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Siemens AG Concludes FCPA Investigations with Record-Setting Criminal Penalty
12/18/2008
Ronald W. Breaux, Barry F. McNeil, Lawrence A. Gaydos, Bradley J. Richards

On Monday, December 15, 2008, German conglomerate Siemens AG and three of its regional subsidiaries pleaded guilty to one count of violating the internal control requirements of the Foreign Corrupt Practices Act (“FCPA”) and one count of violating its books and records provisions. The company agreed to pay $800 million to United States authorities for violations spanning from 2001 into 2007. The monetary penalties include a $450 million fine arising from a criminal action and disgorgement of $350 million as part of its settlement of a corresponding enforcement action filed by the U.S. Securities and Exchange Commission. Siemens also announced the same day that that the Munich public prosecutor in charge of a related German inquiry concluded its investigation with the issuance of a €395 million fine. The total value of monetary penalties assessed by the United States and German authorities collectively is $1.6 billion. The $450 million criminal fine levied by the United States is more than twenty times greater than the previous record fine in FCPA enforcement.

In addition to payment of monetary penalties, Siemens must retain an independent corporate monitor for a period of four years to supervise Siemens’s anticorruption efforts. Theo Weigle, former finance minister of Germany, has been identified as the corporate monitor. The Siemens monitorship period—four years—is the longest imposed by the Department of Justice since the March 2008 release of the Morford Memorandum, which established guidelines for the imposition and duration of monitorships and the selection of corporate monitors.

The resolution of criminal charges against Siemens AG and its subsidiaries does not bring this matter to a final conclusion. Both United States and German officials have signaled that they will continue criminal investigations of key individuals. Additional criminal charges are likely at least in the United States, where the DOJ has consistently identified individual prosecutions as an important component of its FCPA enforcement efforts.

Observations

The Siemens disposition is consistent with several trends observed in FCPA enforcement in recent years. Specifically, the case extends the trend of larger monetary penalties, as record FCPA settlements are surpassed within months of their announcement. The continuing investigations of culpable individuals also underscore the DOJ’s commitment to prosecuting individuals, a practice that has been more evident in the past three years.

A key lesson from the Siemens enforcement actions is the importance of a company’s appropriate and effective response to red flags that might signal illicit payments. The Government’s case against Siemens detailed repeated failures to follow up on issues identified by auditors and legal counsel, to discipline culpable individuals, to implement effective compliance programs and policies, and to reflect a “tone at the top” that opposes corrupt business practices.

The Siemens case provides an example of the Sentencing Guidelines’ usefulness in framing corporate plea negotiations. It also illustrates the Department’s willingness to depart downward from the suggested penalties in response to a company’s cooperation with investigators and to credit a company for monetary penalties paid in other jurisdictions or in other actions.

FCPA Violations

Siemens’s illicit conduct was not confined to a single business unit or geographic region. The Siemens investigation uncovered nefarious payments and internal control failures throughout the business organization and in diverse parts of the world, including Asia, the Americas, and Africa. In announcing the guilty plea, Acting Assistant Attorney General Matthew Friedrich stated, “From the 1990s through 2007, Siemens engaged in a systematic and widespread effort to make and to hide hundreds of millions of dollars in bribe payments across the globe.”

The United States investigation of Siemens focused on the period from March 12, 2001—when Siemens was first listed on the New York Stock Exchange and thus subject to the FCPA—through 2007. During that period, the company made more than $800 million in bribe payments throughout the world, $1.7 million of which was paid in connection with its participation in the United Nations Oil for Food Program.

The DOJ’s allegations paint a picture of widespread corruption and repeated failures to respond properly to red flags. Despite awareness of increasing anticorruption regulations, the company’s internal compliance efforts were neither consistent nor effective. Cited examples include the following:

  • In 2002, the company adopted “principles and recommendations” for agreements with business consultants, but this guidance was neither binding nor effective in preventing corrupt payments.
  • The company’s corporate compliance function was inappropriately resourced and suffered from inherent conflict, having responsibility to both prevent and punish breaches while also defending the company against prosecutorial investigations. 
  • The company failed to discipline or take any action against key employees who refused to submit to interviews by internal investigators looking into allegations of corrupt payments.
  • The company failed to conduct appropriate follow-up review when outside auditors discovered that employees brought €4.1 million in cash into Nigeria and company compliance personnel identified possible bribery.
  • Despite senior management’s awareness between 2004 and 2006 of government investigations into corruption in multiple countries, Siemens “failed to adequately investigate or follow up on any of those issues” and failed to take disciplinary action against any of the employees implicated in the improper conduct.

