Former Siemens Executives and Agents Charged
In December 2008, Siemens resolved the largest ever (in terms of fines and penalties) FCPA enforcement action. See here and here. A portion of the improper conduct focused on Argentina and allegations that Siemens S.A. (Argentina), and those acting on its behalf, engaged in a bribery scheme in connection with an Argentine government contract to produce national identity cards.
Since the 2008 enforcement action, U.S. enforcement authorities have been under pressure to charge culpable individuals. See here for a prior post and here for the transcript of the November 2010 Senate FCPA hearing during which former Senator Specter again called for individual accountability, an occurrence which prompted him to ask me several questions after the hearing about the “most egregious examples of individual conduct associated with the Siemens prosecution.” See here for my responses.
Today, the DOJ announced that “eight former executives and agents of Siemens AG and its subsidiaries have been charged for allegedly engaging in a decade-long scheme to bribe senior Argentine government officials to secure, implement and enforce a $1 billion contract with the Argentine government to produce national identity cards.”
The defendants charged in the indictment (here) are: Uriel Sharef (a former member of the central executive committee of Siemens AG); Herbert Steffen (a former chief executive officer of Siemens Argentina); Andres Truppel (a former chief financial officer of Siemens Argentina); Ulrich Bock, Stephan Signer and Eberhard Reichert (former senior executives of Siemens Business Services); and Carlos Sergi and Miguel Czysch (who allegedly served as intermediaries and agents of Siemens in the bribe scheme). None of the individuals are U.S. citizens and during a press conference today Assistant Attorney General Lanny Breuer indicated that none of the defendants are in U.S. custody.
The indictment, filed in the Southern District of New York, charges the defendants and their co-conspirators with conspiracy to violate the FCPA and the wire fraud statute, money laundering conspiracy and wire fraud.
In the DOJ release, Assistant Attorney General Lanny Breuer stated as follows. “Today’s indictment alleges a shocking level of deception and corruption. The indictment charges Siemens executives, along with agents and conduits for the company, with committing to pay more than $100 million in bribes to high-level Argentine officials to win a $1 billion contract. Business should be won or lost on the merits of a company’s products and services, not the amount of bribes paid to government officials. This indictment reflects our committment to holding individuals, as well as companies, accountable for violations of the FCPA.” During the press conference, Breuer stated that today’s action is the “first time a former Board member of a Fortune 50 company” has ever been charged with FCPA violations. Breuer also stated that “Siemens was a remarkably cooperative and helpful party throughout our investigation.”
In a parallel civil enforcement action also announced today (here), the SEC charged seven former Siemens executives with violating the FCPA for their involvement in the same bribery scheme. The following individuals are charged in the civil action: Sharef, Bock, Signer, Steffen, Truppel, Sergi and Bernd Regendantz (a former chief financial officer of Siemens Business Services). The civil complaint (here) alleges FCPA anti-bribery violations, aiding and abetting Siemens’ FCPA anti-bribery violations, as well as other charges. Robert Khuzami (Director of the SEC’s Division of Enforcement) stated as follows. “Business should flow to the company with the best product and the best price, not the best bribe. Corruption erodes public trust and the transparency of our commercial markets, and undermines corporate governance.” During today’s press conference, Khuzami called the action the “largest [SEC] action ever against individuals” in the FCPA’s history.
Additional analysis of the DOJ and SEC enforcement actions will follow.
Bribery At The Racetrack
[This post is part of a periodic series regarding “old” FCPA enforcement actions]
The FCPA enforcement action against Sam Wallace Company Inc. (“Wallace”) was a first in several regards. It was the first FCPA enforcement action involving both a DOJ and SEC component (all prior enforcement actions were either SEC only or DOJ only) and it was the first FCPA enforcement action involving criminal FCPA books and records charges.
