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The Work Of A Monitor And Checking In On Siemens

Tuesday, January 22nd, 2013

The 2008 Foreign Corrupt Practices Act enforcement action against Siemens remains the largest in FCPA history in terms of resolution amount – $800 million ($450 million DOJ, $350 million SEC). The DOJ stated in this release that “for much of its operations across the globe, bribery was nothing less than standard operating procedure for Siemens.” The SEC stated in the release that the “pattern of bribery by Siemens was unprecedented in scale and geographic reach” and the “corruption involved more than $1.4 billion in bribes to government officials in Asia, Africa, Europe, the Middle East and the Americas.”

Not surprisingly, given the nature and extent of the conduct at issue, as part of its plea agreement (here), Siemens was required to engage a corporate monitor for a three year period.

Time passes quickly, and on December 18, 2012, the DOJ filed this ”Notice Regarding Corporate Monitorship” notifying the court that Siemens has “satisfied its obligations under the plea agreement with respect to the corporate compliance monitor engaged by the company.”

This post details the monitor’s work and then highlights the difficulties of anti-corruption compliance in a large, multinational company.

The Work of a Monitor

The recent DOJ filing details the work of the monitor and states as follows.

“In accordance with the plea agreement, the Monitor conducted an initial review and three subsequent reviews of Siemens’s anti-corruption compliance program, and documented the Monitor’s findings and recommendations in four annual reports dated October 5, 2009, October 13, 2010, October 7, 2011, and October 12, 2012. Over the course of those four years, the Monitor conducted on-site or remote reviews of Siemens’ activities in 20 countries; conducted limited or issue-specific reviews in or relating to an additional 19 countries; reviewed over 51,000 documents totaling more than 973,000 pages in 11 languages; conducted interviews of or meetings with over 2,300 Siemens employees; observed over 180 regularly scheduled company events; and spent the equivalent of over 3,000 auditor days conducting financial studies and testing.

During that time, the Monitor made a total of 152 recommendations in over a dozen topic areas, such as third-party risks, financial controls, and compliance policies and training that, pursuant to the plea agreement, were “reasonably designed to improve the effectiveness of Siemens’ program for ensuring compliance with the anti-corruption laws.” Without objection, Siemens AG adopted and implemented all 152 recommendations. Thereafter, the Monitor confirmed that all of the recommendations had been fully implemented.

Those recommendations and the other remedial measures and internal control improvements undertaken by Siemens have included enhanced policies and a revised code of conduct directed at prohibiting corruption; additional and more frequent training for employees, agents, and business partners on the enhanced anti-corruption policies and procedures; additional staffing and resources dedicated to coordinating and overseeing the implementation and enforcement of the anti-corruption program; improved hotline for reporting potential violations of the code of conduct; improved accounting system controls designed to ensure the maintenance of accurate books and records; and improved due diligence and review processes for agreements with agents and business partners, including an express clause related to anti-corruption.

Pursuant to the terms of the plea agreement, the Monitor has met with representatives from the government and the SEC on an annual basis to review the findings and recommendations in the Monitor’s annual reports. In accordance with the terms of the plea agreement, the Monitor certified on October 13, 2010, October 7, 2011, and October 12, 2012, that “Siemens’ compliance program is reasonably designed and implemented to detect and prevent violations within Siemens of anti-corruption laws . . . .”

Based on the monitor’s work, the filing then states as follows.

“[T]he government concludes that Siemens AG has satisfied its obligations under the plea agreement with respect to the corporate compliance monitorship. The government has conferred with the staff of the SEC and the staff of the SEC concludes that Siemens AG has also complied with the terms of the Final Judgment in the civil action with respect to the corporate compliance monitorship.”

As highlighted in my article “Revisiting an FCPA Compliance Defense” (here), even before the Siemens monitor began its work, Siemens had – in the words of the DOJ – “already implemented substantial compliance changes” and was setting “a high standard for multi-nationals to follow.” According to the DOJ, Siemens’ total external costs for this pre-monitor remediation exceeded $150 million. Although Siemens has not, to my knowledge, disclosed its costs associated with its post-enforcement action monitor, one can safely assume that the monitor costs easily exceeded this $150 million figure and perhaps reached as high as the $800 million amount announced on enforcement action day.

I noted in my Compliance Defense article that “there is likely no other company in the world today … that has devoted as many corporate resources towards compliance” and that “likewise, there is likely no other company in the world today .. that faces as many negative consequences should its compliance efforts fail.”

Difficulties of Anti-Corruption Compliance

The discussion of Siemens in my article, and here, demonstrates that not even a company that has “set a high standard for multi-national companies to follow” (again, in the words of the DOJ) can insulate itself from FCPA and related exposure.

