International Law Advisory - Record US and German Settlements of the Siemens Case Reflect New Realities of Corruption Cases

January 8, 2009

Large Fines, Increased Transnational Cooperation and Coordination Between Law Enforcement Authorities, and Expanding Collateral Consequences of Corruption

On December 15, 2008, the U.S. Department of Justice (“DoJ”), the U.S. Securities and Exchange Commission (“SEC”), and the Office of the Public Prosecutor in Munich, Germany, announced coordinated settlements of allegations of widespread corruption on an unprecedented scale at Siemens AG (“Siemens”). Siemens, a German conglomerate with shares traded on the New York Stock Exchange since 2001, agreed to pay a US$450 million criminal fine to the DoJ ($448.5 million on its own behalf and $1.5 million to settle actions against three subsidiaries), US$350 million in disgorgement of profits to the SEC, and €395 million to German authorities (€394.75 million in disgorgement and €250,000 as a fine), in addition to the €201 million settlement (€200 million in disgorgement and a €1 million fine) Siemens previously reached with German authorities in October 2007. With these settlements, total fines to date reached a staggering US$1.6 billion. As part of the DoJ and SEC settlements, Siemens also agreed to engage Theo Waigel, former Finance Minister of Germany, as compliance monitor for a term of up to four years, and to retain a U.S. firm to provide counsel to Mr. Waigel.

According to the press reports, U.S. authorities began investigating the Siemens matter after news of a November 2006 raid of the offices of Siemens and its executives by German authorities became public. German prosecutors had opened an investigation into corruption at Siemens in 2005 after reports of suspicious transactions were filed by authorities in Lichtenstein, Switzerland, and Austria, and after Siemens was sanctioned for bribery of officials of the Italian state power company Enel SpA by a court in Milan, Italy in 2004.

The bribery scheme at Siemens has garnered notoriety mostly for its magnitude, and for the record penalties imposed to date. The scheme involved, however, the classic type of conduct prohibited by the FCPA: payments through intermediaries and in cash to win business contracts, using elaborate devices to hide improper payments. The SEC held Siemens responsible for more than US$1.4 billion in improper payments made between March 12, 2001, and September 30, 2007, to obtain or retain business around the world.[1] Relying, unusually, on the FCPA’s criminal accounting prohibitions instead of the antibribery provisions,[2] the DoJ cited Siemens for books and records and internal control violations relating to US$1.36 billion in improper payments.[3] Most of the payments were in cash or bearer instruments or through intermediaries the company described as “business consultants”, in order to obtain or retain government contracts.

U.S. authorities alleged that corruption was historically entrenched at Siemens, involving the activities of a variety of business units in more than 10 countries (Bangladesh, China, Greece, Iraq, Israel, Italy, Mexico, Nigeria, Russia, Venezuela, Vietnam, and elsewhere). The most significant portion of improper payments – US$813.9 million – was made by the former Siemens Telecommunications Group. The DoJ focused on payments in connection with particular projects in Argentina, Bangladesh, and Venezuela through separate criminal enforcement actions against Siemens subsidiaries operating in those countries.[4] The improper payments occurred, with knowledge and involvement of certain senior personnel of Siemens and the charged subsidiaries, despite Germany’s 1999 enactment of a law implementing the OECD Convention against Bribery of Foreign Public Officials in International Business Transactions (“OECD Convention”) and despite the application of the FCPA to Siemens as a foreign issuer since its U.S. listing in 2001.

What has received less attention than the record settlement amounts, but is equally notable about the Siemens case and far more likely to be manifested in future cases, is the heightened coordination it reflects between national law enforcement authorities and the expanded risks of collateral consequences of such prosecutions.

Coordinated Settlement Between U.S. and German Authorities Reflects a New Level of International Cooperation in Bribery Cases. The Siemens case marks the first time that U.S. and foreign anti-corruption enforcement authorities have simultaneously announced a coordinated settlement. The timing of the settlement is only one of numerous examples of increased coordination and cooperation between national authorities in the anti-corruption arena in recent years. Such cooperation reflects the emergence of international standards and an enhanced international infrastructure to facilitate it.

