Focus on Pharma
Yesterday, Acting Deputy Attorney General Gary Grindler spoke at the National Institute on Health Care Fraud in Miami. Part of his remarks (see here) included the following:
“… in the months ahead, you can expect to see the department increasingly using the Foreign Corrupt Practices Act to prosecute kickbacks and bribes paid to foreign government officials by pharmaceutical companies. As the drug companies do more and more of their business overseas where so much of the health care business is government run, we unfortunately see the opportunities for FCPA violations proliferating. In some foreign countries, nearly every aspect of the approval, manufacture, import, export, pricing, sale and marketing of a drug product may involve a “foreign official” within the meaning of the FCPA. The department will not hesitate to charge pharmaceutical companies and their senior executives under the FCPA if warranted to root out foreign bribery in the industry.”
If the above “nearly every aspect” snippet sounds familiar, you have a good memory.
It is nearly verbatim what Assistant Attorney General Lanny Breuer said during a keynote address to the 10th Annual Pharmaceutical Regulatory and Compliance Congress and Best Practices Forum last November. (See 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.
As We Say, Not Necessarily As We Do
Yesterday Lanny Breuer (Assistant Attorney General – Criminal Division) spoke before the Council on Foreign Relations. The title of his speech (see here) was “International Criminal Law Enforcement: Rule of Law, Anti-Corruption and Beyond.”
Breuer begins, “I am pleased to be able to share with you today how the Criminal Division seeks to promote the Rule of Law in our increasingly global society.” Breuer notes that “perhaps in no area has the Criminal Division’s” approach “had more dramatic results for the international Rule of Law than in that of corruption.”
Breuer then sketches a brief history of the FCPA and notes that “when the U.S. enacted the [FCPA] in 1977, and as recently as the 1990’s, some developed countries continued to argue that a certain amount of corruption might be desirable in developing nations; and it has been only in the last decade that some developed countries have eliminated tax deductions for foreign corrupt practices.”
On this point, I fully agree that the DOJ is the undeniable leader in prosecuting bribery and corruption, and for this, it deserves credit.
Breuer then “spreads the FCPA gospel” (as Christopher Matthews at Main Justice recently termed it – see here).
Verses included: the “increased emphasis on charging individuals is part of a deliberate enforcement strategy to deter and prevent corrupt practices in the future;” “gone are the days when we relied solely on tips from whistle-blowers to build cases – instead we are now bringing the tools of organized crime investigations to white collar investigations.”
The speech ends – “I would welcome any questions you might have.”
I’ve got some questions.
During Breuer’s tenure, two signature enforcement actions were the BAE and Daimler bribery, yet no bribery enforcement actions (see here and here for prior posts).
In both actions, the DOJ alleged facts sufficient to charge the companies with FCPA anti-bribery violations. Yet in both cases, no anti-bribery violations were charged.
Included in the Rule of Law is the notion that the law is to be applied equally to all subject to the law. Under the Rule of Law, certain companies in certain industries who may sell certain products to certain customers are not immune from the law.
Yet, in the eyes of many, the BAE and Daimler enforcement actions stand for the proposition that certain companies are indeed “above” the FCPA and essentially immune from FCPA anti-bribery charges.
So, my questions are:
How was the Rule of Law advanced in the BAE and Daimler enforcement actions?
How was the Rule of Law advanced when a company (BAE) that “provided support services to [a Saudi official] while in the territory of the U.S.” including “ the purchase of travel and accommodations, security services, real estate, automobiles and personal items” (these are the DOJ’s words) is not charged with FCPA anti-violations? [Particularly when the DOJ alleges that over $5 million in invoices for benefits provided to the Saudi official were submitted by just one BAE employee during a one year period.]
How was the Rule of Law advanced when a company (Daimler) that “engaged in a long-standing practice of paying bribes to ‘foreign officials'” (these are the DOJ’s words) is not required to plead guilty to anything?
As noted above, the DOJ is the undeniable leader in prosecuting bribery and corruption, and for this, it deserves credit. However, with leadership comes responsibility and accountability.
When preaching, the preacher is subject to criticism, particularly when urging his parishioners to do as he says, not necessarily as he does.
The DOJ did some FCPA / Rule of Law preaching yesterday.
For extolling the virtues of the Rule of Law in the face of several recent high-profile examples where Rule of Law principles were seemingly ignored, the DOJ has set itself up for criticism.
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.
Step Up to the Podium Friday
Today’s post includes FCPA excerpts from various speeches/comments made by enforcement officials over the past couple of days.
Stepping to the podium will be Assistant Attorney General Lanny Breuer; Mark Mendelsohn – Deputy Chief of the DOJ Fraud Section; and Cheryl Scarboro – the head of the SEC’s newly formed FCPA unit.