This fact (and a fact I submit makes a compelling case for an FCPA compliance defense as outlined in my article) is clear from a review of Siemens most recent annual report (here), filed with the SEC on Nov. 28, 2012. The filing contains a separate section titled “public corruption proceedings.” To be sure, the section lists various proceedings that pre-date 2008 and that may have been indicative of the corporate culture at Siemens that gave rise to the 2008 FCPA enforcement action in the first place. However, certain proceedings in listed in the filing are post 2008, including the following.

“As previously reported, in May 2011 Siemens AG voluntarily reported a case of attempted public corruption in connection with a project in Kuwait in calendar 2010 to the U.S. Department of Justice, the SEC, and the Munich public prosecutor. The Munich public prosecutor discontinued the investigations, which related to certain former employees, but imposed conditions on them. Siemens is cooperating with the U.S. authorities in their ongoing investigations.”

“As previously reported, in July 2011 the Munich public prosecutor notified Siemens AG of an investigation against an employee in connection with payments to a supplier related to the oil and gas business in Central Asia from calendar 2000 to 2009. Siemens is cooperating with the public prosecutor.”

Add to this list a Dodd-Frank whistleblower retaliation complaint (here) recently filed against Siemens in federal court by Meng-Lin Liu, a former compliance officer for Siemens AG in China. As highlighted by this Reuters report, Liu alleges that Siemens fired him after he tried to expose a kickback scheme involving medical equipment sales to hospitals in China.

In pertinent part, the complaint alleges as follows.

“Shortly after he started at [Siemens China Ltd. (SLC)] in March 2008, Liu began encountering and confronting a culture within Siemens’ Chinese healthcare business of evading and circumventing the anti-corruption due diligence systems and controls required by the FCPA and Siemens’ 2008 Plea Agreement.”

” … Liu consistently objected to and tried to remedy systemic evasion of Siemens’ due diligence systems in circumstances where there were major ‘red flags’ indicating extremely high risks of corruption. Ultimately, Liu uncovered incontrovertible evidence that Siemens was submitting inflated bids for many of the multi-million-dollar medical diagnostic and scanning equipment sales it made to public hospitals in China, and then selling the equipment at substantially lower prices to intermediaries designated by the hospital’s procurement officials. In other words, Liu discovered that Siemens itself was complicit in a scheme whereby the end-user hospitals paid amounts to third-party intermediaries that were between 20% and 130% higher than the price Siemens received for the equipment, which was resold by these intermediaries to the end-user hospital at the original Siemens’ inflated bid price. This had all the hallmarks of a classic bribery or ‘kickback’ scheme and there was no legitimate explanation for the huge price differential that existed between prices at which Siemens sold the equipment and the prices paid by the end-user hospitals.”

“Within a week of presenting this evidence to SLC’s CFO for Healthcare, Liu was summarily removed from his position as Compliance Officer, instructed not to report to the office for the remaining four months of his employment contract and given ‘early notice’ that his contract would not be renewed upon its expiration. Four months later his employment was terminated.”

Friday Roundup

Friday, February 10th, 2012

From the dockets, an FCPA compliance defense – yes or no, hiring a woman closely associated with a foreign official, and a focus on the FCPA’s “red-haired stepchild” – it’s all here in the Friday Roundup.

From the Dockets

Last month when Judge Lynn Hughes dismissed, at the close of the DOJ’s case, the FCPA charges against John Joseph O’Shea (see here for the prior post), it was only a partial victory as O’Shea still faced non-FCPA charges. Complete victory is imminent as yesterday the DOJ filed a motion to dismiss (here) the remaining charges (conspiracy, money laundering and obstruction) against O’Shea.

In July 2011, Patrick Joseph (a former general director for telecommunications at Haiti Teleco and thus a “foreign official” according to the DOJ) was added to the extensive Haiti Teleco case. (See here for the prior post). Because the FCPA does not apply to bribe recipients, the DOJ charged Joseph with a non-FCPA offense: one count of conspiracy to commit money laundering. Earlier this week, Joseph pleaded guilty to the charges (see here). Pursuant to the plea agreement, Joseph agreed to forfeit approximately $956,000. It is clear from the plea agreement that Joseph was likely an early cooperator in the Haiti Teleco case as the plea agreement refers to a June 2009 proffer agreement with the DOJ. Many of the other individual defendants in the Haiti Teleco case were charged in December 2009 (see here). The plea agreement requires Joseph’s continued cooperation and later this month a trial is to begin as to other defendants in the wide-ranging Haiti Teleco case.

FCPA Compliance Defense – Yes or No?

