United States: FCPA Watch: Siemens Agrees to Pay Record-Breaking US$800 Million For FCPA Violations

Originally published December 16, 2008

Keywords: Foreign Corrupt Practices Act, FCPA, Siemens AG, disgorgement

Siemens AG (Siemens), Europe's largest engineering company, pleaded guilty on Monday, December 15, 2008, to violating the internal controls and book and records provisions of the Foreign Corrupt Practices Act (FCPA) and agreed to pay a $450 million fine to the Department of Justice and $350 million in disgorgement of profits to the SEC. The $800 million settlement is by far the largest penalty paid to-date in an FCPA case, dwarfing the FCPA fine of $44 million paid last year by Baker Hughes Inc.

The United States Department of Justice (DOJ) and Securities and Exchange Commission (SEC), as well as prosecutors in countries around the world, have been investigating Siemens since 2006. On Friday, December 12, the DOJ filed a criminal information¹ and the SEC filed a complaint² against Siemens in the District of Columbia. FCPA-related charges were also filed against three Siemens subsidiaries — Siemens Argentina, Siemens Bangladesh and Siemens Venezuela. According to the Siemens AG information, Siemens violated the FCPA by funding $1.36 billion in bribes to foreign officials around the world in relation to a wide range of Siemens contracts, including the United Nations oil-for-food program in Iraq, telecommunications equipment in Nigeria and Bangladesh, and medical devices in China, Russia, and Vietnam. The information alleges that Siemens made these payments from March 2001 (when Siemens AG was first listed on the New York Stock Exchange) through November 2006, during which time the company created elaborate payment schemes and off-book accounts to conceal corrupt payments and knowingly failed to implement anti-bribery compliance programs. According to the information, Siemens employees at all levels of management, including senior management, were involved in the corruption.

Moreover, according to the Sentencing Memorandum (Memorandum), also filed by US prosecutors on December 12, Siemens engaged in efforts to falsify corporate books and records and to failed to implement existing internal controls from the mid-1990's and continuing to 2007.³ Specifically, these efforts are described in the Memorandum as: (i) using off-books accounts for the corrupt payments; (ii) entering into business consulting agreements that had no legitimate business purpose and engaging former employees as purported business consultants to act as conduits for corrupt payments to government officials; (iii) drafting sham business consulting agreements to justify third-party payments and changing the name of certain purported business consulting agreements to "agency agreements" to avoid detection; (iv) creating false invoices to justify corrupt payments; (v) mischaracterizing corrupt payments as legitimate expenses in corporate accounting records and limiting the scope and quality of audits of those payments; (vi) accumulating profit reserves as liabilities in internal accounting records and then using them to make corrupt payments; (vii) making false signatures on forms authorizing payments to conceal the identity of the signors; and (viii) allowing third-party payments to be made based on a single signature in contravention of Siemens' "four eyes" policy, which required authorization of payments by two managers.

Government officials described the level of corruption at Siemens as a "pattern of bribery" that was "unprecedented in scale and geographic reach."

Guilty Pleas

On Monday, December 15, Siemens pleaded guilty to the DOJ action and settled the SEC complaint. The three Siemens subsidiaries also pleaded guilty. Pursuant to the terms of the DOJ plea agreement, Siemens will pay $450 million in criminal penalties. Without admitting or denying the SEC's allegations, Siemens has consented to the entry of a court order permanently enjoining it from future violations of Sections 30A, 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act. Under the terms of the SEC agreement, Siemens must forfeit $350 million in tainted profits and must submit to a monitor for a period of four years to ensure FCPA compliance going forward.

Siemens also entered into an agreement on Monday, December 15 with the Munich Public Prosecutor's Office. As a part of that agreement, Siemens agreed to pay approximately $569 million, which included a fine and disgorgement of profits, based on charges of corporate failure to supervise officers and employees. DOJ and SEC officials worked closely with the Munich Public Prosecutor's Office throughout the investigation of Siemens. The cross-border collaboration was made possible by the use of mutual legal assistance provisions of the 1997 Organization for Economic Cooperation and Development Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. Government officials have stated that the high level of cooperation between German and US officials was a key factor to bringing the systematic corruption at Siemens to light.

Details of the Internal Investigation

The government's Memorandum provides an insider's look into the internal investigation by Siemens that lead to the conclusion of the case by US government prosecutors. Siemens retained two law firms and an consulting company to help unravel more than a decade of corrupt activity across the globe. The challenges faced by these outside professionals included the privacy laws of various countries that at times impeded the flow of information to US regulatory agencies.

Siemens is credited with establishingdocument collection sites in Germany and China and spending more than $100 million to collect, review and process these documents. In addition, the company adopted a two-tier employee amnesty and leniency program to encourage employees to cooperate with the company's outside counsel. For all but the most senior, the program protected employees from termination and damage claims in return for voluntary disclosure of information regarding possible violations of anti-corruption laws. For those employees too senior to qualify for amnesty, as well as those employees who did not come forward during the amnesty period, the leniency program provided for individualized leniency determinations for those who cooperated with the internal investigation. More than 100 Siemens employees provided information pursuant to this program.

The government characterized Siemens' cooperation efforts in the Memorandum as "exceptional" and credited Siemens with providing substantial assistance in the investigation and with taking significant steps toward remediation. Among the remediation acts described in the Memorandum is the replacement of nearly all of Siemens' senior leadership team, including the Chief Executive Officer, the General Counsel, the Head of Internal Audit and the Chief Compliance Officer. The company also completely revamped its compliance program and polices. The compliance program now includes more than 500 compliance personnel worldwide and puts in place a new anti-corruption handbook and sophisticated web-based tools for due-diligence and compliance matters. Siemens hired an outside consulting company to assist it in implementing the program in 162 Siemens entities across the world. The cost of its remediation efforts was placed at $150 million.

In the government's view, "[t]he reorganization and remediation efforts of Siemens have been extraordinary and have set standard for multi-national companies to follow." These measures also include an outside corporate monitor who will be in place for a period of four years.

Lessons Learned

Companies whose business affairs bring them within the reach of the FCPA can take valuable lessons from this case. First, a strong FCPA compliance program is merely the starting point for reducing the risk of corruption associated with global business operations. Not only must companies implement policies designed to prevent corruption, the effectiveness of those policies must be continually tested and assessed. Second, the retention of third party consultants should be tied to a due diligence process that examines the background of the consultant, the business purposes for the retention and the manner and method of remuneration. Finally, high-level managers must be responsive to claims of corruption and corrupt behavior.

In announcing the Siemens plea agreement, government officials made clear that FCPA enforcement and compliance will remain a top priority of prosecutors and investigators. Acting Assistant Attorney General Matthew Friedrich stated that "[t]he Department and our international colleagues will continue our efforts to level the business playing field, making it free from corruption and fair to those who seek to participate in it."

Footnotes

1 The Securities and Exchange Commission's complaint can be viewed here: http://www.mayerbrown.com/public_docs/Siemens_Complaint.pdf .

2 The Department of Justice's criminal information can be viewed here: http://www.mayerbrown.com/public_docs/Siemens_Criminal_Information.pdf .

3 The Department of Justice's sentencing memo can be viewed here: http://www.mayerbrown.com/public_docs/Siemens_Sentencing_Memo.pdf .

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