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Entries in Issuer (31)

Friday
Dec192008

Siemens: The Clean-up Crew

Here are some important corrections and clarifications to earlier posts about Siemens:

1. Wednesday’s post indicates that Schnitzer Steel pleaded guilty to books and records and internal controls violations. In fact, it was Schnitzer’s subsidiary that pleaded guilty, and those charges included antibribery and books and records charges, but not internal controls charges. The Siemens Information included the first ever criminal internal controls charge brought by the Justice Department. Although the SEC routinely includes internal controls charges in its civil resolutions, the DOJ has never done so.

2. The same post implies that Bristow Group Inc. settled an FCPA case with DOJ. That never happened. Bristow settled only with the SEC.

3. Friday's post mentions the 1998 amendments and implies that only after that did the FCPA apply to foreign companies, but the FCPA has applied to foreign issuers (like Siemens and some of the other companies mentioned in the post) since its enactment in 1977. The amendments only broadened the scope to include foreign individuals and foreign companies that were not issuers when they act unlawfully while within the territory of the U.S. The list of companies includes both issuers and non-issuers, but the post makes it seem as though none of them could have been prosecuted under the FCPA before 1998, which is not true.
__________

Our thanks to those who provided their help in setting the record straight.

The relevant posts have also been corrected to prevent the spread of errors.

Enjoy the weekend.
.

Thursday
Dec182008

Foreign Affairs

Our 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." It was snared by the FCPA because, as the Justice Department's 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. 15 U.S.C. § 78dd-1(a). By virtue of its status as an issuer, Siemens was required to comply with the provisions of the FCPA."

We shouldn't be too surprised that 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 (Switzerland), Smith & Nephew (UK) and Total (France), among others.

Outside America's borders, its globo-cop role may not sit well with everyone (it makes a lot of Americans uneasy, too). But the FCPA's long reach and sharp teeth are changing global business practices. Our favorite pundit said it was probably the threat of criminal prosecution under the FCPA that finally scared Siemens enough to come clean. That's what Congress had in mind in 1998 when it expanded the FCPA to cover foreign companies that weren't issuers when they act unlawfully while within the territory of the U.S. ; American businesses needed a more level playing field.

But fighting public graft is also the right thing to do. A. A. Sommer, Jr., a commissioner of the SEC, said in 1976, a year before enactment of the FCPA, that "there are moral problems as well as legal problems that go far beyond simply the question of illegal payoffs to foreign officials. There are questions concerning the role of multi­national corporations, the extent to which they have obligations to the countries in which they conduct their business, the extent to which they should seek to raise the standards of conduct there, the respect which they should show the laws of other countries." Thirty-two years later the Wall Street Journal could say that the quixotic Foreign Corrupt Practices Act had turned into one of Congress's finer moments.

The DOJ's Matthew Friedrich summed up the case this week with these words:

For let there be no doubt that corruption is not a victimless offense. Corruption is not a gentlemen's agreement where no one gets hurt. People do get hurt. And the people who are hurt the worst are often residents of the poorest countries on the face of the earth, especially where it occurs in the context of government infrastructure projects, contracts in which crucial development decisions are made, in which a country will live by those decisions for good or for bad for years down the road, and where those decisions are made using precious and scarce national resources.
That's why the fight against international public corruption is worthwhile, and why the FCPA makes sense.
.

Tuesday
May132008

From The Mailbag

The question our readers most want answered -- after we tell them bloggers have no way to predict Powerball winners -- is, Who's covered by the Foreign Corrupt Practices Act? It's always the jurisdiction thing -- and for good reason. How, for gosh sakes, does the FCPA reach from Washington to the four corners of the earth and back again? It's unnatural -- until you know how it works. Then it's just plain terrifying.

So to keep the FCPA's jurisdiction straight, we take inspiration from the Justice Department. That means we think about it by categories. Here's how:

Category One: Issuers. An "issuer" is a corporation that has issued securities that have been registered in the United States or who is required to file periodic reports with the SEC. See 15 U.S.C. §§ 78c(a)(8), 78dd-1(a). All issuers are covered by the FCPA, wherever they are.

