Bribery Everywhere Chronicles From The Foreign Corrupt Practices Act Richard L. Cassin
Bribery Everywhere Copyright Š 2009 by Richard L. Cassin All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means without written permission of the author.
ISBN 978-0-557-05348-3
Information in this book is intended for public discussion and educational purposes only. It does not constitute legal advice and its use does not create an attorney-client relationship.
In memory of Richard L. Cassin Sr. His credo was simple: Be nice to people. It wasn’t something he had to work at or remind himself to do. It was who he was—all the time. So he had no regrets along the way and every day was something special for him. We’re thankful for his long and well-lived life, and for showing us what’s truly important.
From the FCPA Blog December 5, 2008
Table of Contents Author’s Foreword .............................................................................9 Siemens: Systematic Global Corruption........................................13 A Spectacular Leap ...........................................................................19 Was Justice Served? ..........................................................................21 Foreign Affairs ..................................................................................25 Ex-KBR Boss Pleads Guilty............................................................29 KBR And Halliburton Resolve Charges .......................................33 KBR’s Twisted Web .........................................................................37 Aibel Pleads Guilty ...........................................................................41 Shock And Awe In U.S. Federal Court .........................................45 More Hurdles For Private Litigants ...............................................47 Industry-Wide Investigation Snares Another ...............................51 The Highest Roller In Town...........................................................53 The Briefing Book ............................................................................57 A Bit Of An Old Boy’s Club...........................................................61 Rocket Scientist Pleads Guilty ........................................................65 Congressman’s FCPA Trial Draws Near ......................................67 Jail For Japanese Executive .............................................................71 Case Closed For Kay And Murphy................................................73 After Kay, A New Warning.............................................................75 Bits And Pieces..................................................................................79 Who’s Covered? ................................................................................83 No Foreign Official, No FCPA Offense ......................................87
Mandarins Gone Wild ..................................................................... 89 Looking Through The FCPA......................................................... 91 May It Please The Court ................................................................. 95 The Great Temptation .................................................................... 99 In The Master’s Defense............................................................... 103 Naked Corporate Defendants ...................................................... 105 Limiting The Local Law Defense ................................................ 107 Business Down, Compliance Risks Up ...................................... 109 These Opinions Really Matter...................................................... 111 A Messy Ménage............................................................................. 115 A Rare (Or Medium Rare) Opportunity..................................... 119 More Than Normally Careful....................................................... 121 A Dozen Fast Facts ....................................................................... 125 Intent On Complying .................................................................... 129 The Law We Love To Hate.......................................................... 133 Why We Cheat................................................................................ 137 Workers Of The World, Comply................................................. 139 Cases We’ll Never Report............................................................. 141 Bribe Takers Get A Pass ............................................................... 143 Chasing Dirty Money..................................................................... 147 It’s Another World At That Bank ............................................... 149 That’s Milton Friedman?............................................................... 151 Welcome To N’awlins ................................................................... 155 Aon Pays U.K. Fine ....................................................................... 157 U.S. Law Firms Face China Probe .............................................. 161 Sweating The Small Stuff .............................................................. 163
Graft’s Impact ................................................................................ 167 The Victims Of Corruption ......................................................... 171 Just Laws And Human Dignity.................................................... 175 Appendix I ...................................................................................... 177 Appendix II..................................................................................... 181
Author’s Foreword
T
his book is a companion to Bribery Abroad: Lessons from the Foreign Corrupt Practices Act. Like Bribery Abroad, it’s based on posts from the FCPA Blog, an online site about the Foreign Corrupt Practices Act (FCPA).1 On the blog, the conversation often turns to related subjects. Public corruption around the globe, ethics, how best to catch and punish criminals, and government accountability in the U.S. and elsewhere, are among the popular topics. That’s true in this book too.
What Is The FCPA? For those new to the FCPA, it’s an American law enacted in 1977.2 It has two parts. The first part outlaws corrupt payments to foreign officials that are meant to obtain or retain business. These so-called antibribery provisions apply to all businesses organized under U.S. law, or based or doing business in the U.S. Foreign companies with securities registered on a U.S. stock exchange also have to comply, along with individuals of any nationality who act from U.S. soil. Finally, the antibribery provisions always apply to U.S. citizens and permanent residents, no matter where they’re located. That’s why, among American criminal statutes, the reach of the antibribery provisions is unmatched.
