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.
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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.
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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.”
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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.
Multilateral Development Banks Sign Cross-Debarment Agreement
In April, five multilateral development banks (MDB’s) – the World Bank, the African Development Bank, the Asian Development Bank, the European Bank for Reconstruction and Development, and the Inter-American Development Bank Group – signed an agreement to “cross-debar firms and individuals found to have engaged in wrongdoing in MDB-financed development projects. (See here for more information).
World Bank Group President Robert Zoellick noted that with the “cross-debarment agreement among development banks, a clear message on anticorruption is being delivered: steal and cheat from one, get punished by all.”
Under the agreement (here), each participating institution “will enforce debarment decisions made by another participating institution” to the extent the debarment exceeds one year. However, as is often the case, notwithstanding such a commitment, the agreement also states that a “participating institution may decide not to enforce a debarment by the sanctioning institution where such enforcement would be inconsistent with its legal or other institutional considerations …”
It remains to been seen whether the cross-debarment agreement will have any deterrant effect by raising the “cost” of engaging in bribery and corruption.
For a World Bank list of debarred firms and individuals (see here).
In July 2009, the World Bank announced (here) “an agreement of up to a four-year debarment for Siemens’ Russian subsidiary, and a voluntary two-year shut-out from bidding on Bank business for Siemens AG and all of its consolidated subsidiaries and affiliates.” In November 2009, the World Bank announced (here) that it “debarred [for four years] Limited Liability Company Siemens (OOO Siemens), a Russian subsidiary of Siemens AG, for having engaged in fraudulent and corrupt practices in relation to a World Bank-financed project – Moscow Urban Transport Project.” For more information on what was and was not included in that debarment proceeding, see here.
Point – Counterpoint With Billy Jacobson
A few weeks ago, I took issue with Mark Mendelsohn’s (DOJ Deputy Chief, Fraud Section and the DOJ’s FCPA “top cop”) recent defense of the 2008 Siemens enforcement action. (see here).
In response, I heard from William Jacobson.
I am always grateful for reader feedback, especially when its comes from someone the caliber of Jacobson – the former Assistant Chief for FCPA Enforcement at the Fraud Section, Criminal Division, U.S. Department of Justice. While at DOJ, Jacobson worked closely with Mendelsohn, including on the Siemens matter. For more on Jacobson’s role at DOJ see this recent profile in Main Justice. Jacobson is currently the Vice President, Co-General Counsel, and Chief Compliance Officer at Weatherford International, Ltd. (see here).
With Jacobson’s permission, I set forth our e-mail exchange below.
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WJ – I have to take issue with your recent post regarding the Siemens settlement. As a recent émigré to the world of in-house counsel, I can assure you that the staggering monetary settlement made a tremendous impact in boardrooms across the U.S. and the world. One can certainly argue that the government should have kept investigating Siemens until it uncovered every scrap of evidence against the company. One can also argue that the fine and disgorgement amounts could have been greater. However, the government’s goal was not to destroy the company and thereby cause untold damage to its shareholders. In fact, I think it is fair to say that the government’s goal was to sufficiently punish the company without destroying the company. An investigation lasting several more years and a fine of several billion dollars could well have done that – not to mention debarment, the lack of which you have also criticized.
Since at least 2001, the Fraud Section has been trying to bring “real-time” prosecutions as often as possible. This often means focusing on the one or two most egregious transactions at issue in a case, bringing a case based upon those transactions and moving on. An important component of this strategy in FCPA cases has been ensuring that companies improve their compliance departments to mitigate the chances of bad conduct recurring. This is precisely what the Fraud Section (as well as the SEC and the Munich Prosecutor) did with Siemens and, in my opinion, it was the correct approach.
MK – Nice to hear from you and thanks for reading the blog. I am not suggesting that in a case that apparently involved hundreds, if not thousands, of separate bribe payments, that the DOJ/SEC need to fully investigate each and every instance, perhaps focusing on six, ten (I don’t know what the magical number is or should be) is desirable. Even so, is it too much to ask that, as to those six or ten instances, that the criminal charges actually fit the facts? In other words, is it too much to ask of the DOJ to actually charge a company that clearly committed FCPA antibribery violations with FCPA antibribery charges?
Point taken that the “government’s goal was not to destroy the company and thereby cause untold damage to its shareholders.” Indeed, that is a legitimate policy issue present in any corporate criminal matter, FCPA or not. However, is agreeing to an overall penalty LESS than the amount of the alleged payments and LESS than the amount of the business allegedly obtain or retained – is that “sufficiently punishing” the company. Siemens net income between 2004-2008 (a time period that does not even cover the full range of the relevant time period) was approximately $28.3 billion. Thus, the worldwide fines and penalties accounted for approximately 5% of its net income, how does this “sufficiently punish” the company? Is not one justified, when viewing the amounts at issue, to conclude that this whole episode was a net positive for Siemens?
You raise the debarment issue, which I have discussed on my blog as well. My opinion is that the message DOJ says it wants to send in these cases, will not be sent until a company is debarred for a specific time period. If the DOJ is looking for deterrence it has the tools at its disposal.
If “real-time” prosecutions are indeed the goal of the DOJ (a dubious assertion given that many, many disclosed FCPA cases have languished for years and years) that is a good goal. However, the rush to get things settled and put a nice shiny bow around a case so that the enforcement agencies can conserve resources and focus elsewhere, and so that the company can move on, should not result in a situation, which I think is reflected in the Siemens and BAE enforcement actions, that certain companies in certain industries which sell to certain customers are essentially immune from FCPA antibribery violations.