Category Two: Domestic concerns. A "domestic concern" is any individual who is a citizen, national, or resident of the United States, or any corporation, partnership, association, joint-stock company, business trust, unincorporated organization, or sole proprietorship which has its principal place of business in the United States, or which is organized under the laws of a State of the United States, or a territory, possession, or commonwealth of the United States. See § 78dd-2(h)(1). All domestic concerns are covered by the FCPA, wherever they are. Helpful hint: If your lawyer calls you a domestic concern, it's more likely to be a warning than an insult.

Category Three: Parent companies. U.S. parent corporations (issuers or domestic concerns) may be held liable for the acts of their foreign subsidiaries if they (the U.S. parent) authorized, directed, or controlled the activity in question, as can U.S. citizens or residents, themselves domestic concerns, who were employed by or acting on behalf of such foreign-incorporated subsidiaries.

Category Four: Foreign companies and individuals. A foreign company or person is subject to the FCPA if it, he or she takes any act in furtherance of a corrupt payment while within the territory of the United States. See § 78dd-3(a), (f)(1). When a foreign company or person acts on U.S. soil, the FCPA applies. Note, however, that the Justice Department interprets Category Four much more expansively. The government's position --untested in court -- is that there's FCPA jurisdiction whenever a foreign company or national (wherever they are) causes an act to be done within the territory of the United States by any person acting as that company's or national's agent.

Those are the categories. As we said, they're inspired by the Justice Department -- specifically the United States Attorneys' Manual, Title 9, Criminal Resource Manual §1018 “Prohibited Foreign Corrupt Practices” (November 2000).

And now, back to our Powerball picks.

View CRM §1018 here.

Friday
Feb082008

The Accounting Standards Make The Shortlist

The FCPA's anti-bribery provisions attract lots more attention than its accounting standards -- and there's no mystery why. Public corruption is fascinating, while public accounting is . . . well, less fascinating. But although it might be tempting to ignore the accounting standards, doing that is never smart. Violations can be easier to prove than anti-bribery offenses and even more devastating, with potential jail terms and fines many times greater than under the anti-bribery provisions.

Without question, then, anyone dealing with compliance needs to be completely fluent in the accounting standards. With that in mind -- and to suit our short attention span for anything "accounting" -- we've come up with these ten steps to enlightenment. Our little list gives us a place to start, which helps. But to be honest, our public-company auditing friends can teach us volumes about the accounting standards. So we're never shy to ask for their help.

1. Who's Covered? The Foreign Corrupt Practices Act's accounting standards -- which are sometimes called the "books and records provisions" -- apply only to domestic and foreign companies whose securities (any class of equity or debt) are listed in the United States. See 15 U.S.C. § 78m(b)(2). In FCPA-speak, those companies are called "issuers."

2. Subsidiaries and Affiliates. In addition to being responsible for its own books and records, each issuer is also responsible under the FCPA for the books and records of subsidiaries and affiliates over which it exercises control. But an issuer that holds 50% or less of the voting power of a domestic or foreign subsidiary or affiliate is only required to attempt in good faith to use its influence to cause the subsidiary or affiliate's compliance with the FCPA's books and records provisions. See § 78m(b)(6).

3. Books and Records. What exactly do the accounting standards require? First, issuers must make and keep books and records that accurately and fairly reflect the transactions and dispositions of the assets of the corporation.

4. Internal Controls. Second, issuers must devise and maintain a system of internal accounting controls adequate to provide reasonable assurances that: (i) transactions are executed in accordance with management's authorization; (ii) transactions are recorded as necessary to enable preparation of financial statements in accordance with GAAP and to maintain accountability of assets; (iii) access to assets is permitted only in accordance with management's authorization; and (iv) the recorded accountability for assets is periodically compared with the existing assets and any differences are addressed.

