Siemens Teaches Cos. FCPA Dos & Don’ts

Good news for compliance officers: You now have solid evidence that the benefit of implementing an effective compliance program far outweighs the cost, in the form of the massive Foreign Corrupt Practices Act settlements swallowed by Siemens AG and three of its foreign subsidiaries.

Siemens, a German conglomerate that is one of the largest engineering firms in the world, agreed in December to pay more than $1.6 billion to U.S. and German regulators for a massive bribery scheme that felled the highest executives at the company. Penalties paid to the Justice Department and Securities and Exchange Commission alone topped $800 million, by far the largest sanction ever imposed in an FCPA case.

Now Siemens’ new management is practically doing a road show of self-confession, speaking at conferences and holding Webcasts to discuss how the company managed the investigations and pieced its compliance function back together again. Experts say large companies everywhere can take away lessons of what to do, and what not to do.

Holtmeier

“The fine amount puts away any doubt about whether it’s worth it to make a substantial investment in compliance,” says Jay Holtmeier, a partner in the law firm WilmerHale. “The penalties have gotten so big companies can’t afford not to.”

The previous record for an FCPA fine was $44 million, paid by Baker Hughes; that now seems like small change, Holtmeier says. Likewise, boards and executives had previously grumbled that “spending a few million on compliance sounded like a lot,” he says. “Now it doesn’t seem like so much.”

Morley

Matt Morley, a partner at the law firm K&L Gates, says the settlements also underscore the need for foreign companies to confront corruption problems, since Siemens faced probes—and staggering fines—by both U.S. and overseas regulators alike. Historically, overseas companies viewed bribery as something only prosecuted by zealous U.S. regulators using the FCPA statute as a club.

“It really ought to serve as a strong reminder that every company involved in international business, large or small, has to take preventative steps to address anti-corruption risks,” Morley says.

Cassin

Likewise, Richard Cassin of the Singapore-based Cassin Law, says anti-corruption enforcement “isn’t just the concern of the U.S. government; it’s now a global movement.”

The case also highlights the value of cooperation with enforcement authorities. Eye-popping as the penalties may be, Morley and others say the fines could have been “significantly greater” if Siemens hadn’t received credit for cooperation efforts that even enforcement authorities described as “extraordinary.”

“It really ought to serve as a strong reminder that every company involved in international business, large or small, has to take preventative steps to address anti-corruption risks.”

— Matt Morley,

Partner,

K&L Gates

Of course, fines weren’t the only cost to Siemens. The company has agreed to a number of extraordinary remedial measures, including the appointment of an independent monitor for four years. The costs simply to reach this point were staggering, too. During a Jan. 13 Webcast hosted by the Society of Corporate Compliance & Ethics, Joel Kirsch, head of Siemens’ U.S. compliance activities, described a “massive” investigation that spanned 32 countries and took two years to finish.

Kirsch

In that time, Kirsch said, Siemens footed the bill for more than 200 outside lawyers and support staff from the law firm Debevoise & Plimpton, plus another 1,300 forensic investigators from Deloitte; the two firms racked up a total of 1,531,000 man-hours on the project. Siemens itself had 16 employees working on the probe full-time.

In all, investigators conducted more than 1,150 interviews, reviewed more than 14 million documents, and analyzed 38 million separate financial transactions, Kirsch said. Total cost of the investigation: $850 million.

Turteltaub

Adam Turteltaub, vice president of development at the Society of Corporate Compliance & Ethics, had a better way to sum up the hidden costs of an FCPA problem. “Have your advertising people tell you how much a 30-second spot costs on the Jay Leno show,” he quipped during the Webcast. “Every time he makes a joke about your company, you’ve basically spent that much money in advertising against it.”

Where to Go From Here

Kirsch told Webcast listeners that in many ways, Siemens is now “starting from scratch” building its compliance program.

“By and large we determined that we had very little, if any, compliance program,” he said. “We didn’t have sufficient compliance resources to have an effective compliance program, not just with respect to policies, but also with respect to investigations.”

INVESTIGATING SIEMENS

In the following excerpt, Linda Chatman Thomsen speaks on the massive Siemens investigation:

Bringing Siemens to justice today is a testament to the close, coordinated working relationship among the SEC, the U.S. Department of Justice, and other U.S. and international law enforcement, particularly the Office of the Prosecutor General in Munich, Germany.

In the SEC’s action, we allege that Siemens paid a staggering $1.4 billion in brides to government officials in Asia, Africa, Europe, the Middle East, and the Americas. The scope of the bribery scheme is astonishing, and the tone set at the top at Siemens was a corporate culture in which bribery was tolerated and even rewarded at the highest levels of the company.