That is the title of a free webcast on February 21st to be hosted by Bruce Carton’s Securities Docket (see here to sign up and for more information). I will be discussing my paper “Revisiting a Foreign Corrupt Practices Act Compliance Defense”and will argue in favor of Congress creating an FCPA compliance defense. On the other side of the issue, Howard Sklar (Senior Counsel, Recommind and a frequent commentator on FCPA issues at, among other places, his Open Air Blog) will argue that Congress should not include a compliance defense to violations of the FCPA.

Former Employee Alleges FCPA Issues at GE

As previously reported by Chris Matthews at Wall Street Journal Corruption Currents (see here) Khaled Asadi (a dual U.S. and Iraqi citizen) who was previously employed by G.E. Energy (USA) LLC (“GE Energy”) as its Country Executive for Iraq, located in Amman, Jordan, has filed a civil complaint (here) in the Southern District of Texas against G.E. Energy. GE Energy is a wholly-owned subsidiary of General Electric Company (“GE”).

The complaint alleges that G.E. harassed, pressured Asadi to vacate his position, and ultimately terminated him after he informed his supervisor and G.E.’s Ombudsperson “regarding potential violations of the Foreign Corrupt Practices Act committed by G.E. during negotiations for a lucractive, multi-year deal with the Iraqi Ministry of Electricity.” The substance of Asadi’s complaint is that “on or about June of 2010 Mr. Asadi was alerted by a source in the Iraqi Government that GE had hired a woman closely associated with the Senior Deputy Minister of Electricty (Iraq) to curry favor with the Ministry while in negotiation for a Sole Source Joint Venture Contract with the Ministry of Electricity. (According to the complaint, the Joint Venture Agreement between GE and the Ministry of Electricity was signed in Baghdad on December 30, 2010 and that the exclusive materials and repairs provision is estimated to be valued at $250,000,000 for the seven year agreement.)

Hiring friends, family members, etc. of a ”foreign official” at the request of the ‘foreign official” has been the basis, in part, for previous FCPA enforcement actions – particularly if the hired individual was not qualified for the position, did not engage in any meaningful work, or was paid an unreasonably high salary. For instance, the 2011 FCPA enforcement action against Tyson Foods (see here for the prior post) involved, in part, allegations that a company subsidiary placed the wives of Mexican ”foreign officials” on its payroll and provided them with “a salary and benefits, knowing that the wives did not actually perform any
services” for the company.

In the WSJ Corruption Currents article, a GE spokesman stated as follows. “Mr. Asadi’s termination had absolutely nothing to do with any allegations he is making. Regarding our contracts in Iraq, GE followed all requirements and his allegations are false.”

Travel Act Readings

A few informative Travel Act readings to pass along.

In this article from Thomson Reuters News & Insight, Mike Emmick (Sheppard Mullin Richter & Hampton) calls the Travel Act the “FCPA’s red-haired stepchild” and says that in conducting an internal investigation “there are some additional rocks to flip over” before celebrating findings of no payments to “foreign officials.”

In this article from Bloomberg Law Reports, John Rupp and David Fink (Covington & Burling) note that a “move by U.S. authorities to target commercial bribery robustly is a distinct possibility.” The piece discusses the laws that could be used by U.S. authorities to prosecute foreign commercial bribery.”

*****

A good weekend to all.

President Obama Visits Allison Transmission

Friday, April 8th, 2011

President Obama will be in the Indianapolis area today visiting Allison Transmission. See here. [Update: given the budget talks in Washington, President Obama has postponed his visit to Allison Transmission].

Readers may recall that in November 2010, Allison Transmission was named as a defendant in a “noisy exit” case. See here for the prior post and here for the prior coverage in the Indianapolis Business Journal (“IBJ”).

Stephen Lowe (Allison’s former Managing Director for China, Japan & Korea Operations) alleged in a civil complaint that Allison fired him because he “refused to engage in violations of the FCPA.” Lowe’s complaint implicated both Allison’s Vice President of International Sales and Marketing and Allison’s Commercial Director of Asia Strategy.

As noted here by the IBJ, Lowe’s lawsuit against Allison was quickly settled in January 2010.

I noted, for the IBJ article, that Allison could be dealing with FCPA exposure for years to come given that such employee allegations often result in a company launching an internal investigation and/or for the DOJ to become interested in the allegations and the company’s overall FCPA compliance.

Fast forward to late March when Allison filed a registration statement with the SEC for an initial public offering. See here for the IBJ coverage.

Allison’s registration statement (here) is silent as to FCPA issues aside from a generic template-like statement as to future risk factors.

This suggest a number of possibilities: (1) that Lowe’s complaint lacked merit yet was settled for nuisance value; (2) that Lowe’s complaint had merit, but the DOJ has not yet contacted the company or perhaps never will; or (3) that Lowe’s complaint had merit, the DOJ has contacted the company, but Allison has chosen not to disclose this in its registration statement.