5. SEC Enforcement. The accounting standards can be enforced through civil and administrative actions brought by the Securities and Exchange Commission. The SEC can seek disgorgement or civil monetary penalties ranging from $50,000 to $500,000 per violation for business entities (or more if the “gross pecuniary gain” to the accused exceeds $500,000). The SEC also has the power to bar individuals from serving as officers or directors of public companies.

6. DOJ Prosecution. Criminal prosecutions under the accounting standards -- which must involve willful violations -- are brought by the Department of Justice.

7. The Criminal Standard. A willful violation is the intentional circumvention of or failure to implement a system of internal accounting controls, or willful falsification of an issuer's books, records, or accounts in violation of § 78m.

8. Corporate Felons. Willful violations of the accounting standards are a felony under § 32(d) of the Exchange Act of 1934 and punishable by a fine of up to $25 million against entities.

9. Personal Crimes. Against individuals, criminal convictions for willful violations can result in a maximum fine of $5 million, and up to 20 years’ imprisonment if the individual knew he or she was breaking the law. [The maximum prison sentence for an anti-bribery violation is five years.]

10. No Bribery Needed. Offenses under the accounting standards can be enforced or prosecuted whether or not there has been any violation of the FCPA's anti-bribery provisions. See § 78m(b)(5). So there is no requirement that any bribery to a foreign official be alleged or proven in an enforcement action or prosecution under the accounting standards.

View prior posts about accounting here.

Monday
Oct292007

Let's Be Reasonable

It's a material world -- at least for auditors, public-company executives and securities lawyers. Material losses. Material misstatements and omissions. Material adverse changes. But wait. When it comes to the books and records provisions of the U.S. Foreign Corrupt Practices Act, forget materiality. The standard becomes reasonableness -- a head fake that confounds professionals and produces a steady stream of compliance calamities.

Why reasonableness? Why -- for the FCPA's accounting standards -- should issuers "make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer?" Why do issuers have to "devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions are properly executed and recorded?" Why are similar transactions measured at reasonable intervals as a way to sniff out impropriety?

The best explanation comes from former SEC Chairman Harold Williams. His 1981 speech about the FCPA's accounting standards was so illuminating and succinct, it became an official policy statement. And his remark then that "[t]housands of dollars ordinarily should not be spent conserving hundreds" entered the compliance argot that is still with us today. Here's part of what he said:

"But, materiality, while appropriate as a threshold standard to determine the necessity for disclosure to investors, is totally inadequate as a standard for an internal control system. It is too narrow -- and thus too insensitive -- an index. For a particular expenditure to be material in the context of a public corporation's financial statements -- and therefore in the context of the size of the company -- it would need to be, in many instances, in the millions of dollars. Such a threshold, of course, would not be a realistic standard. Procedures designed only to uncover deficiencies in amounts material for financial statement purposes would be useless for internal control purposes. Systems which tolerated omissions or errors of many thousands or even millions of dollars would not represent, by any accepted standard, adequate records and controls. The off-book expenditures, slush funds, and questionable payments that alarmed the public and caused Congress to act, it should be remembered, were in most instances of far lesser magnitude than that which would constitute financial statement materiality.

"Reasonableness, rather than materiality, is the appropriate test. Reasonableness, as a standard, allows flexibility in responding to particular facts and circumstances. Inherent in this concept is a toleration of deviations from the absolute. One measure of the reasonableness of a system relates to whether the expected benefits from improving it would be significantly greater than the anticipated costs of doing so. Thousands of dollars ordinarily should not be spent conserving hundreds. Further, not every procedure which may be individually cost-justifiable need be implemented; the [Foreign Corrupt Practices] Act allows a range of reasonable judgments."

See Foreign Corrupt Practices Act of 1977: Statement of Policy, SEC Release No. 34-17500 (Jan. 29, 1981) [46 FR 11544]. SEC Release No. 34-17500 is the codification of SEC Chairman Harold Williams' speech on January 13, 1981 to the American Institute of Certified Public Accountants Annual Conference.