WJ: While I agree that debarment would send an even stronger deterrent message than non-debarment, it is hard to see how a $1.6B penalty equates with immunity as you suggest. There is always more punishment that is possible, but the maximum does not have to be applied for DOJ to be effective.
Another factor that should be considered is jurisdiction. If I remember correctly, the Siemens charging papers state that its Venezuelan and Bangladeshi subsidiaries used U.S bank accounts to further their bribe schemes. The papers do not make similar US-nexus allegations for either the parent company or the Argentine subsidiary. Thus, it may be that DOJ felt it didn’t have jurisdiction over the parent company for a bribery charge. As for BAE, I can only say what press reports make clear – the case was enormously challenging for many different reasons. I think the folks at DOJ would agree that their settlement was not perfect, but I think they did an admirable job of not having perfect be the enemy of good.
MK – I am clearly not suggesting that Siemens escaped liability for its “egregious,” “staggering,” and “brazen” corrupt conduct (those are the enforcement agencies’ words – not mine). However, it sure seems that certain companies have come to be immune from FCPA antibribery charges. Any time a particular company is immune from particular aspects of a law, respect for that law and indeed the rule of law suffers.
As to Siemens and whether there was a U.S. nexus sufficient to charge an antibribery violation, the DOJ’s information clearly states that Siemens Power Generation (with offices in Florida), Siemens Power Transmission and Distribution (with offices in North Carolina) and Siemens Transportation Systems (with offices in California) were key players in the overall bribery scheme – presumably DOJ included the “with offices” in the U.S. part for a reason.
In any event, where does this leave the future of FCPA enforcement. I teach the FCPA to my students, should I now conclude my FCPA section with “FCPA enforcement – an area of law where perfect should not be the enemy of good.” If you are an individual sitting in prison today because you violated the FCPA’s antibribery provisions, how do you explain to such an individual that certain companies are immune from the same conduct for which they are sitting in prison?
WJ: Those of your students that aspire to prosecution, especially white collar prosecution, would be well served to learn that concept, yes. Prosecutorial discretion is a wonderful feature of our judicial system which often leads to imperfect solutions, but, on balance, usually – though certainly not all the time — works out just about right.
Random Musings
A recent Main Justice article by Christopher Matthews (see here) talked about Mark Mendelsohn (DOJ FCPA Top Cop) and Cheryl Scarboro (Head of the SEC’s New FCPA Team) “spreading the FCPA gospel” at the recent National Forum on the Foreign Corrupt Practices Act.
Two items in the article caught my eye.
First, Mendelsohn is reported to have said, in response to a question, that the DOJ “does consider collateral consequences when structuring settlement agreements” and that “there is a growing recognition that the European Union debarment requirement presents particular challenges for companies trying to settle cases.”
That European debarment is the engineer driving the FCPA locomotive in certain cases is clear upon reviewing the DOJ’s sentencing memoranda in the Siemens, BAE, and Daimler bribery, yet no bribery enforcement actions.
The Siemens memo (here) states:
“The Department’s analysis of collateral consequences included the consideration of the risk of debarment and exclusion from government contracts.”
The BAE memo (here) has a separate section on debarment and states:
– “European 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 Daimler memo (here) states:
The DOJ’s “analysis of collateral consequences included the consideration of the risk of debarment and exclusion from government contracts, and in particular European Union Directive 2004/18/EC, which provides that companies convicted of corruption offenses shall be mandatorily excluded from government contracts in all EU countries.”
The way around these debarment provisions appears to be simple, yet troubling.
Despite clear evidence of FCPA antibribery violations, don’t charge FCPA antibribery violations!
Second, Scarboro indicated that the SEC’s “FCPA Team” will be up and running “in the next two weeks” and that “the dedicated staff involved in these cases will have a chance to learn the nuts and bolts.”
Perhaps in learning the FCPA’s “nut and bolts,” the SEC enforcement attorneys will learn that many features of its FCPA enforcement program have no legal support such as: (i) employees of state-owned or state-controlled enterprises being deemed “foreign officials”; (ii) parent companies being strictly liable for subsidiary or affiliate books and records and internal control violations; (iii) seeking disgorgement remedies in the absence of antibribery charges.
Potpourri
Back in active blogging “mode” here on the campus of the Sweet 16 bound Butler Bulldogs after an enjoyable few days in Washington D.C. where I participated in Georgetown Law’s Combating Global Corruption Conference. It was nice to see some familiar faces, connect faces to some names I have met through this blog, and to meet new people. The title of my presentation and upcoming paper in the Georgetown Journal of International Law is “The Facade of FCPA Enforcement” and I will post in the coming days a short abstract of the paper as well as my presentation slides.
In the meantime, some items of note.
Africa Sting
Christopher Matthews at Main Justice continues to follow the Africa Sting case and has this report of yesterday’s hearing.
Shearman & Sterling Update
Shearman & Sterling pioneered the concept of keeping track of FCPA enforcement actions in an “FCPA Digest” (see here) and it supplements the digest with occasional “Recent Trends and Patters” update. For the latest, see here from Philip Urofsky & Danforth Newcomb.
FCPA Compliance in Phnom Penh
Looking for additional evidence that the FCPA is indeed a hot topic. How about this article from Phnom Penh Post of Cambodia. As noted in the article, a recent FCPA seminar, hosted in part by the American Chamber of Commerce, attracted more than 100 local business leaders.
I wonder if anywhere in the discussion of Siemens and/or BAE the point was made that neither of these entities were charged with FCPA antibribery violations?
Further, I remain perplexed by the curious (and frequent) tendency of FCPA conferences including representatives from FCPA violators – a regional compliance officer for Siemens Singapore presented at the seminar.