1 2
http://fcpablog.blogspot.com and http://fcpablog.com 15 U.S.C. §§ 78dd-1, et seq.
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The other part of the FCPA, called the accounting provisions, requires public companies to make and keep accurate books and records, and have an adequate system of internal accounting controls. The reach of the accounting provisions is limited to companies with securities listed on a U.S. stock exchange and filing reports with the Securities and Exchange Commission (SEC). Generally, the SEC enforces the accounting provisions, while the Justice Department prosecutes antibribery offences. Accounting violations can land a person in jail for 20 years, and an antibribery offense carries a penalty of up to five years in prison. Violations can also result in criminal fines, the loss of export privileges, debarment from U.S. government contracts, as well as ruined reputations and wrecked lives.
Record-Setting Penalties There’s been plenty of news about the FCPA. In late 2008, Germany’s Siemens paid the biggest criminal fine in FCPA history—$450 million. And it disgorged to the SEC $350 million of profits tainted by its systematic global bribery. Then in early 2009, Houston-based Kellogg Brown & Root (better known to most people as KBR) was hit with a $402 million fine and, along with its former parent company Halliburton, a $177 million disgorgement payment. Other companies appearing in FCPA-related headlines during the past year have included Avon, Fiat, BAE Systems, AB Volvo and Aon, among others. Some high-profile individuals now defending themselves against FCPA charges are Frederic Bourke, Jr., owner of the luxury handbag brand Dooney & Bourke, Hollywood movie producers Gerald and Patricia Green, and former U.S. Representative William J. 10
Author's Foreword
Jefferson, the first sitting Congressman to be charged under the Foreign Corrupt Practices Act.
About This Book This book divides roughly into three sections. The first is about some of the notable cases during the past year or so.3 The middle section is about the FCPA itself—how it works and what companies and individuals should do to comply with it. Most of the focus is on the exceptions in the law and defenses to it. Those seem to generate endless confusion and controversy, so they need plenty of attention. The final section goes further afield. It looks at current FCPA enforcement policies and tactics in use now by the Justice Department. And it surveys what some other countries are doing or need to do to fight public corruption. Regular readers of the FCPA Blog will find themselves on familiar ground. They may also be surprised to see how the scattergun posts from the blog can be reassembled to create more continuous commentaries about the FCPA and related topics. The selections have been edited very little. So readers unfamiliar the blog should get an authentic taste of the daily on-line experience.
3 Appendix I is the 2008 FCPA Enforcement Index. It lists all Foreign Corrupt Practices Act enforcement actions by the Justice Department and the Securities and Exchange Commission during 2008, as well as most private litigation involving allegations of facts that, if true, would constitute violations of the FCPA. All of the cases appearing in the 2008 FCPA Enforcement Index are discussed on the FCPA Blog.