See also 15 U.S.C. §§ 78m(b)(2)(A) and 78m(b)(2)(B) [Securities Exchange Act of 1934 Section 13(b)(2)(A) 13(b)(2)(B)].

View Chairman Williams' January 29, 1981 Speech Here.

Wednesday
Oct172007

One Law,Two Parts

The question comes from Pune, India: Can a payment that is not a bribe – such as a facilitating payment – be the basis for a criminal violation of the U.S. Foreign Corrupt Practices Act if the accounting for the payment is intentionally misleading?

The answer is yes, and here's how. The FCPA has two parts – the anti-bribery provisions and the accounting standards. They're supposed to work together and often do, but they can also work separately. The anti-bribery provisions are a stand-alone federal criminal statute enforced by the Department of Justice. They reach all U.S. companies and their personnel. In contrast, the accounting standards do not stand alone. They're part of the Securities Exchange Act of 1934. The accounting standards do not apply to everyone, just SEC-reporting companies, called "issuers," and their employees.

While the anti-bribery provisions are a pure criminal statute, the accounting standards – as part of the SEC’s regulatory scheme for public companies – are both administrative rules and a criminal statute. As administrative rules, the accounting standards can be violated by accident. When a “technical violation” happens, the SEC can sanction the violator, but only with civil or administrative penalties and not with criminal fines or jail time. The accounting standards become a criminal matter, however, when a violation happens “knowingly.” In that case, the offense is punishable by up to 20 years in prison and fines. By the way, the possible jail time for violating the anti-bribery provisions is "only" five years, not 20, and proving an accounting offense is simpler than an anti-bribery charge. That's why the Department of Justice favors FCPA accounting prosecutions when there's a choice.

But we're getting ahead of ourselves. Because the anti-bribery provisions and the accounting standards can work separately, an intentional violation of the accounting standards can be a criminal offense “whether or not such falsification is related to a foreign corrupt practice proscribed by the FCPA.” See the United States Attorneys' Criminal Resource Manual (Title 9, Section 1017, FCPA Corporate Recordkeeping). To paraphrase Uncle Sam, then, you can take the fcp out of the FCPA and still commit a criminal offense under the accounting standards. All that's required is for an issuer to cook the books. Therefore, a lawful facilitating payment that is knowingly accounted for in a misleading way can be the basis for a criminal violation of the FCPA.

View the United States Attorneys' Criminal Resource Manual, Title 9, Section 1017 Here.

Sunday
Sep162007

Schnitzer’s Victory

The case was full of bad facts. For nearly ten years until late 2004, some $1.8 million in bribes went to foreign officials and private parties in South Korea and China. Officers and employees of Schnitzer Steel Industries Inc. and its Korean subsidiary, SSI International Far East Ltd., approved the bribes, then used elaborate means to fund and conceal them.

Cash, gift certificates, a Cartier watch, pens, perfume, entertainment, a golf club membership, even a condo timeshare – all these changed hands. Off-the-books bank accounts in Korea held slush funds. The bribes were falsely accounted for as “refund to customer” or “rebate to customer,” or “quality claims,” “discounts,” “credits” or “freight savings.” They were disguised as “gratuities” or “congratulations money." Some bribes were even masked as “condolence money.” The corruption was so habitual that even after it was discovered and ordered stopped, an executive approved two more bribes.

There were still more bad facts. Schnitzer had no Foreign Corrupt Practices Act compliance program of any kind – no education for employees, no training, no due diligence, no audits. In ignorance of the FCPA, senior managers emailed each other about arranging “kickbacks” and protecting the crooked recipients from legal trouble in their home countries. Schnitzer, a public company and one of America's largest recyclers of scrap metal, lacked even the basic financial controls needed to prevent or detect secret bank accounts, corrupt payments and false accounting.