In 1981, the SEC filed a complaint against Wallace (a Texas based construction company), Robert Buckner (Chairman of the Board of Wallace, CEO of Wallace, and a Director of Wallace) and Alfonso Rodriguez (Executive Vice President of Wallace, Regional Manager of various Wallace subsidiaries, and a Director of Wallace). The conduct at issue focused on “payments from Wallace bank accounts totaling at least $1.391 million to a certain foreign official to aid Wallace in procuring and maintaining certain contracts and billings with a certain foreign government.” According to the SEC complaint, the defendants “disguised and concealed such payments on Wallace’s books and records by utilizing, or causing to be utilized, certain false accounting entries which did not reflect the true nature and purpose of, and falsely described the expenditures used in the making of these payments to a certain foreign official.” The SEC complaint for permanent injunction and certain ancillary relief charged FCPA anti-bribery violations as well as a variety of other securities law violations such as Section 10b-5 and filing false reports and proxy statements with the SEC. Without admitting or denying the SEC’s allegations, Wallace agreed to establish a Special Committee of its Board to investigate the matters alleged in the SEC’s complaint and to file the report with the Court and the SEC.
In 1983, the DOJ filed a criminal information against Wallace containing more detail than the SEC’s complaint. According to the DOJ, the recipient of the bribe payments was “John H. O’Halloran, then chairman of the Trinidad and Tobago Racing authority” and the payments were made “in order to obtain and retain a contract to construct the grandstand and receiving building portion of the Caroni Racetrack Project in Trinidad.” The information charges that Wallace, aided and abetted by certain of its officers and employees, caused the Sam P. Wallace & Co. of P.R. Inc. (a wholly owned subsidiary of Wallace whose earnings were consolidated with the financial reports of Wallace) to “create fictitious purchase orders to purported suppliers for the purpose of concealing the withdrawal of corporate funds in order” to pay bribes to O’Halloran. Among other charges, the information charges violations of the FCPA’s books and records provisions. Wallace pleaded guilty and was ordered to pay a criminal fine of $530,000.
In 1983, the DOJ also filed a criminal information against Rodriguez. In the information, the DOJ alleged that the “Trinidad and Tobago Racing Authority was an agency of the government of the Republic of Trinidad and Tobago and was an instrumentality of the Trinidad and Tobago government.” The information charged FCPA anti-bribery violations and Rodriguez pleaded guilty. His sentence was suspended and he was placed on probation for two years and ordered to pay a $10,000 fine.
See here for original source documents from the SEC’s and DOJ’s enforcement action.
For more on the “foreign official” – Johnny O – see here; for recent news regarding the Caroni racetrack, see here.
A Dialogue Worth Having
This previous post discussed U.K. plans to introduce U.S.-style corporate plea bargains, including deferred prosecution agreements. Among other things, the post mentioned an October 17th meeting with U.K. prosecutors at Pinset Mason’s London office.
thebriberyact.com summarizes the meeting and nicely frames the issues here and here. The post states as follows. “We think that the need for DPA legislation is obvious. Its absence has often been remarked upon by the Director of the SFO and for very good reason. It is a serious hole in the UK law. Its absence has a chilling effect on the attempts to ensure that ethical attitudes become a permanent feature of corporate life in all companies, be they International, SME or small.”
Others have shared their views on whether the U.K. should adopt U.S. style alternative resolution vehicles and, if so, how.
Thomas Fox at the FCPA Compliance and Ethics Blog (here) believes “that the ability to enter into a DPA is a powerful tool that advances the interests of prosecutors, the judiciary and the public.” Fox states that “the primary reason for both the prosecution and a company which violates the Bribery Act entering into a DPA is certainty.”
Ross Parlane of McGuire Woods writing at The Bribery Library (here) states as follows. “There are a number of benefits to be gained from giving UK prosecutors the power to negotiate DPAs. Certainly the cost and time involved in investigating offences would be significantly reduced, which is good news for the public purse. Further, a well negotiated DPA that gives proper attention to remediation (e.g. through monitoring) as well as to punishment, has the potential to effect a permanent positive change in the culture of an organisation.” Yet Parlane states (and identifies) that “there are a number of tricky issues that need to be resolved before the use of deferred prosecution agreements can be adopted in the the U.K.”
Michael Volkov, writing at thebriberyact.com (here) notes that “for UK policymakers, the balance between judicial review and prosecutorial discretion is one which has to be resolved before any new policy can be enacted.”
Let me contribute to the dialogue by posing this question. Why does a law with an adequate procedures defense require the third option of a deferred prosecution agreement – the first two options being prosecute vs. not prosecute?
If a corporate has adequate procedures, but an isolated act of bribery nevertheless occurs within its organization, the corporate presumably would not face prosecution under the Bribery Act. Seems like a reasonable result. In other words, no need for the third option in such a case.