The SEC portion of the Siemens settlement—$350 million in disgorgement—is by far the largest settlement amount ever obtained by the SEC under the Foreign Corrupt Practices Act (FCPA). To put this in context, the largest prior SEC FCPA settlement was reached in 2007 and was for $33 million. The SEC’s settlement with Siemens is more that 10 times that amount.

Furthermore, the $1.6 billion total that Siemens will pay in these settlements is the largest amount that any company has ever paid to resolve corruption-related charges.

And that is fitting because the alleged conduct by Siemens was egregious and brazen. It was systematic, it involved thousands of payments, and it occurred over an extensive six-year period. Siemens created elaborate payment schemes to conceal these corrupt payments to foreign officials. The company’s inadequate internal controls allowed the conduct to flourish.

The details tell a very unsavory story: employees obtained large amounts of cash for Siemens’ cash desks; employees sometimes carried that cash in suitcases across international borders to pay bribes; payment authorizations were recorded on post-it notes that were later removed to avoid leaving any permanent record; there were slush funds and a cadre of consultants and intermediaries to facilitate paying the bribes.

Investigating this intricate scheme and righting Siemens’ wrongs has taken a remarkable and unprecedented level of coordination among many law enforcement agencies around the world. I would like to thank everyone involved for their outstanding work, cooperation and coordination:

The Fraud Section of the United States Department of Justice

The Fraud and Public Corruption Section of the United States Attorney’s Office for the District of Columbia

The Federal Bureau of Investigation

The Internal Revenue Service

The Office of the Prosecutor General in Munich, Germany

The Financial Services Authority in the United Kingdom

And the Hong Kong Securities and Futures Commission.

This marks the first time that United States and foreign prosecutors have coordinated their enforcement efforts to address violations of anti-bribery laws. I expect it will not be the last.

Source

Linda Chatman Thomsen Speech on Siemens Probe (Dec. 15, 2008).

For instance, shortly after the investigation began, Siemens wanted to provide employees a way to report information about corruption; at the time, it didn’t have any reporting hotlines outside the United States. The company later appointed an external ombudsman in Germany. Siemens also replaced its entire management team with outsiders and hired its first global chief compliance officer, Andreas Pohlmann.

Kirsch said the company had to make some tough business decisions along its road to reform, including what he called a “critical” early step to restrict its use of business consultants, who are often a primary conduit for improper payments. Siemens now refuses to pay any of its business consultants for any services until the appropriate due diligence could be done on the consultant and the underlying transaction.

Siemens also revamped its previously decentralized structure, which was deemed at least partly to blame for its problems, in favor of a more centralized, sector-based chain-of-command that allows for more accountability and control.

Kirsch said one of the toughest challenges was implementing an effective internal controls system, a process he described as “difficult, time-consuming, and onerous.”

“We took our compliance program and created a Sarbanes-Oxley controls system around it,” he said. “We went down to the smallest detail.”

After implementing some particularly onerous compliance processes, Kirsch said, the company is now working to develop “more streamlined, less complicated compliance policies that will be easier to follow,” without lessening its focus on compliance and ethics. The challenge is making compliance less burdensome for employees, while “making people understand that this wasn’t a two-year phase.”

DiBianco

Experts cite a number of lessons to be learned from the Siemens fiasco. Chief among them is the importance of a robust corporate compliance function, says Gary DiBianco, a partner in the law firm Skadden, Arps, Slate, Meagher & Flom. That’s been a consistent requirement in FCPA settlements in recent years, and the Siemens settlements underscore that trend, he says.

DiBianco and others advise companies to reconsider their own compliance programs in light of the deficiencies cited in SEC and Justice Department charging papers. For example, he says, companies should review their existing compliance structures and assess “whether they are adequately staffed, have the full support and participation of senior management, and have sufficient independence.”

Notably, the case also marks the first criminal charge brought by the Justice Department for internal controls violations. The charging papers “contain the most guidance in the internal controls area that Justice has provided so far,” says Holtmeier, and that should be helpful to companies.

Those documents also point to other risks that should be old news to careful compliance departments, DiBianco says: control over cash accounts, due diligence and oversight of intermediaries and agents, and proper follow-up when a breach of policy has been identified.

“In each area, companies can, and should, benchmark their policies and procedures against best practices in their peer groups,” DiBianco says.

On a more uplifting note, Cassin says the Siemens settlements show that “no company is beyond redemption and rehabilitation.”

“The company undertook the biggest, most intrusive internal investigation ever performed … Now it can finally move on,” he says. “That’s an amazing outcome.”