Global Investigation Spurred by Cooperation Between European Anti-Money Laundering Authorities. The German investigation of Siemens launched in 2005 is, in significant part, the byproduct of cooperation between anti-money laundering authorities within the European Union. In this case, approximately €1 million entered a Lichtenstein account held in the name of an offshore company and was withdrawn on the same day. In addition, six transactions involving €5 million passed between related accounts over the course of three weeks. The red flags in these transactions raised the suspicions of bank auditors in Lichtenstein in 2003, resulting in the filing of suspicious activity reports (“SARs”). In all, German authorities reportedly obtained information on suspicious transactions tied to Siemens from Lichtenstein, as well as Switzerland and Austria. With heightened requirements on financial institutions and professionals, including lawyers, to report suspicious of money laundering, the number of SARs involving corruption and the level of cooperation between national financial intelligence units (“FIUs”) are on the rise. In the United States alone, more than 1,000 SARs relating to bribery have been filed in recent years.
Cooperation Between U.S. and German Authorities Sets a New Standard. In announcing the Siemens case, U.S. Attorney for the District of Columbia Jeffrey Taylor explained that “[t]he coordinated efforts of U.S. and German law enforcement authorities in this case set the standard for multi-national cooperation in the fight against corrupt business practices.”[5] In particular, the SEC recognized the cooperation of the Munich Public Prosecutor’s Office,[6] which the DoJ described as “exceptional help provided, in the form of mutual legal assistance”. The DoJ attributed this level of cooperation to the cooperation provisions of the OECD Convention.[7] U.S. Assistant Attorney General Friedrich also noted, in light of widespread adherence to the OECD Convention and the United Nations Convention against Corruption, foreign enforcement is “something that we will only see more of in the future.”[8] Indeed, the level of international cooperation in the Siemens case is unusually high, and may become the new standard.[9]
Relationship of U.S. and German Penalty Amounts. The DoJ called attention to the “combined total” settlement by Siemens of “more than $1.6 billion”.[10] The settlements with U.S. and German authorities respectively comprised nearly equal shares of the combined total. The settlement is noteworthy for its imposition of foreign and U.S. penalties of roughly equal magnitude.[11] The total settlement with U.S. authorities reached US$800 million (almost 20 times higher than any previous FCPA settlement), while the total of 2007 and 2008 settlements with German authorities reached €596 million (approximately US$856 million). In announcing the reduced penalty, the DoJ stated that it “considered related cases of other governmental authorities.”[12]

Collateral Consequences of Corruption Allegations and Settlements. The Siemens settlement also reflects a heightened concern over the collateral consequences of corruption, particularly debarment risks. Both the disposition of the case, and the facts alleged, likely reflect concerns over the implications of the settlement collaterally.