On the other hand, if a corporate does not have adequate procedures (i.e. has no committment to anti-bribery compliance) and an act of bribery occurs within its organization, it presumably would face prosecution under the Bribery Act. Seems like a reasonable result. Does a third option really need to be created for corporates who do not implement adequate procedures?
Because the FCPA does not have an adequate procedures / compliance defense (at least not yet), the same analysis does not apply.
*****
In other recent U.K. developments, last week the SFO announced (here) that two former Innospec executives were charged. Dennis Kerrison, the former CEO of Innospec Ltd., was charged with “an allegation of conspiracy to corrupt, in that he gave or agreed to give corrupt payments to public officials and other agents of the Government of Indonesia as inducements to secure, or as rewards for having secured, contracts from the Government of Indonesia.” Paul Jennings, the former CEO of Innospec, is accused of “two allegations of conspiracy to corrupt, in that he gave or agreed to give corrupt payments to public officials and other agents of the Governments of Indonesia and Iraq as inducements to secure, or as rewards for having secured, contracts from those Governments.”
Earlier in the week, the SFO also announced (here) that David Turner, a former business unit director of Innospec Ltd., was charged with “alleged offenses of conspiring to make corrupt payments to public officials in Indonesia and Iraq to secure contracts for Innospec Ltd. for the supply of its products.”
Both Jennings (here for the prior post) and Turner (here for the prior post) previously settled SEC FCPA enforcement actions based on the same core set of conduct.
As with the SFO’s recent case against Victor Dahdaleh (see here for the prior post), the recent Innospec related enforcement actions are not Bribery Act enforcement actions.
*****
Sure, it’s Halloween and all, but the FCPA reform debate (see here) is getting a little silly don’t you think?
Another Enforcement Action Involving Chinese Design Institutes
Yesterday, the SEC issued (here) an administrative cease and desist order as to Watts Water Technologies, Inc. (“Watts”) and Lessen Chang concerning violations of the FCPA’s books and records and internal control provisions. Watts designs, manufactures, and sells water valves and related products and Chang, a U.S. citizen, was the former interim general manager of Watts Valve Changsha Co. Ltd. (“CWV”), a wholly-owned Chinese subsidiary operated by Watts and sold in 2010. According to the SEC, Watts consolidated CMV’s books and records into its financial statements and CWV’s revenues accounted for approximately 1% of Watts’ gross revenues.
According to the SEC, “CWV produced and supplied large valve products for infrastructure projects in China” – projects “mostly developed, constructed, and owned by state-owned entities” that routinely retained “state-0wned design institutes to assist in the design and construction” of projects. According to the SEC, “employees of CWV made improper payments to employees of certain design institutes … to influence the design institutes to recommend CWV valve products to [SOEs] and to create design specifications that favored CWV valve products.” According to the SEC, “the payments were disguised as sales commissions in CWV’s books and records, thereby causing Watts’ books and records to be inaccurate,” and that “Watts failed to devise and maintain a system of internal accounting controls sufficient to prevent and detect the payments.” According to the SEC, Chang “approved many of the payments to the design institutes and knew or should have known that the payments were improperly recorded on Watts’ books as commissions.” The SEC found that “CWV’s improper payments generated profits for Watts of more than $2.7 million.”
The Watts enforcement action is yet another example of an FCPA enforcement action focused on Chinese Design Institutes. Previous enforcement actions include Rockwell Automation (here), ITT (here), and Avery Dennison (here).
In the order, the SEC found that “Watts failed to implement adequate internal controls to address the potential FCPA problems posed by its ownership of CWV – a subsidiary that sold its products almost exclusively to SOEs.” The SEC noted that “although Watts implemented an FCPA policy in October 2006, Watts failed to conduct adequate FCPA training for its employees in China until July 2009.” As to Chang’s role, the SEC stated that “Chang approved commission payments to CWV sales personnel that he knew included payments to design institutes.” According to the SEC, “Chang also knew that Watts’ management in the U.S. was unaware of the CWV [sales policy that generated the commission payments] that facilitated the improper payments and he resisted at least one attempt by several of his colleagues at Watts China to have the policy translated and submitted to Watts’ senior management for approval.” The SEC stated that “Chang’s resistance to efforts to have the Sales Policy translated and submitted to Watts’ management in the U.S. was a cause of Watts’ internal control violations, since it prevented the parent company from discovering the improper payments.”