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The FCPA Blog has been a great way to join a wider community and hear what’s on people’s minds. As I said in a post not long ago, “Our faces might not be familiar to each other. But there’s a strong bond among the members of the compliance community, whether we’re from service firms, industry, government, academia, the press or elsewhere. The idea that people from so many places and backgrounds care so deeply about the rule of law is always encouraging.” Yes, I’m encouraged. And I’m always grateful to be a small part of this growing discussion. Public corruption hurts millions of people every day. It prevents roads and bridges, hospitals and schools from being built. It keeps water and electricity from reaching some of the neediest humans on the planet. It destroys the idea that hard work and perseverance bring rewards, and it robs people of hope. That’s why the Foreign Corrupt Practices Act and laws like it in other countries are so important. And that’s why we keep plugging. Singapore April 2009
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Siemens: Systematic Global Corruption
I
t was a corporation that tolerated fraud, deceit and concealment. There were slush funds used to bribe public officials. There were phony contracts and fake invoices to cover up the corruption, and there was a boardroom that knew for years what was happening but feigned ignorance.4 And yet it was one of the world’s most important companies, a global powerhouse in electronics and electrical engineering, with nearly 400,000 employees and yearly revenues above $100 billion. Now come reports that Siemens AG will plead guilty to criminal charges of violating the Foreign Corrupt Practices Act, likely resulting in fines of $450 million. Another expected agreement with the Securities and Exchange Commission will also require it disgorge at least $350 million of its tainted profits.5 The Justice Department’s criminal information charging Siemens in the biggest FCPA enforcement action ever tells of more than 4,000 payments worth at least $1.4 billion to foreign officials to obtain or
Posted on the FCPA Blog on Dec. 14, 2008. Siemens and the U.S. government announced the final settlements on Dec. 15, 2008. Siemens agreed with the Justice Department to pay a criminal fine of $450 million and to disgorge to the Securities and Exchange Commission $350 million. On the same day, Siemens also announced a settlement with the Munich Public Prosecutor that included a payment of €395 million on top of the €201 million it paid in Oct. 2007 to settle a related corruption case. In the U.S. criminal case, Siemens pleaded guilty to one count each of violating the FCPA’s internal controls and books and records provisions. Its Argentina subsidiary pleaded guilty to conspiracy to violate the books and records provisions of the FCPA, and its Bangladesh and Venezuela subsidiaries pleaded guilty to conspiracy to violate the antibribery and books and records provisions. 4 5
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retain business—and systematic and intentional violations of the internal controls and books and records provisions that might have prevented or detected the payments.6 How could it have happened? Because of the corporate structure Siemens created and the culture it nourished. Where operating groups and foreign subsidiaries were accountable for their bottom line but little else. Where ethics training didn’t happen. Where compliance personnel and inside auditors were choked off from resources and hobbled by internal restrictions and a confused mission. Where reliable reports to headquarters of large-scale corruption weren’t investigated. Where senior employees known to have paid bribes and cooked the books were never disciplined—but instead were allowed to leave the company with benefits, bonuses and severance packages.
What Went Right There’s also the story in the Sentencing Memorandum of Siemens’ eventual road to redemption. Because of the scope of its bribery, the company faced fines under the Federal Sentencing Guidelines of up to $2.7 billion. But the DOJ’s prosecutors will ask for a penalty reduced to $450 million. And they won’t charge the parent-company, Siemens AG, under the FCPA’s antibribery provisions, so it probably won’t be barred from U.S. government contracts. Why?
6
15 U.S.C. § § 78m(b)(2), 78(b)(5) and 78ff(a).
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Siemens: Systematic Global Corruption
The Justice Department said it views as exceptional Siemens’ wideranging cooperation, including 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.
What Went Wrong The 36-page criminal information said that 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 went to the board of directors, members of management and the Corporate Compliance Office. But no one made any attempt to investigate the facts, or explore whether the suspicious payments were related to other similar instances of wrongdoing. From 2004 to 2006, after learning of corruption involving Siemens in Nigeria, Italy, Greece, Liechtenstein and elsewhere, the company’s senior management was told of government investigations into corruption in Israel, Hungary, Azerbaijan, Taiwan, and China. Nevertheless, no one ordered an adequate investigation or follow up to learn the complete scope of the problem. Employees implicated in the various investigations were never disciplined. Three managers in the Italian cases, for example, each received a severance package standard for early retirees, despite some board members knowing that at least two of them had already admitted to paying bribes before they retired. From 2004 to 2006, the Corporate Compliance Office continued to lack resources, and there was an inherent conflict in its mandate, 15
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which included both defending the company against prosecutorial investigations and preventing and punishing compliance breaches. There were extremely limited internal audit resources to support compliance efforts. These flaws undermined Siemens; violations were difficult to detect and remedy, and resources were insufficient to train 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 being discovered. The Chief Compliance Officer’s status reports on criminal investigations often conveyed incomplete information. Management sometimes provided inaccurate and misleading information to the Audit Committee, and never conveyed a sense of alarm or growing crisis.
