On December 15, 2008, Siemens AG, Europe's largest engineering conglomerate and the largest electronics company in the world, settled a wide-ranging Foreign Corrupt Practices Act (FCPA) investigation resulting in combined penalties of $800 million to the United States Department of Justice (DOJ) and Securities and Exchange Commission (SEC). Together with various penalties imposed in Germany, Siemens' penalties are $1.6 billion. The US penalties are by far the largest monetary sanction ever imposed in an FCPA case, dwarfing the prior record of $44 million paid by Baker Hughes. The company and three subsidiaries that pleaded guilty to criminal charges also agreed to retain an independent compliance monitor for a term of four years.
The settlement with the DOJ and SEC involved at least 4,200 allegedly corrupt payments totaling approximately $1.4 billion over six years to foreign officials in numerous countries.1 Those payments spanned Siemens' business groups to include transactions as varied as an infrastructure project in Argentina, telecommunications projects in Bangladesh and Nigeria, and the installation of electricity lines in China, to the construction of power plants in Israel, the design and construction of municipal transit systems in Venezuela, and the sale of medical devices in China, Russia and Vietnam. The DOJ and SEC also charged Siemens with books-and-records and internal controls violations related to payments to the Iraqi government in connection with contracts secured by Siemens under the auspices of the United Nations Oil-for-Food Program (OFFP). WilmerHale served as counsel to Siemens in connection with the OFFP investigation.
The Siemens settlement is notable because of the sheer scope of the improper payments at issue and the size of the penalties that were imposed as a result--$450 million in criminal fines to the DOJ and $350 million in disgorgement to the SEC. According to the government's papers, the improper payments implicated virtually all aspects of Siemens' operations, including its headquarters, subsidiaries and regional operating companies. While the Siemens settlement is unprecedented given the magnitude of the fines that were imposed, there are several other notable aspects to the case, including that it marks the first time the DOJ has ever charged a company with a criminal failure to maintain adequate internal controls.
First Ever Criminal Charge for Internal Controls Violations by a Company
The FCPA's internal controls provision, 15 U.S.C. § 78m(b)(2)(B), requires issuers to design and maintain a system of internal accounting controls that provide reasonable assurances that, among other things, transactions are carried out in accordance with management's authorization and permit preparation of accurate financial statements. To be held criminally liable, a company must "knowingly circumvent or knowingly fail to implement a system of internal accounting controls."2 While the SEC previously has alleged civil internal controls violations in a number of instances and the DOJ has commented on control failures, the DOJ had not previously brought a criminal internal controls charge against a company.3 The DOJ's charges against Siemens therefore provide important guidance as to the DOJ's views on the elements of an adequate FCPA compliance program.
According to the DOJ's charging papers, Siemens merely adopted a "paper program" largely limited to the distribution of anti-corruption circulars and the promulgation of FCPA policies. Critically absent was a sufficient "tone at the top" emphasizing adherence to those policies. The DOJ specifically noted that Siemens' Executive Committee "provided few strong messages regarding anti-corruption compliance."4 Likewise, the DOJ alleged that senior management "made no clear statement that Siemens would rather lose business than obtain it illegally."5 The failure to establish an adequate "tone at the top" was particularly problematic at Siemens because, according to the DOJ, improper payments to foreign officials were systemic throughout the company before Germany adopted foreign anti-bribery laws in 1999 and before Siemens was listed on a US securities exchange in 2001.
The DOJ also premised its criminal internal-controls allegations on specific structural and substantive deficiencies. Those deficiencies, which provide salient lessons for all companies, arose in the following areas:
- Siemens allegedly failed to establish a "sufficiently empowered and competent" compliance department. First, the DOJ alleged that the Corporate Compliance Department was severely understaffed in relation to the number of employees at Siemens. To support this allegation, the DOJ cited a 2005 benchmarking analysis conducted by Siemens that compared its compliance infrastructure to that of General Electric. The comparison identified "serious deficiencies" in compliance resources, but no action was taken to remedy the situation. In fact, the DOJ's charging papers specifically and disapprovingly noted that a plan to further analyze the deficiency remained in draft form for the 16 months that preceded the government's investigation. Second, regional compliance officers (who assisted the Corporate Compliance Department) had full-time responsibilities other than compliance and received minimal training or direction regarding their compliance responsibilities. Finally, the DOJ cited an "inherent conflict in [the] mandate" of the Corporate Compliance Department given that it was charged with preventing compliance breaches as well as defending the company against government investigations.