In any event, none of this is likely to come up during Obama’s visit to Allison Transmission today, but Obama’s visit did provide a good opportunity to check up on Allison Transmission.

*****

A good weekend to all.

Still Yet Another Noisy Exit

Thursday, December 23rd, 2010

Perhaps it is a new trend.

Perhaps it is because the media now covers anything and everything FCPA related.

In any event, it is noticeable.

There has been still yet another “noisy exist.”

Including the below example, I count five in the last few months. See here, here and here for the prior posts.

In October 2009, Stephen Lowe was hired by Allison Transmission (“Allison”) as its Managing Director, China, Japan & Korea Operations. [Allison (here) is an Indiana based designer, manufacturer and supplier of automatic transmissions for medium- and heavy-duty commercial vehicles and military vehicles. In 2007 (see here) The Carlyle Group and Onex Corporation acquired Allison Transmission from General Motors Corporation for US$5.575 billion.]

Lowe alleges in this complaint recently filed in Marion County (Indiana) Superior Court that Allison fired him in July 2010 because he “refused to engage in violations of the FCPA.” Lowe’s complaint implicates both Allison’s Vice President of International Sales and Marketing (“Vice President”) and Allison’s Commercial Director of Asia Strategy (“Commercial Director”).

Among other things, Lowe alleges that: (i) he witnessed the Commercial Director deliver a cash filled envelope to Beijing City Bus officials during dinner; (ii) he heard the Commercial Director describe how he purchased silver jewelry for Chinese government officials “in order to please the officials” (iii) the Commercial Director bragged about winning a Beijing City Bus Olympics contract by doing “whatever it took to please the officials” “including giving gifts, money and prostitutes” and (iv) the Commercial Director “deliberately lost” high-stakes card games to “key Beijing City Bus officials.” [Brain teaser of the day - is deliberately losing a high-stakes card game to a "foreign official" providing the official with a "thing of value"?]

According to the complaint, Allison’s Vice President knew, and approved of, certain of the Commercial Director’s conduct. According to the complaint, “a month before Allison fired him” Lowe disclosed his concerns about the Commercial Director and the Vice President to Allison’s Marketing Manager.

Lowe’s complaint, filed by The Employment Law Group law firm, alleges various Indiana state law causes of action including retaliatory discharge, breach of contract, and breach of the implied covenant of good faith and fair dealing.

For additional coverage of Lowe’s complaint, see here from the Indiana Business Journal.

Yet Another Noisy Exit

Monday, November 15th, 2010

Rodolfo Michelon was the Director & Controller – Mexico of Sempra Global. Michelon was also the legal representative of various Sempra subsidiary companies located in Mexico and served as a member of the board of directors of the Mexican subsidiaries.

That is until March 10, when Michelon was terminated by Sempra.

In a lawsuit (here) recently filed in California state court, Michelon claims that his termination was wrongful for many reasons, including the following:

“Sempra regularly required Michelon to transfer funds, and account for illegitimate expenditures that boiled down to bribes of government officials – everything from fraudulent trusts ostensibly to purchase fire fighting equipment for Mexican governments, to paying off local fisherman to move their operations away from Sempra facilities, to demanding remediation of accounting that falsely stated Sepmpra’s assets, to the outright wiring of huge amounts of money to ‘consultants’ throughout Mexico. As with his other attempts to ensure he was complying with his ethical requirements as a CPA, Michelon’s repeated questioning and protests of the miscellaneous frauds and bribes was met with open hostility and threats of termination. The termination of the Controller employment was not only in retaliation for Michelon’s complaints, but it was also meant to keep Michelon from reporting the frauds and bribes to governmental, law enforcement officials.”

Sempra Global is described (here) as “the umbrella for Sempra Energy’s businesses operating in competitive energy markets. Sempra Global companies acquire, develop and operate infrastructure assets related to the production and distribution of energy, including power plants, natural gas pipelines and liquefied natural gas (LNG) receipt terminals.”

Various Sempra entities are publicly traded issuers (see here).

In this San Diego Union Tribune report Sempra officials “called Michelon a disgruntled ex-employee attempting to cash in by making ‘outlandishly false claims and misrepresentations’ after being let go in a routine reorganization.” A Sempra spokesperson said that the “company first became aware of Mr. Michelon’s claims several months ago” and that “Sempra’s board of directors ordered an independent investigation, which found Mr. Michelon’s allegations to be completely without merit.”

Michelon’s “noisy exit” is the fourth such exit publicly reported over the past three months that may implicate the FCPA. See here and here for the prior posts.