The Cover Up From at least March 2001 to November 2006, Siemens knowingly falsified books, records, and accounts; they didn’t reflect in reasonable detail, accurately and fairly, the transactions and dispositions of the company. Siemens used off-books accounts to conceal corrupt payments. It entered into purported business consulting agreements that had no basis, sometimes after the company had won the relevant project. It justified payments to consultants based on false invoices, and mischaracterized bribes in the corporate books as consulting fees and other seemingly legitimate expenses. It accumulated profit reserves as liabilities in internal balance sheet accounts, then used them to make corrupt payments through the consultants. And it stuck removable 16
Siemens: Systematic Global Corruption
Post-It notes for signatures on approval forms authorizing payments, to conceal the identity of the signors and obscure the audit trail. Siemens also described kickbacks it paid to the Iraqi government in connection with the Oil for Food Program as commission payments to agents. But it knew a substantial portion was being passed to the Iraqi government in exchange for contracts.
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A Spectacular Leap
B
ob Beamon’s long jump of 29 feet 2½ inches in Mexico City in the 1968 Olympics broke the world record by an astounding 21¾ inches. With that one jump Beamon became the first man to reach both 28 and 29 feet, and the word Beamonesque was born—meaning a spectacular event. We’d describe Siemens’ $800 million settlement of Foreign Corrupt Practices Act violations as Beamonesque, considering that it surpassed the existing FCPA settlement record by $755.9 million.7 Before Siemens, Baker Hughes’ April 2007 payment of $44.1 million (including penalties and disgorgement) was the biggest in an FCPA case. Baker Hughes, we think, won’t be sorry to relinquish the top spot on the settlement list, since being there gets you mentioned in the press about as often as Madonna. Among other notable settlements, Willbros paid $32.3 million in May 2008 and Chevron’s violations related to the U.N.’s oil for food program cost it $30 million a year earlier. Titan Corporation held the record after it paid $28.5 million in 2005 for its FCPA settlement. Vetco’s resolution cost it $26 million in 2007 and Lockheed paid $24.8 million in 1994, the biggest case of its time. York International spent $22 million to end its enforcement action in 2007. Statoil was close behind, paying $21 million in 2006. AB Volvo’s 2008 case settled for $19.6 million, and ABB’s violations cost it $16.4 million in 2004.
7
Posted on the FCPA Blog on Dec. 18, 2008.
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Schnitzer Steel agreed to pay $15.2 million in 2006 and Flowserve $10.5 million in 2007. Bob Beamon’s great leap stood as a world record for 23 years and earned him a postage stamp in Burundi. We’re fairly sure Siemens won’t be appearing soon on any postage stamps, but it could hold the FCPA settlement record for a very long time.
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Was Justice Served?
I
ts historic settlement of Foreign Corrupt Practices Act offenses was bound to raise the questions: Did Siemens enjoy checkbook justice? Did it achieve something ordinary criminal defendants can’t? Did it use its extraordinary wealth and power to arrange a rather painless resolution with the U.S. government? By paying $800 million in penalties and disgorgement, did the German giant get off easy?8 By any measure, Siemens’ crimes were terrible. Evidence the company itself gathered and disclosed shows that for at least ten years it operated as a corrupt global enterprise. How much of its profit came through kick-backs and bribes we’ll never know, but it amounted to billions. The company spread sleaze all over the globe, distorting government decisions and hurting millions by its lawlessness. But how many of its 400,000 employees were directly involved in the criminal acts? How many arranged or paid the bribes? How many had a hand in cooking the books to cover up the fraud? Was it a dozen employees? Or more like a hundred, or even a thousand? Whatever the number, the crooked ones were a minuscule part of Siemens’ total workforce. The question, then, is how much punishment should be inflicted on the corporation because of a few bad apples, relatively speaking? Should the DOJ have put Siemens on trial for bribery and sought the harshest sanctions available? Prosecutors, after all, had the company cold.
8
Posted on the FCPA Blog on Dec. 17, 2008.
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Under the doctrine of respondeat superior, an organization is generally guilty per se when one of its employees commits a crime within the scope of his or her employment. In this case, then, Siemens was defenseless—a sitting duck awaiting execution.