- While Siemens did adopt some policies, the DOJ alleged that it lacked sufficient anti-bribery compliance policies and procedures to control significant FCPA risks. For example, until recently, Siemens had in place "principles and recommendations"--but not mandatory policies--on engaging business consultants. In addition, those recommendations included no guidance on how due diligence should be conducted. When mandatory policies on consultants ultimately were adopted in 2005, the policies largely were not implemented by regional compliance personnel. Senior-level compliance personnel then knowingly failed to remedy the issue.
- The DOJ alleged that Siemens failed to appropriately investigate and respond to corruption issues in multiple markets. In support, the DOJ cited the fact that an external auditor's discovery that approximately $5 million in cash was transported to Nigeria by Siemens' telecommunications group resulted in Siemens conducting a one-day investigation. That investigation confirmed potential bribery violations and possible systemic issues, yet no additional follow-up was conducted, no employees were disciplined, and the matter never was referred to the Board or the Audit Committee. For three years thereafter, the involved employees continued to pay bribes through a series of slush funds, with those payments ceasing only after arrests were made by German prosecutors--those arrests ultimately triggered the recently settled investigations involving the DOJ and SEC.
- According to the DOJ's allegations, Siemens failed to discipline culpable employees involved in various corruption investigations. As a result, several employees who admitted paying bribes to foreign officials were provided with standard severance packages for early retirees.
- The DOJ alleged that despite numerous instances of corruption in multiple Siemens business groups, the company lacked a mandatory FCPA training program until 2007.
- The DOJ alleged that Siemens failed to implement sufficient accounting and finance controls. Those control deficiencies included a lack of central records on the true number of corporate bank accounts, widespread access to and use of cash and off-books accounts, and inadequate reviews by employees responsible for authorizing payments. As an illustration of the latter issue, the DOJ's charging papers highlighted the allegation that the Siemens officer responsible for authorizing payments in Russia was unable to read the language in which supporting documentation for the payments was prepared.
- The DOJ alleged that Siemens maintained extremely limited internal audit resources to support compliance efforts, which undermined improvements in policies and the periodic evaluation of the effectiveness of the company's FCPA program.
The structural and substantive deficiencies highlighted by the DOJ's charging papers identify areas where the US government will expect companies to implement robust internal FCPA controls. And, as the settlement illustrates, it is imperative that the effectiveness of internal controls be consistently and thoroughly monitored, particularly at companies with historical instances of corruption and within those companies conducting business in higher risk regions or industries.
Significant Credit Based on Substantial Assistance and Cooperation
Another distinctive aspect of the Siemens settlement was the significance of the company's extensive cooperation with the US government. Although Siemens did not voluntarily disclose its conduct before German law enforcement authorities raided its offices, the DOJ and SEC specifically noted and considered Siemens' substantial assistance, cooperation and remediation efforts, resulting in the DOJ's recommendation that the court impose total criminal fines of $450,000,000, rather than a fine of between $1.35 billion and $2.70 billion, the applicable range under the US Sentencing Guidelines according to the DOJ's Sentencing Memorandum. In addition, Siemens' level of cooperation may have influenced the DOJ's decision to not charge the parent entity with violating the FCPA's anti-bribery provisions. The consequences of such a charge could have been significant for Siemens, given that it may have led to debarment from US government contracts.
Highlights of the company's efforts included:
- Providing timely, detailed and significant information about third parties, including individuals and entities that were conduits for concealing corrupt payments to foreign officials;
- Delivering timely debriefing sessions complete with PowerPoint presentations and binders of pertinent documents;
- Providing English translations of foreign-language documents that were produced;
- Providing forensic analyses of bank records and payments;
- Conducting a sweeping and independent internal investigation, which spanned 34 countries, involved over 1,750 interviews, and included the collection and preservation of over 100 million documents;
- In consultation with the DOJ, designing and implementing company-wide amnesty and leniency programs to facilitate the internal investigation;
- Terminating members of senior management implicated in the misconduct uncovered by the investigation;
- Cooperating with relevant foreign law enforcement authorities who were conducting investigations of alleged improper payments abroad; and
- Overhauling and greatly expanding its compliance organization.