Lanny Breuer
Breuer spoke at the ABA National Institute on White Collar Crime in Miami. See here for his comments.
As to the FCPA, here is what Breuer had to say.
“… As I’m sure many of you are aware, in a recent FCPA investigation, the Criminal Division’s Fraud Section used undercover law enforcement techniques to uncover what we allege to be widespread fraud and corruption. As a result, 22 executives and employees of companies in the military and law enforcement products industry were indicted for their involvement in schemes to bribe foreign government officials. This investigation involved the most expansive use ever of undercover techniques to uncover FCPA violations.”
Note – per the DOJ, there was no actual involvement by any real “foreign government official.” This dynamic raises some legal issues – see here.
Back to Breuer’s comments.
“Let me say a few more words about our very robust FCPA program, because it, in many ways, typifies how we are approaching crime in corporate America.”
“The FCPA investigation I just referenced is the largest single prosecution of individuals in the history of DOJ’s enforcement of the FCPA. It thus vividly illustrates one cornerstone of our FCPA enforcement policy: the aggressive prosecution of individuals. Put simply, the prospect of significant prison sentences for individuals should make clear to every corporate executive, every board member, and every sales agent that we will seek to hold you personally accountable for FCPA violations. As we focus on the prosecution of individuals, we will not shy away from tough prosecutions, and we will not shy away from trials. We are ready, willing, and able to try FCPA cases in any district in the country—as we demonstrated with our three FCPA trial victories just last year.”
Note – In one of the trials, William Jefferson was acquitted of FCPA substantive charges. He was convicted of, among things, conspiracy, a verdict that may or may not have, included conspiracy to violate the FCPA. See here. In another trial, Frederic Bourke was convicted of conspiracy to violate the FCPA. He was sentenced to 366 days in prison. At sentencing, Judge Shira Scheindin said – “After years of supervising this case, it’s still not entirely clear to me whether Mr. Bourke is a victim or a crook or a little bit of both.” See here.
Back to Breuer’s comments.
“To be sure, we are not focusing on individuals to the exclusion of corporations. We will continue to insist on corporate guilty pleas or to bring criminal charges against corporations in appropriate cases – when the criminal conduct is egregious, pervasive and systemic, or when the corporation fails to implement compliance reforms, changes to its corporate culture, and undertake other measures designed to prevent a recurrence of the criminal conduct. We will continue to insist on appropriately stiff corporate fines, applying a consistent, principled approach that considers the facts and circumstances within the Department’s established framework and that is guided by the Sentencing Guidelines in arriving at an appropriate sanction.”
“I also want to assure you that the Department’s commitment to meaningfully reward voluntary disclosures and full and complete corporate cooperation will continue to be honored in both letter and spirit. I know that many of you often grapple with the difficult question of whether to advise your client to make a voluntary disclosure. I strongly urge any corporation that discovers an FCPA violation – or any other criminal violation, for that matter – to seriously consider making a voluntary disclosure and to cooperate with the Department. The Sentencing Guidelines and the Principles of Federal Prosecution of Business Organizations obviously encourage such conduct, and your clients will receive meaningful credit for that disclosure and cooperation.”
Mark Mendelsohn
Mendelsohn recently spoke at the Dow Jones Global Ethics Summit in New York City. DOJ has not released a transcript of his remarks, but a collection of media sources covered his comments.
As to the Africa Sting case, Main Justice reports the following from Mendelsohn:
That the government is “in a strong position because of the massive volumes of information it has collected. “That should give you an idea of the strength of our case,” he said. Specifically, Mendelsohn said that a simple meeting in a New York hotel to discuss a bribery scheme would fall under the FCPA, even if the rest of the scheme took place entirely outside the U.S. Money and, potentially, e-mails, electronically transferred through the U.S. could bring a bribery scheme under the jurisdiction of the FCPA, he said.”
Cheryl Scarboro
Scarboro, an SEC veteran, was recently appointed to lead the SEC’s new FCPA unit (see here). Jesse Sunenblick at Main Justice recently sat down with Scarboro for a Q&A (see here).
As to the new FCPA unit Scarboro said:
“… [T]he new unit will give us the resources and the ability to do even more going forward. People on the ground will be focusing exclusively [on FCPA investigations], making them smarter about industry practices problem areas. We will be able to leverage resources and leads we get from others. There are ongoing investigations exactly like oil for food: not just concerning one company, but looking beyond into widespread practice in particular areas. I would expect filed cases in the short term, in a matter of months. These cases will be an illustration of what we’ve already been doing. But the new unit will allow us to do even more of it. We have areas and industries we are focusing on—pharmaceutical is one.”