Punish, Don’t Kill But the DOJ is understandably reluctant to hit corporations head on. The Arthur Andersen prosecution in the aftermath of the Enron scandal demonstrated the catastrophic consequences that can result from a corporate felony charge. For Andersen it was an instant death sentence, even though the firm was later exonerated. That’s why the DOJ has since adopted a softer approach to FCPA and other white collar offenses. It offers companies that want to cooperate alternatives in the form of negotiated settlements. The idea is that no company is beyond redemption. That each one can change—most dramatically by changing its board and top management, as Siemens had already done. Schnitzer Steel did that a couple of years ago in an FCPA case involving outrageous criminal conduct, and it saved itself. Like Siemens, Schnitzer wasn’t charged with bribery. Instead a subsidiary was allowed to plead guilty to violating the FCPA’s antibribery and books and records provisions. And Bristow Group Inc. settled serious FCPA violations in 2007 with the SEC without paying a dollar in penalties, mainly because its all-new management showed their commitment to compliance. Is there anything more a corporate body can do? And even though corporations might escape the harshest aspects of the law, their culpable employees aren’t always so fortunate. From 22
Was Justice Served?
the time the DOJ began backing off its stiff-armed approach to corporate prosecutions, the number of individuals held accountable under the FCPA has shot up. So nobody’s getting away with anything. In Siemens’ case, were the goals of criminal sentencing— retribution, deterrence, incapacitation and rehabilitation—all met? Once the company had new leaders who uncovered and confessed its crimes, who adopted an effective compliance program, accepted a monitor, agreed to pay fines and disgorge profits, was there any reason to punish the organization further? Wouldn’t more strokes of the cane merely have bloodied innocent employees, partners, shareholders and customers, while doing nothing about the long-gone crooks?
Culture Shift Peter Löscher became Siemens’ CEO in July 2007, just as the frightening scope of its wrongdoing was becoming clear. In an interview six months into his tenure, this was his assessment: “It’s completely clear that the management culture failed. Managers broke the law. But this has nothing to do with a lack of rules. Siemens had and still has an outstanding set of rules. The only problem is that they were apparently being violated on an ongoing basis. The management culture was simply not practiced consistently and uniformly. This is why my job now is to install a new culture. And I can guarantee you that senior management will practice what it preaches—to a T.” Löscher committed himself and everyone around him to a clean company. That’s what saved Siemens—not its money or its power. The most important ingredient in its survival was its leader’s decision to fix things by demanding real change. As Löscher said in 2007,
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“Siemens endorses clean business. Period. I am not interested in deals that can only be had through corruption.” That’s it, then. Compliance first, profit second. We believe in corporate redemption—in well-earned second chances. And we’re glad Siemens is getting one now.
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Foreign Affairs
O
ur singular focus over the past week moved our spouse to ask whether we also plan to redo the walls in Siemens Blue. We’re considering it. But what really comes to mind after the biggest FCPA enforcement action in history is that it involves not a U.S. company—not a Boeing or an Exxon or a GE—but “a corporation organized under the laws of Germany with its principal offices in Berlin and Munich.”9 It was snared by the FCPA because, as the Justice Department’s criminal information put it, “As of March 12, 2001, Siemens was listed on the New York Stock Exchange and was an ‘issuer’ as that term is used in the FCPA . . . By virtue of its status as an issuer, Siemens was required to comply with the provisions of the FCPA.” 10 We shouldn’t be too surprised the big hammer fell on a foreign company. Since 1998, the pace of investigations and enforcement actions involving foreign companies has accelerated. In addition to Siemens, overseas names in the FCPA news include ABB Ltd (Switzerland), Vetco Gray UK Ltd, Akzo Nobel, NV (the Netherlands), Statoil ASA (Norway), AstraZeneca (UK-Sweden), BAE Systems (UK), DaimlerChrysler (Germany), Innospec (UK), Magyar Telekom (Hungary), Norsk Hydro (Norway), Novo Nordisk (Denmark), Panalpina
Posted on the FCPA Blog on Dec. 19, 2008. 15 U.S.C. §§ 78c(a)(8), 78dd-1(a). An “issuer” is a corporation that has issued securities that have been registered in the United States or which is required to file periodic reports with the SEC. All issuers are covered by the FCPA, wherever they are located or doing business. 9
10
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