosecutor may not negotiate away an agency’s right to debar or delist the corporate defendant.”
This last clause, part of the U.S. Attorneys’ Manual, seems particularly relevant here given that the DOJ release and the Sentencing Memorandum both expressly state that BAE “defrauded” the U.S.
Sections 9-27.400-530 of the U.S. Attorneys’ Manual supplement the above corporate specific provisions by setting forth information relevant to “Selecting Plea Agreement Charges.”
Among other things, this section notes: “the defendant should be required to plead to a charge or charges” “that is the most serious readily provable charge consistent with the nature and extent of his/her criminal conduct” and “that has an adequate factual basis.” Commentary notes that “except in unusual circumstances, this charge will be the most serious one.”
It sure seems, per the government’s own evidence, that there was a more serious readily provable charge against BAE. But all things, even the circus, must come to an end, so perhaps this was one of those “except in unusual circumstances” type of cases.
The BAE circus is still playing out across the Atlantic and the next post will discuss how various public interest organizations, subject to less restrictive “standing” rules than here in the U.S. for challenging agency decisions, are challenging the SFO’s plea agreement with BAE.
BAE
In a joint enforcement action that is sure to generate much discussion and controversy, the U.K. Serious Fraud Office (SFO) and the U.S. DOJ announced today resolution of an enforcement action against BAE Systems.
The SFO announced (here) that it has “reached an agreement with BAE systems that the company will plead guilty” to the offense of “failing to keep reasonably accurate accounting records in relation to its activities in Tanzania.”
BAE’s press release (here) notes that “[i]n connection with the sale of a radar system by the Company to Tanzania in 1999, the Company made commission payments to a marketing adviser and failed to accurately record such payments in its accounting records. The Company failed to scrutinise these records adequately to ensure that they were reasonably accurate and permitted them to remain uncorrected. The Company very much regrets and accepts full responsibility for these past shortcomings.”
The SFO and company release note that BAE will pay a £30 million penalty “comprising a fine to be determined by the Court with the balance paid as a charitable payment for the benefit of Tanzania.”
In a strange turn of events, the SFO also announced (here) that it has withdrawn charges filed last week (see here) against a former agent charged with “conspiracy to corrupt” and for “conspiring with others to give or agree to give corrupt payments […] to unknown officials and other agents of certain Eastern and Central European governments, including the Czech Republic, Hungary and Austria as inducements to secure, or as rewards for having secured, contracts from those governments for the supply of goods to them, namely SAAB/Gripen fighter jets, by BAE Systems Plc.”
The SFO release notes that “[t]his decision brings to an end the SFO’s investigations into BAE’s defence contracts.”
So what happened to the charges and allegations involving certain Eastern and Central European governments, including the Czech Republic, Hungary, and Austria?
Good question.
Much like the wave of magician’s wand, they have simply disappeared.
Closer to home, the DOJ announced that it:
“filed a criminal charge (here) in the U.S. District Court for the District of Columbia against BAE Systems plc charging that the multinational defense contractor conspired to impede the lawful functions of the Departments of Defense and State, made false statements to the Departments of Defense and Justice about establishing an effective anti-corruption compliance program to ensure conformance with the Foreign Corrupt Practices Act and paid hundreds of millions of dollars in undisclosed commission payments in violation of U.S. export control laws.”
The DOJ and BAE release note that the company “will pay a fine of $400 million and make additional commitments concerning its ongoing compliance.”
According to the DOJ release (which is available through the DOJ Office of Public Affairs, but not yet publicly posted on DOJ’s website) “BAE Systems is charged with intentionally failing to put appropriate, anti-bribery preventative measures in place, contrary to the representations it made to the United States government, and then making hundreds of millions of dollars in payments to third parties, while knowing of a high probability that money would be passed on to foreign government decision makers to favor BAE in the award of defense contracts. BAE Systems allegedly failed to disclose these payments to the State Department, as it was required to do so under U.S. laws and regulations in order to get necessary export licenses.”
The bold language above would expose most companies to an FCPA enforcement action, but BAE is no ordinary company. It is a major defense contractor on both sides of the Atlantic (as noted in the criminal information “in 2008, BAE was the largest defense contractor in Europe and the fifth largest in the U.S. as measured by sales”).
You can bet that these charges were the subject of much negotiation so as to not upset current or future government contracts as well as foreign policy issues and concerns.
The BAE charges and thus similar to those against Siemens in December 2008. In that case, despite the company engaging in bribery “unprecedented in scale and geographic scope” and despite the company being one in which “bribery was nothing less than standard operating procedure” (both direct DOJ quotes), the company avoided FCPA antibribery charges. (See here for prior posts about Siemens).
These two cases seriously raise the issue of whether certain companies in certain industries are simply “above” the FCPA.
Can the enforcement agencies on both sides of the Atlantic say with a straight face that this case was merely about improper record keeping, making false statements to the government, and export licenses?
Transparency, corporate accountability, and indeed a criminal justice system all suffered setbacks today.
The FCPA suffered a black-eye as well and one would be right to ask, “what the heck is going on here!”
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)?