Absence of a DoJ Bribery Charge Likely Reflects Concern Over Debarment Risks in FCPA Settlements. Prior to the December 2008 FCPA settlement, Siemens already received debarment sanctions in Italy and from the United Nations (which Siemens appealed). Siemens also has been cooperating with anti-corruption investigations by the World Bank and regional international financial institutions (“IFIs”), which have the authority to debar companies found to have engaged in corrupt practices in IFI-financed projects. Certain debarment risks appear to have been reduced, however, by the nature of the charges U.S. authorities brought against Siemens. Although Siemens agreed to settle SEC charges including violations of the anti-bribery prohibition of the FCPA, 15 U.S.C. § 78dd-1, the DoJ only charged Siemens with criminal violations of the accounting provisions (internal controls and books and records) of the FCPA. In describing the factors in its decisions regarding the “overall disposition”, the DoJ said that it considered the “collateral consequences” arising from the prosecution including “the risk of debarment and exclusion from government contracts.” Although U.S. law provides a number of potential bases for debarment of a company involved in corruption schemes, a plea of bribery would have increased the risk that U.S. authorities would have exercised their discretion to institute a debarment proceeding against Siemens. (A settlement with the SEC does not carry the same level of risk because SEC settlements are concluded on a no-admit, no-deny basis.) In announcing the DoJ settlement, Siemens also disclosed that the U.S. Defense Logistics Agency (“DLA”) formally determined Siemens was “presently responsible” and thus able to continue to participate in U.S. government contracting. Had Siemens pleaded guilty to bribery charges, it would have been more difficult for DLA to make such a determination. The absence of a guilty plea to bribery also may enhance Siemens’ position in collateral proceedings before the World Bank and other IFIs, and may reduce future difficulties for Siemens in securing financing from the U.S. Export-Import Bank (which had provided some financing for contracts in Venezuela tainted by bribery involving the Venezuelan subsidiary of Siemens).
Corruption Involving Siemens Spurs Civil Litigation Including Action Against Certain Former Members of Siemens’ Managing Board. The Siemens case has led to a variety of types of civil litigation. Siemens initially brought suit against a former employee in Greece. Earlier in 2008, the company announced it would initiate a suit against 11 former members of its Managing Board and that it had found a breach of duty by two former Supervisory Board members. (In addition, in the internal investigation, Siemens used leniency and amnesty programs, including immunity from the threat of bringing suit, to encourage cooperation by employees.) A shareholder action in New York state court, based largely upon press reports, alleges breach of fiduciary duty by former members of Siemens Supervisory and Management Boards. Siemens also faces civil suits by Iraq seeking to recover proceeds from kickbacks, and by a competitor in Greece. The Siemens case thus illustrates a trend in large-scale corruption cases: enforcement activity spawns a variety of civil actions both against the company (by shareholders and competitors) as well as by the company (typically against former employees and, what is somewhat unusual in the Siemens case, against former management).
Effects of the Settlement on Pending Disputes Involving Siemens. The Siemens case highlights how allegations of corrupt business activities may affect the outcome of litigation or arbitration involving affected projects or contracts. In Argentina, third parties who had received payments from Siemens in connection with the national identity card project demanded additional payments after the project for which Siemens Argentina was prosecuted was cancelled in 2001. The SEC complaint identifies Siemens’ payments in settlement of these claims as improper payments. And the DoJ, after noting that a 2005 arbitration against Siemens by third parties uncovered evidence of corruption by the third parties involved in the identity card project, criticized Siemens for not disclosing such evidence in its investor-state arbitration proceeding against Argentina over termination of the project. An arbitral panel awarded US$217 million to Siemens in 2007, but even before the settlement was announced, the Argentine government had been seeking annulment of the award based on Siemens’ alleged corruption. Siemens’ admissions in the DoJ settlement could be taken as presumptive admissions in the arbitration proceeding, and makes annulment of the US$217 million award more likely.[13]

Further enforcement actions against individuals and third parties are expected. Authorities in the United States and Germany continue to investigate the conduct of individuals and third parties, based in part on information provided by Siemens. Authorities in other jurisdictions, such as Nigeria, Greece, Italy, Norway, Argentina, Hungary, Indonesia and Serbia, also have been investigating allegations of corruption involving Siemens, its employees or third parties engaged by Siemens. As a result, follow-on enforcement actions around the world are expected.[14]

The Siemens settlement will likely stand as the high-water mark for FCPA fines for years to come. The size of the enterprise and the scope of the payments make it unlikely other cases will match it in the near future. Although perhaps sui generis in that respect, other aspects of the case reflect the new realities of anti-corruption enforcement. 2009 will likely see continued vigorous FCPA enforcement by U.S. authorities, with significant monetary penalties, international cooperation, and increasing collateral risks.

RELATED DOCUMENTS

United States v. Siemens Aktiengesellschaft Statement of Offense

United States v. Siemens S.A. (Argentina) Statement of Offense

United States v. Siemens Bangladesh Limited Statement of Offense

United States v. United States v. Siemens S.A. (Venezuela) Statement of Offense

DoJ Sentencing Memorandum

DoJ Press Release

SEC v. Siemens Aktiengesellschaft Complaint

SEC Litigation Release

We will continue to keep you apprised of developments related to FCPA enforcement. If you have any questions or for further information, please feel free to contact Lucinda Low at 202.429.8051; Ed Krauland at 202.429.8083; Pat Norton at 202.429.8034; Erik Kitchen at 202.429.8132; Matt Herrington at 202.429.8164; Andrew Irwin at 202.429.8177; Julia Court Ryan at 202.429.6418; David Lorello at 44(0)20.7367.8007; Alexandra Baj at 202.429.6478; Tom Best at 202.429.8079; Owen Bonheimer at 202.429.6266; Michael Pass at 202.429.8101; Brittany Prelogar at 202.429.5518; Sarah Lamoree at 202.429.6488; William Gordon at 202.429.8013; Vincenza Rabenn at 202.429.1305.

[1] SEC v. Siemens Aktiengesellschaft, Case No. 08cv2167 (D.D.C.) (Complaint Dec. 12, 2008).

[2] This is the first time a company has been prosecuted criminally for internal control violations.