Based on the above conduct, Watts agreed to pay approximately $3.8 million (2.8 million in disgorgement, $820,000 in prejudgment interest and a $200,000 civil monetary penalty). Chang agreed to pay a $25,000 civil monetary penalty.
How did Watts’ general counsel learn that Chinese Design Institutes could present FCPA risk? According to the SEC, by reading its prior enforcement action against ITT. The SEC states as follows. “In March 2009, Watts’ General Counsel learned of a Commission enforcement action against another company that involved unlawful payments to employees of Chinese design institutes. Because Watts’ senior management in the U.S. knew that CWV’s customers included [SOEs], Watts implemented anti-corruption and FCPA training for its Chinese subsidiaries. This training took place starting in the Spring of 2009. In July 2009, following FCPA training sessions for certain management of Watts China, Watts China’s in-house corporate counsel became aware of potential FCPA violations at CWV through conversations with CWV sales personnel who were participating in the training. Shortly thereafter, the in-house lawyer notified Watts’ management in the U.S. of the potential violations. On July 21, 2009, Watts retained outside counsel to conduct an internal investigation of CWV’s sales practices. Watts’ outside counsel subsequently retained forensic accountants to assist with the investigation. On August 6, 2009, Watts self-reported its internal investigation to the staff. As the internal investigation progressed, Watts shared the results of the investigation with its outside auditors and the staff through periodic reports, and undertook” remedial measures.
Under the heading “Watts’ Remedial Measures” the SEC stated as follows. “Since July 2009 when the conduct was discovered, Watts has taken the following remedial steps. At the start of its internal investigation, Watts directed all of its sales and finance employees at CWV and Watts China to stop all payments of any kind to SOEs. While the internal investigation was ongoing, Watts eliminated commission-based compensation at CWV to ensure that no further improper payments were made by CWV sales personnel and disclosed the internal investigation in its August 7, 2009 Form 10-Q. In addition, Watts retained additional outside counsel to draft and implement enhanced anti-corruption policies and procedures, including an enhanced Anti-Bribery Policy, a Business Courtesy Policy designed to ensure that any payments made to customers comply with the FCPA, an enhanced Travel and Entertainment Expense Reimbursement Policy for its Chinese subsidiaries, and enhanced intermediary due diligence procedures. In conjunction with its internal investigation, Watts conducted a worldwide anti-corruption audit. As part of its anti-corruption audit, Watts conducted additional FCPA and anti-corruption training for Watts China and the company’s locations in Europe, conducted a risk assessment and anti-corruption compliance review of Watts’ international operations in Europe, China, and any U.S. location with international sales, and conducted anti-corruption testing at seven international Watts sites, including each of the manufacturing and sales locations in China. In an effort to ensure FCPA compliance and training going forward, Watts contracted with an online global training organization to provide regular anti-corruption training and hired a Director of Legal Compliance, a new position that reports to Watts’ General Counsel regarding issues under the Code of Conduct and Anti-Bribery Policy.”
Question of the day – should payments made without U.S. management knowledge at a Chinese subsidiary constituting less than 1% of overall revenue result in a company conducting a worldwide review of its operations?
DOJ Prosecution Of Individuals – Are Other Factors At Play?
A post earlier this week (here) noted that since 2008, the DOJ has criminally charged 64 individuals with FCPA offenses. 60% of the individuals charged have been in just three cases and 78% of the individuals charged by the DOJ since 2008 have been in just six cases. Considering that there has been 42 “core” corporate DOJ FCPA enforcement actions (NPAs, DPAs, Pleas, or Convictions) since 2008, this was a rather remarkable statistic. The previous post also noted that of the 42 “core” corporate DOJ FCPA enforcement actions, 30 (or 71%) have not (at least yet) resulted in any DOJ charges against company employees. I noted that during this era of the FCPA’s resurgence, the DOJ has consistently stated that prosecution of individuals is a “cornerstone” of its FCPA enforcement strategy. Yet, the numbers paint a different picture – at least in certain enforcement actions.
Yesterday’s post (here) further crunched the numbers on DOJ prosecutions of individuals and exposed (what sure seems like) a public-private divide. Of the 64 individuals charged since 2008, 50 of the 64 individuals charged (78%) were employees or otherwise affiliated with private business entities. This was a striking statistic given that 37 of the 42 ”core” corporate DOJ FCPA enforcement actions since 2008 (88%) were against publicly traded corporations.