Did prosecutors, as expected, seek the corporate death penalty? Not at all. In the end, Schnitzer was never charged with a crime. Its subsidiary, SSI Korea, pleaded guilty in October 2006 to violating the FCPA's anti-bribery and books and records provisions, as well as conspiracy and wire fraud. It paid a $7.5 million criminal fine. Schnitzer itself, however, escaped with a $7.7 million civil penalty and a deferred prosecution agreement, whereby it promised to keep its nose clean and take remedial actions. Thereafter, Schnitzer survived and has since flourished in the robust global steel market.

What accounts for this surprising result? For a start, Schnitzer accepted all responsibility. On first learning about the corrupt payments, the board's audit committee commissioned an aggressive internal investigation. At each stage of the investigation, Schnitzer voluntarily disclosed what it was learning to the Department of Justice and the Securities and Exchange Commission. Then, looking forward, Schnitzer set out to transform its culture. To make sure everyone inside the company and outside got the point, it replaced the chairman of the board, hired a new CEO, and brought in a fresh team of senior management.

The Department of Justice was satisfied, even impressed. “When companies voluntarily disclose FCPA violations and cooperate with Justice Department investigations, they will get a real, tangible benefit. In fact," the DOJ said, "Schnitzer Steel’s cooperation in this case was excellent and . . . the disposition announced today reflects that fact.”

The outcome was never inevitable. Like other companies facing a corruption scandal, Schnitzer had a crucial choice -- to retreat behind the corporate parapet and wait for prosecutors and public opinion to storm the gates, or to cooperate up to a point but try to keep defense options open, or to surrender peacefully, make a full confession, show a repentant spirit and seek forgiveness. By choosing the last option, the company was able to enjoy a quick rehabilitation and full restoration to corporate citizenship. Schnitzer's victory was no accident, but a product of its own decisions.

View the DOJ’s Press Release Here.

Tuesday
Sep112007

Another Look At Facilitating Payments

As the lone exception written into the U.S. Foreign Corrupt Practices Act, facilitating payments have a reputation for being safe and practical. In truth, grease payments are often dangerous and potentially damaging.

The facilitating payments exception allows bribes to be paid for “routine governmental action . . . which is ordinarily and commonly performed by a foreign official." See 15 U.S.C. §§78dd-1 (b) and (f) (3) [Section 30A of the Securities & Exchange Act of 1934]. But claiming that a bribe is really a facilitating payment risks intense scrutiny from the U.S. Department of Justice and, for issuers, the Securities and Exchange Commission. Prosecutors say that anyone relying on the exception should be prepared to defend it -- that is, the burden of proof is always on the one asserting the exception as a defense to an FCPA violation. They warn that dollar thresholds alone aren't reliable, which means bribes aren't facilitating payments just because they are small. And, they say, an issuer’s books and records must accurately reflect facilitating payments, so that the actual purpose for the bribes is clear to an outside observer. That amounts to a signed confession, creating a further risk of prosecution in foreign countries where there may be violations of local anti-corruption laws.

More often than not, bribes first identified as permitted grease payments do not fall within the exception after all. Sometimes it is the purpose of the payments that makes them unsuitable, or the recipient's identity or role, or even the timing or size of the payments. In other words, a lot can go wrong. And then there is the requirement for issuers to disclose grease payments through their SEC filings. Corrupt dealings overseas, no matter how petty, aren't something investors will cheer about.

The facilitating payments exception is a lot trickier than often assumed. No wonder, then, that so many companies are deciding to ban the use of facilitating payments entirely.

See, for example, SEC Today, Volume 2006-57, Friday, March 24, 2006 (“DC Bar Panelists Discuss Developments in Foreign Corrupt Practices Act Cases”), beginning at page 1.