[3] United States v. Siemens Aktiengesellschaft, Case No. 08cr367 (D.D.C.) (Statement of Offense Dec. 15, 2008). [4] United States v. Siemens S.A. (Argentina), Case No. 08cr368 (D.D.C.) (Statement of Offense Dec. 15, 2008); United States v. Siemens Bangladesh Limited, Case No. 08cr369 (D.D.C.) (Statement of Offense Dec. 15, 2008); United States v. Siemens S.A. (Venezuela), Case No. 08cr370 (D.D.C.) (Statement of Offense Dec. 15, 2008). [5] DoJ Press. Rel. (Dec. 15, 2008). [6] SEC Lit. Rel. 20829 (Dec. 15, 2008). [7] DoJ Press. Rel.

[8] DoJ Press. Conf. Transcript (Dec. 15, 2008).

[9] Coordination with foreign enforcement authorities likely will be part of any resolution of the longstanding FCPA investigation of the activities of Halliburton Company (“Halliburton”) over the last 20 years, including the participation of its former subsidiary Kellogg, Brown, and Root, Inc. (“KBR”) in the Bonny Island Liquefied Natural Gas Project in Nigeria. After the September 2008 plea agreement and civil SEC settlement with Jack Stanley, former Chairman of KBR, U.S. authorities continue to investigate Halliburton and KBR. See High-Level Executives Targeted for FCPA Enforcement; Continued Scrutiny of Foreign Subsidiary Operations, Steptoe & Johnson LLP International Advisory (Oct. 8, 2008). The DoJ settlement with Mr. Stanley recognized cooperation from authorities in France, Switzerland, Italy and the United Kingdom. Halliburton is cooperating with investigations in France, Switzerland, and Nigeria, and has indemnified KBR for possible penalties that may be imposed by authorities in the United States, the United Kingdom, France, Nigeria, Switzerland, and/or Algeria. Halliburton 10-Q (Oct. 21, 2008). [10] DoJ Press Rel. [11] U.S. FCPA enforcement actions have credited foreign penalties, as in the 2006 Statoil case, or offered credit for foreign penalties to be negotiated in the future, as in the 2007 Akzo Nobel case. In both of those cases, however, the total foreign penalty was considerably lower than the U.S. penalty. In Statoil, the DoJ treated a US$3 million fine Statoil paid to Norwegian authorities in 2004 relating to the same payments as an offset to the US$10.5 million criminal fine imposed by DoJ. See Steptoe & Johnson LLP International Client Alert (Nov. 6, 2006). In Akzo Nobel, DoJ agreed not to impose a US$800,000 fine on the company if its subsidiary reached a €381,000 settlement relating to the same allegations with Dutch authorities within six months. (DoJ Press Rel. Dec. 20, 2007.) By contrast, in Siemens, the U.S. and German penalties comprised roughly equal components of the total US$1.6 billion in penalties, and the final settlements were announced at the same time. [12] DoJ Sentencing Memorandum (Dec. 12, 2008) at 11. Although at record levels, the U.S. fine amounts reflected very large discounts given by the DoJ under Sentencing Guidelines calculations. Not only did Siemens receive a 66-percent discount off the low end of the fine range under the Sentencing Guidelines, but the way losses were calculated may have significantly understated the base amount. [13] Siemens also has faced press reports describing an allegation of an improper payment in Saudi Arabia. After a terminated distributor initiated an arbitration and threatened to expose evidence of Siemens’ corruption to authorities, Siemens reportedly paid the former distributor US$50 million in 2005. Siemens has claimed the payment was legitimate settlement of a claim of US$910 million advanced by the distributor, and that the settlement was certified by a court in Saudi Arabia. [14] To date, German authorities have convicted several individuals. Reinhard Siekaczek, a former Siemens executive of the Communications Group, was convicted of 49 counts of breach of trust and received a two-year suspended sentence and a fine of €108,000. Two of Siekaczek’s assistants were convicted in November of accessory to breach of trust and received probation and fines of €12,000 and €20,000, respectively. Another former manager in the Power Generation Unit was convicted of embezzlement in connection with the scheme in Italy. In relation to that scheme, in November 2006, Siemens and two former employees agreed to a plea bargain without admission of guilt or responsibility (patteggiamento). The court also sentenced a former employee to a year and 11 months imprisonment. A year later, in November 2007, criminal charges were filed in Milan against two others allegedly involved in the scheme.