February 26, 2009

FCPA Enforcement Under the Obama Administration: Siemens Case Sets New Precedent

DOJ Lead Prosecutor Comments on Corporate Corruption and Multijurisdictional Enforcement
Holland & Knight Alert
Christopher A. Myers

On February 5, 2009, Mark Mendelsohn, the Deputy Chief of the Criminal Fraud Section of the Department of Justice, spoke at the 2009 Global Ethics Summit hosted by Dow Jones and Ethisphere. Mendelsohn’s office, in combination with the Securities and Exchange Commission, recently announced the largest ever criminal and civil penalty settlement under the Foreign Corrupt Practices Act (FCPA). The settlement with Siemens, a German company which is publicly traded in U.S. markets, totaled $1.6 billion in combined U.S. and German sanctions. It marked one of the first times that the U.S. Department of Justice and the SEC worked with foreign counterparts in the European Union to collaborate on the investigation and prosecution of a multinational corporation.

Larger Settlement Due to Intentional Nature of Bribes to Foreign Officials

Mendelsohn reported that the size of the settlement was driven to a large degree by the fact that the corrupt practices of Siemens were intentional, rather than inadvertent compliance failures. Siemens had, with senior management knowledge and participation, made more than $805 million in bribes to foreign officials. Under normal circumstances, crimes of this magnitude would have resulted in criminal fines with a potential range between $1.35 billion to $2.7 billion in the U.S. alone. The actual U.S. civil and criminal fine was only $800 million. Why?

Exceptional Cooperation by Siemens

Mendelsohn said that the extraordinary size and scope of corruption within Siemens was tempered by its extraordinary cooperation once the investigation began and by the company’s robust commitment to implement effective compliance procedures during the investigation. From beginning to end, the investigation took only two years – this was “rocket ship fast” for an investigation of this type and size. The speed of the investigation and resolution was driven by the commitment of Siemens’ officers and directors and the overall cooperation of the company.

Lessons Learned: Looking Forward

What are the lessons of the Siemens case and the landscape for FCPA enforcement under the new Obama administration? Mendelsohn reported that the pace of FCPA investigations and prosecutions has been steadily picking up over the past two years. There were 16 FCPA prosecutions in 2007 and 16 more in 2008. The settlements in 2008 were significantly larger than those in 2007. He predicted that the numbers will increase in 2009, particularly with the anticipated additional enforcement resources. Brackett Denniston, the General Counsel of General Electric, who also spoke at the Global Ethics Summit, predicted that we can expect to see anti-corruption enforcement “on steroids” under the new administration.

In addition to an increase in corporate corruption investigations and prosecutions, Mendelsohn also predicted that there will be a significant increase in the criminal prosecutions of individuals involved in corruption at their companies. He pointed to the recent example of the criminal charges brought against the CEO of KBR, the international construction company in conjunction with a more than $500 million settlement by the company itself.

Mendelsohn said that the Department of Justice will use “the full breadth” of the FCPA to prosecute both U.S.-based companies and foreign companies that have some contact with the United States. He said we are likely to see more and more multijurisdictional investigations as international law enforcement cooperation grows. In addition, he said that the Department is currently making numerous corruption referrals to foreign law enforcement agencies. He also pointed out that FCPA prosecutions will be used in conjunction with other criminal statutes, including commercial bribery laws, export control violations, sanctions program violations and anti-money laundering laws.

Mendelsohn acknowledged that there are numerous challenges ahead, including the lack of cooperation in anti-corruption efforts in China, Russia and India. He also noted that the international economic crisis is likely to make some people more willing to resort to corrupt means to get or keep business.

Breaking Down the Barriers

In order to avoid the huge settlement, investigative costs and damage to reputation and brand caused by corruption investigations and prosecutions, Mendelsohn said companies need to do more. In his view, the private sector needs improved compliance standards, more robust compliance controls, better testing of compliance and a recognition that “integrity is good business” behavior. He also recommended that companies in industry sectors band together in “integrity pacts.” In such agreements, companies can follow a shared set of ethical standards, thus leveling the playing field for all companies to compete fairly and honestly.

One of the keys to corporate ethical behavior is breaking down what Mendelsohn called the “wall of silence” – a corporate culture, like Siemens had, in which employees who witnessed wrongdoing were unwilling to report, or “rat out” their co-workers. Siemens had to work very hard as a company to get employees to come forward and tell internal investigators what they had witnessed.

Focus on Key Industry Sectors

In the Q&A session which followed his formal remarks, Mendelsohn was asked if he had any “predictions” about which industry sectors were likely to see an increase in FCPA and other enforcement attention. He specifically identified ongoing enforcement efforts involving the pharmaceutical and medical device industries, both domestically using the Anti-Kickback Act and internationally using the FCPA. In addition, he said he expected the current focus on the defense industry and financial industries to continue. Another prediction by Mendelsohn was that we can expect to see expanded enforcement involving the IT industry because these companies often have neither in-house general counsel nor any kind of compliance program. Mendelsohn also said that companies that had grown rapidly, particularly through acquisition, often do not have the compliance infrastructures that they need.

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