Monday
Sep032007

Siemens' Global Corruption Problems Will Worsen

Perhaps the biggest, although not yet the loudest, international corruption story involves Siemens AG, the German electronics and electrical engineering giant. Siemens says it has identified "a multitude of payments made in connection with [consulting agreements] for which we have not yet been able either to establish a valid business purpose or to clearly identify the recipient. These payments raise concerns in particular under the Foreign Corrupt Practices Act (FCPA) in the United States, anti-corruption legislation in Germany and similar legislation in other countries." Some reports put the level of potentially corrupt payments at a staggering half a billion dollars.

The press, led by the Wall Street Journal, is also reporting that Siemens' managers in many countries are stonewalling the internal investigation. That, in turn, may have pushed the U.S. Department of Justice and the Securities and Exchange Commission to begin working on a deal with German prosecutors to share information and possibly resources in their respective investigations.

With Siemens' own managers now going silent, the DOJ and SEC face tough challenges collecting evidence abroad and compelling non-residents to appear in American courts, either as witnesses or defendants. Meanwhile, the tension among Siemens' management-level employees must be enormous. If they voluntarily give evidence, they could end up being prosecuted. If they refuse to give evidence, they could end up being fired and still be prosecuted. And unless the internal investigation gets back on track, Siemens itself may lose the opportunity to work out a favorable disposition of the case with U.S. and other prosecutors.

Siemens AG's ADRs trade on the NYSE under the symbol SI.

View A Recent Press Report Here.

View Siemens' Recent SEC Disclosure Here.

Monday
Aug272007

The Long, Strong Arm of the FCPA

Its jurisdictional reach is legendary, but understanding exactly why the FCPA's coverage stretches so far and wide is not always easy. One explanation comes from the United States Attorneys' Manual, in this clear and sometimes ominous exposition:

Under the FCPA, U.S. jurisdiction over corrupt payments to foreign officials depends upon whether the violator is an "issuer," a "domestic concern," or a foreign national or business. An "issuer" is a corporation that has issued securities that have been registered in the United States or who is required to file periodic reports with the SEC. See 15 U.S.C. §§ 78c(a)(8), 78dd-1(a). A "domestic concern" is any individual who is a citizen, national, or resident of the United States, or any corporation, partnership, association, joint-stock company, business trust, unincorporated organization, or sole proprietorship which has its principal place of business in the United States, or which is organized under the laws of a State of the United States, or a territory, possession, or commonwealth of the United States. See § 78dd-2(h)(1).

Issuers and domestic concerns may be held liable under the FCPA under either territorial or nationality jurisdiction principles. For acts taken within the territory of the United States, issuers and domestic concerns are liable if they take an act in furtherance of a corrupt payment to a foreign official using the U.S. mails or other means or instrumentalities of interstate commerce. See §§ 78dd-1(a), 78dd-2(a). For acts taken outside the United States, U.S. issuers and domestic concerns are liable if they take any act in furtherance of a corrupt payment, even if the offer, promise, or payment is accomplished without any conduct within U.S. territory. See §§ 78dd-1(g), 78dd-2(i). In addition, U.S. parent corporations may be held liable for the acts of their foreign subsidiaries where they authorized, directed, or controlled the activity in question, as can U.S. citizens or residents, themselves "domestic concerns," who were employed by or acting on behalf of such foreign-incorporated subsidiaries.

Prior to 1998, foreign companies, with the exception of those who qualified as "issuers," and most foreign nationals were not covered by the FCPA. The 1998 amendments expanded the FCPA to assert territorial jurisdiction over foreign companies and nationals. A foreign company or person is now subject to the FCPA if it takes any act in furtherance of the corrupt payment while within the territory of the United States. There is, however, no requirement that such act make use of the U.S. mails or other means or instrumentalities of interstate commerce. See § 78dd-3(a), (f)(1). Although this section has not yet been interpreted by any court, the Department interprets it as conferring jurisdiction whenever a foreign company or national causes an act to be done within the territory of the United States by any person acting as that company's or national's agent.

(emphasis in original)

From the United States Attorneys' Manual, Title 9, Criminal Resource Manual §1018 “Prohibited Foreign Corrupt Practices” (November 2000).

View CRM §1018 Here.