I concluded yesterday’s post by asking whether FCPA enforcement has resulted in two tiers of justice and/or whether other factors are at play? I do believe FCPA enforcement has resulted in two tiers of justice (see here for a prior post), but I also believe that other factors are at play as well.
In connection with my testimony at the November 2010 Senate FCPA hearing, I submitted a written statement (here) in which I observed that a possible reason for the absence of individual FCPA criminal charges in many corporate enforcement actions “may have more to do with the quality of the corporate enforcement action than any other factor.” I noted that given the prevalence of non-prosecution agreements (NPAs) and deferred prosecution agreements (DPAs) in the FCPA context, and the ease in which DOJ offers these alternative resolution vehicles to companies subject to an FCPA inquiry, companies often agree to enter into such resolution vehicles regardless of the DOJ’s legal theories or the existence of valid and legitimate defenses. In many cases, it is easier, more cost efficient, and more certain for a company to do so than it is to be criminally indicted and mount a valid legal defense – even if the DOJ’s theory of prosecution is questionable. This dynamic contributes to what I have called the “facade of FCPA enforcement” (see here). Individuals, on the other hand, face a deprivation of personal liberty, and are more likely to force the DOJ to satisfy its high burden of proof as to all FCPA elements.
So the question is raised – what impact do NPAs or DPAs have on individual FCPA criminal prosecutions? The below numbers suggest a significant impact.
According to my analysis, since alternative resolution vehicles were first used in the FCPA context (December 2004 – an NPA as to InVison Technologies), there have been 61 “core” corporate DOJ FCPA enforcement actions. 47 of the 61 “core” corporate DOJ FCPA enforcement actions (77%) have been resolved via an NPA (19 instances) or a DPA (28 instances). In these 47 “core” corporate DOJ FCPA enforcement actions, only 7 enforcement actions (15%) have resulted in any individual FCPA criminal charges against company employees.
In other words, when the DOJ resolves an FCPA enforcement action via a NPA or DPA, there is only a 15% likelihood that individual criminal charges will be filed against any company employee or those affiliated with the company. The 7 “core” corporate DOJ FCPA enforcement actions resolved through an NPA or DPA that have resulted in individual criminal charges are as follows:
Armor Holdings (NPA) / Richard Bistrong;
Alliance One International (NPA) / Bobby Elkin;
Alcatel-Lucent (DPA) / Christian Sapsizian and Edgar Acosta;
ABB Ltd. (DPA) / John Joseph O’Shea and Fernando Maya Basurto;
Omega Advisors (NPA) / Clayton Lewis;
Schnitzer Steel (DPA) / Si Chan Wooh; and
Willsbro Group (DPA) / Jim Bob Brown, James Tillery, Paul Novak and Jason Steph.
In contrast, in the 14 “core” corporate DOJ FCPA enforcement actions resolved (since invention of NPAs/DPAs in the FCPA context) through actual, prosecuted criminal charges, 10 of these actions (71%) resulted in related prosecution of company employees or those affiliated with the company. The 4 DOJ FCPA enforcement actions that resulted in actual, prosecuted criminal charges, yet no individual prosecutions of company employees are Siemens, BAE (recognizing that this was an FCPA-related prosecution), DPC Tianjin, and ABB Vetco Gray. In short, when a corporate entity is actually prosecuted for FCPA violations, there is a 71% chance that a company employee will also be prosecuted.
In summary, when the DOJ resolves an FCPA enforcement action via a NPA or DPA, there is only a 15% likelihood that individual criminal charges will be filed against any company employee or those affiliated with the company. On the other hand, when the DOJ files actual, prosecuted criminal charges against a company, there is a 71% chance that a company employee will also be prosecuted.
So are there other factors at play? Yes, there are and I believe a contributing factor to the lack of individual prosecutions in many corporate DOJ FCPA enforcement actions has to do with the quality of the corporate enforcement action in the first place. As Reynolds Holding recently stated in a Reuters BreakingViews column (here) the current era of enforcement and the dynamics at play “encourage prosecutors to pursue what they can punish, not what the law prohibits.”
Perhaps the question should not be why do so few DOJ corporate FCPA enforcement actions result in individual prosecutions, but rather do many DOJ corporate FCPA enforcement actions actually evidence proof beyond a reasonable doubt that FCPA violations occurred?