Home -> Law Blog Directory -> International Law Blogs -> The FCPA Blog

International Law

: The FCPA Blog

Siemens: Systematic Global Corruption

It's a story of fraud, deceit and concealment -- a company gone haywire. It's filled with slush funds used to bribe public officials, phony contracts, fake invoices, and a boardroom feigning ignorance. And it all happened in one of the world's most important companies, a global powerhouse in electronics and electrical engineering, with nearly 400,000 employees and revenues last year of ?72.4 billion.

As reported yesterday, Siemens AG will plead guilty as early as Monday to Justice Department charges of violating the Foreign Corrupt Practices Act, likely resulting in fines of $350 million. And once an expected agreement with the Securities and Exchange Commission is signed, the company will also be required to disgorge at least $450 million of ill-gotten profits.

The Justice Department's Information charging Siemens in the biggest FCPA enforcement action ever tells of some 4,283 payments worth at least $1.4 billion to foreign officials to obtain or retain business -- and systematic and intentional violations of the internal controls and books and records provisions (15 U.S.C. §§ : 78m(b)(2), 78(b)(5) and 78ff(a)).

How could it have happened? Because Siemens created a structure and nourished a culture where operating groups and foreign subsidiaries had little accountability. Where compliance training didn't happen. Where bribery flourished -- funded through tricks and covered up with lies. Where reliable reports to headquarters of large-scale corruption weren't investigated. Where compliance personnel and inside auditors were choked off from resources and hobbled by internal restrictions and a confused mission. Where senior employees who paid bribes and cooked the books were never disciplined -- but instead were allowed to retire with benefits, bonuses and rich severance packages.

Equally astounding are those details in the government's Sentencing Memorandum that describe Siemens' amazing road to redemption. Because of the scope of its bribery, the company faced fines under the Federal Sentencing Guidelines up to $2.7 billion. But the DOJ's prosecutors are asking for a penalty reduced to $350 million, and haven't charged Siemens under the FCPA's antibribery provisions, meaning it won't be barred from U.S. government contracts. Why? The Justice Department said it views as exceptional Siemens? wide-ranging cooperation efforts throughout this investigation, which included a sweeping internal investigation, the creation of innovative and effective amnesty and leniency programs, and exemplary efforts with respect to preservation, collection, testing, and analysis of evidence. ... More on that in later posts.

For today, here are some key allegations from the 36-page Information:

• In April 2006, in response to a special audit request by the board of directors, Siemens? outside auditors reported at least 250 suspicious payments made through the parent to companies in foreign jurisdictions. The audit report was provided to the board of directors, members of management and the Corporate Compliance Office. But no one made any attempt to investigate these facts, or explore whether they were related to other similar instances of wrongdoing.

• From 2004 to 2006, in addition to learning of corruption issues involving Siemens in Nigeria, Italy, Greece, Liechtenstein, and elsewhere, the company's senior management learned of government investigations into corruption by Siemens in Israel, Hungary, Azerbaijan, Taiwan, and China. Nevertheless, executives and senior management failed to adequately investigate or follow up on any of these issues.

• Siemens also failed to take effective disciplinary measures with respect to any of the employees implicated in the various investigations. For example, the three managers implicated in the Italian cases each received a severance package standard for early retirees, despite the fact that certain Siemens board members knew that at least two of the managers had already admitted to paying bribes at the time of their retirement.

• From 2004 to 2006, the Corporate Compliance Office continued to lack resources, and there was an inherent conflict in its mandate, which included both defending the company against prosecutorial investigations and preventing and punishing compliance breaches. In addition, there were extremely limited internal audit resources to support compliance efforts. All of these factors undermined the improved policies because violations were difficult to detect and remedy, and resources were insufficient to train business people in anti-corruption compliance.

• There was a consistent failure on the part of certain members of management to alert the Audit Committee to the significance of the compliance failures discovered within Siemens. Reports to the Audit Committee by the Chief Compliance Officer were principally status reports on prosecutorial investigations and often conveyed incomplete information. In some instances, management provided inaccurate information in response to Audit Committee inquiries. At no time did management convey to the Audit Committee a sense of alarm or growing crisis.

And here, from the final paragraph of the Information, are the DOJ's books-and-records charges against the company:

From at least March 2001 to November 2006, Siemens knowingly falsified and caused to be falsified books, records, and accounts required to, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the company. In doing so, Siemens:

(a) used off-books accounts as a way to conceal corrupt payments;

(b) entered into purported business consulting agreements with no basis, sometimes after Siemens had won the relevant project;

(c) justified payments to purported business consultants based on false invoices;

(d) mischaracterized bribes in the corporate books and records as consulting fees and other seemingly legitimate expenses;

(e) accumulated profit reserves as liabilities in internal balance sheet accounts and then used them to make corrupt payments through business consultants as needed;

(f) used removable Post-It notes to affix signatures to approval forms authorizing payments to conceal the identity of the signors and obscure the audit trail; and

(g) drafted and backdated sham business consulting agreements to justify third party payments; and

(h) falsely described kickbacks paid to the Iraqi government in connection with the Oil for Food Program in its corporate books and records as commission payments to agents when Siemens and Siemens France, Siemens Turkey and others were aware that a substantial portion of these payments was being passed on to the Iraqi government in exchange for being awarded contracts with the Iraqi government.

_________

Download a copy of the DOJ's Information charging Siemens AG here.

Download the DOJ's Sentencing Memorandum here.

Download here the charges related to Argentina, Bangladesh and Venezuela.

Download the Joint Statement here.

* * *
Our special thanks to readers who assisted in compiling the documents filed by the DOJ in U.S. District Court in Washington, D.C. yesterday. Those linked above are at the heart of this extraordinary FCPA enforcement action.

.

Full post as published by The FCPA Blog on December 12, 2008 (boomark / email).