Calculation of the Criminal Fine

The record-setting $450 million criminal fine was framed using the 2007 U.S. Sentencing Guidelines, according to the plea agreement filed in the case. Applying § 8C2.4 of the Guidelines, the DOJ based Siemens’s base fine on the amount of pecuniary “loss” involved in the offense rather than on the standard fine table, because the former yielded a larger fine. The Department divided the total “loss” figure into two components: (1) the profits derived from the U.N. Oil for Food Program (“OFFP”), and (2) the amount of the bribe payments made in non-OFFP business. With respect to the OFFP business, the DOJ applied the commentary to § 2B1.1 that permits use of pecuniary gain in circumstances where loss would be difficult or impossible to assess. The Government’s investigation showed that Siemens obtained $38 million in profits from the OFFP business. The DOJ based the remaining part of the base fine—$805.5 million—on a Guidelines provision applicable to government benefits cases, which the Government found “instructive.” See U.S.S.G. § 2B1.1 (application note 3(F)(ii)). Because calculation of Siemens’s gain from several years on thousands of projects “would require an unreasonable amount of time and resources” in the Government’s view, this approach permitted use of the amount of bribe payments as a measure of loss. The total base fine, therefore, was $843.5 million.

The multiplier that could have been applied to the base fine under § 8C2.7 of the Sentencing Guidelines was 1.6 to 3.2, which resulted in a suggested fine range from $1.35 billion to $2.70 billion. Although the $1.6 billion in total monetary sanctions imposed in the United States and Germany is within the Sentencing Guidelines range, the $450 million fine component levied in the United States falls below the suggested range. In agreeing to a criminal fine below the suggested range, the DOJ considered (a) the Guidelines range, (b) Siemens’s assistance in the investigation, (c) other fines and other monetary penalties paid in the United States and abroad, (d) Siemens’s substantial compliance with remediation efforts, (e) its “extraordinary rehabilitation,” and (f) the factors contained in 18 U.S.C. § 3553(a).

Siemens’s Investigation and Remediation Efforts

The criminal fine imposed on Siemens in the United States was mitigated in part by the company’s substantial assistance to authorities in their investigation of corrupt payments and by the company’s efforts to restructure its operations to prevent future violations. In its sentencing memorandum, the DOJ detailed Siemens’s “exceptional cooperation.” Specifically, the Department noted the following:

  • Extensive Investigation: Soon after German authorities raided Siemens’s offices in November 2006, the company retained a U.S. law firm to conduct a comprehensive internal investigation into violations of anticorruption laws. The details of the investigation demonstrate that the company’s investigation was monumental. The investigation required sustained work by approximately 100 attorneys and 1,300 forensic accountants. Investigators worked in 34 countries, conducted more than 1,750 interviews and 800 informational meetings, and collected more than 100 million documents. The company’s attorneys and consultants reviewed more than 14 million documents and produced approximately 24,000 of them to the DOJ. The work performed by the investigating law firm and forensic accountants totaled 1.5 million person-hours at a cost of $850 million. 
  • Corporate Amnesty and Leniency Programs: The DOJ and SEC both credited Siemens’s implementation of corporate leniency programs with providing significant assistance to their investigative efforts. Under the leniency programs, Siemens provided that employees who came forward with complete and truthful information about violations would not be unilaterally terminated or assessed damages. The program did not provide any amnesty from prosecution. More than 100 employees participated in the leniency program, which the DOJ characterized as “vital to obtaining the types of detailed information” needed for its thorough investigation.
  • Preservation, Collection, Testing, and Analysis of Evidence: From the outset of the internal investigation, Siemens implemented a worldwide policy to preserve data that might be relevant to the investigation. The DOJ noted that this effort was both complex and expensive due to the tremendous number of documents and the data protection laws in various countries.
  • Remediation Efforts: The DOJ characterized Siemens’s remediation efforts as “exceptional,” noting that the company terminated senior managers implicated as a result of the investigation. Additionally, it expanded and centralized its compliance operations, implemented sophisticated tools for due diligence and compliance, installed a confidential channel for reporting suspect business practices, and adopted a disciplinary committee to address misconduct.

Haynes and Boone, LLP has extensive experience in FCPA matters. If you would like advice on the matters mentioned in this Foreign Corrupt Practices Act Alert, please contact the White Collar Criminal Defense practice group or one of the Haynes and Boone attorneys listed above.