Siemens also committed substantial resources to preserving and producing to the DOJ and SEC an enormous volume of hard copy and electronic data. The DOJ explicitly indicated that the extent of those efforts might "serve as a model for other multi-national companies seeking to cooperate with law enforcement authorities."6 While the nature of these efforts corresponded, of course, to the scope of the improper payments at issue, the DOJ's sentencing memorandum nonetheless signaled that serious efforts to preserve and produce documents from foreign countries will be a critical factor in assessing whether, and if so the degree to which, a company is entitled to a reduced sentence based on its cooperation with enforcement authorities.
Finally, Siemens voluntarily initiated a practice of requesting approval from the DOJ and SEC for more than 50 divestitures undertaken during the two-year investigation. In each divestiture, Siemens secured access provisions with prospective purchasers that provided the DOJ and SEC with post-sale access to documents and employees. In one transaction in which Siemens was selling a majority ownership interest, Siemens negotiated a right of direct access by the DOJ and SEC to the divested entity's data and personnel. Those measures served to underscore Siemens' willingness to cooperate with US enforcement authorities, even beyond the scope of the conduct being investigated.
Substantial Coordination Involving US and Overseas Prosecutors
The Siemens case further demonstrates the internationalization of anti-corruption law enforcement actions. In addition to cooperating with the DOJ and SEC, Siemens also expended great effort to cooperate with the Munich Public Prosecutor's Office, authorities in Bangladesh, Greece and Nigeria, as well as with multilateral development banks such as the World Bank. During a joint press conference on the Siemens settlement, both the DOJ and SEC explained that cooperation between US and foreign law enforcement in this case was unprecedented, and that they expected such coordination to continue. Moreover, the Siemens investigation appears to be the first collaborative effort undertaken by Eurojust, a formal network of prosecutors in the European Union recently formed to jointly investigate and prosecute significant cross-border crimes. As other jurisdictions continue to bolster their anti-corruption efforts, companies can expect to confront an increased global focus on anti-bribery compliance, as well as an inter-governmental response should issues arise.
Ongoing Investigations of Siemens Personnel
The significant corporate fines paid to US and German authorities have not fully resolved the Siemens matter. When announcing the company's settlement, the DOJ specifically stated that Siemens "also agreed to continue fully cooperating with the Department in ongoing investigations of corrupt payments by company employees and agents."7 In addition, the plea agreement that Siemens reached with the DOJ requires Siemens to recommend orally and in writing that all Siemens directors, officers, employees and agents "cooperate fully" in ongoing investigations being conducted by the DOJ and other enforcement authorities, including authorities outside the US.8 Thus, aspects of the Siemens investigation are continuing.
1See United States v. Siemens Aktiengesellschaft, No. 08-367 (D.D.C. Dec. 12, 2008) (Information); United States v. Siemens A.S. (Argentina), No. 08-368 (D.D.C. Dec. 12, 2008) (Information); United States v. Siemens Bangladesh Ltd., No. 08-369 (D.D.C. Dec. 12, 2008) (Information); United States v. Siemens S.A. (Venezuela), No. 08-370 (D.D.C. Dec. 12, 2008) (Information); SEC v. Siemens Aktiengesellschaft, No. 08-2167 (D.D.C. Dec. 12, 2008) (Complaint).
2 15 U.S.C. § 78m(b)(5).
3 Criminal charges previously have been brought against individuals for knowingly circumventing internal controls. See, e.g., United States v. Lake, 472 F.3d 1247, 1250 (10th Cir. 2007). Previously, the DOJ had described internal controls violations--but without charging them--in United States v. Titan and in a Non-Prosecution Agreement with Faro Technologies. See United States v. Titan Corp., 05-314 (S.D. Cal. Mar. 1, 2005) (Information ¶¶ 33-36); Non-Prosecution Agreement Between United States Department of Justice and Faro Technologies, Inc. (June 3, 2008) (Statement of Facts ¶¶ 21-25).
4United States v. Siemens Aktiengesellschaft, No. 08-367 (D.D.C. Dec. 12, 2008) (Information ¶ 64).
6United States v. Siemens Aktiengesellschaft, No. 08-367 (D.D.C. Dec. 12, 2008) (DOJ Sentencing Memorandum at 21).
7 Press Release, US Department of Justice, Siemens AG and Three Subsidiaries Plead Guilty to Foreign Corrupt Practices Act Violations and Agree to Pay $450 Million in Combined Criminal Fines; Coordinated Enforcement Actions by DOJ, SEC and German Authorities Result in Penalties of $1.6 Billion (Dec. 15, 2008), available here.
8See Plea Agreement Between United States Department of Justice and Siemens Aktiengesellschaft (Dec. 15, 2008), at ¶ 10.