Busting Graft For Profit

By Benjamin Kessler

Michael Hershman, left, president of The Fairfax Group, helps public and private sector clients integrate core principles of social responsibility into their everyday practices.

In a 2010 talk to law students at Pepperdine University, Hershman described an instructive experience he had at Siemens AG in the late nineties:

They asked me to come in and talk about how they could do business going forward…I met with 20 of their top executives, and I gave what I thought was a rousing lecture for two hours…At the end, I asked for questions. There were none. Of the 20 people seated around that table, half went to jail.

After the Siemens bribery scandal broke, the company appointed Hershman to assist in the creation of its anti-corruption program.

The Virginia-based Fairfax Group has a network of staff and contacts that extends to more than ninety countries.

In addition to taking a direct role in influencing public policy, Hershman believes that pressure from for-profit institutions can be crucial to defeating corruption. He said,

Corporations are better positioned to deal with corruption than governments, particularly publicly listed multinationals. They have lots of checks and balances that should prevent corruption. When we bring multinationals together with other private sector companies to work in collaboration, we can start putting pressure on governments to help lower their risk of corruption.

Hershman’s CV includes work as a counterterrorism agent with U.S. Military Intelligence in the late 1960s, as well as a senior staff investigator for the Senate Watergate Committee. Immediately prior to founding The Fairfax Group in 1983, Hershman served as deputy auditor general for the Foreign Assistance Program of the U.S. Agency for International Development (AID).

His public-sector work continues today. In 2011, he traveled to Malaysia four times to supervise the implementation of groundbreaking initiatives such as an online database of corruption offenders and new whistleblower-protection legislation.

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Benjamin Kessler is an editor and writer for Ethics 360. He can be contacted here.

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This post is part of our series profiling global compliance leaders. Most appear on our sponsor Ethisphere’s annual list of the 100 Most Influential People in Business Ethics.

Top Stories Of 2011

Some picks for the year's hottest FCPA headlines are these:

#1: Drop in corporate enforcement actions. In 2010, 23 companies settled FCPA cases for $1.8 billion; in 2011, just 15 companies settled for $508.6 million. Reason? The DOJ was distracted by an unprecedented number of FCPA-related trials. But there's no shortage of corporate investigations in the pipeline so look for enforcement to pick up next year. (We'll post our 2011 enforcement index right after the New Year holiday.)

#2: Mistrial in the first Africa sting case. A hung jury in July showed that the DOJ's FCPA unit isn't invincible after all. And in December, the judge dismissed the conspiracy counts against six other defendants in the case, resulting in one defendant's outright acquittal.

#3: Lindsey and Lee dismissals. Why would the government cheat in an FCPA prosecution when it usually wins without breaking a sweat? The judge found the DOJ's tactics so outrageous he dismissed the indictments after the jury heard the case and decided to convict the defendants on all counts. The DOJ is appealing the dismissals. If it loses, will it clean its own house?

#4: Putting the 'foreign' in Foreign Corrupt Practices Act. With the Magyar / Duetsche Telekom settlement this week, nine of the top ten FCPA cases involve non-U.S. companies. We think there's a message there from Washington to the rest of the world.

 #5: The DOJ - SFO partnership is in full bloom. The U.K.'s Serious Fraud Office is prosecuting three former Innospec execs. It charged Alcoa's super agent, Victor Dahdaleh, with corruption and proceeds-of-crimes offenses. And the SFO is leading the global investigation into Paris-based Alstom, a Siemens-sized scandal in the making.

#6: Enforcement actions are getting bigger. The top ten cases now account for criminal and civil penalties and disgorgement of $3.28 billion. Eight were settled in the past two years.

#7: An attitude adjustment at the DOJ? Associate AG Lanny Breuer promised to release detailed FCPA guidance next year, after a thirty-year wait. This month, the DOJ indicted eight former Siemens execs and agents, answering criticism that big companies plead and pay while their people walk.

#8: Fifteen-year prison term. Joel Esquenazi, one of the Haiti telco defendants, took his chances at trial and lost big. His sentence is the longest in FCPA history. Despite the DOJ's missteps in the Africa sting and Lindsey trials, Esquenazi's sentence shows how dangerous and devastating FCPA prosecutions can be.

#9: 'Foreign officials' galore. Motions by FCPA defendants to dismiss based on who's a foreign official failed in the Carson, Lindsey, and Esquenazi cases. The DOJ's view that foreign state-owned enterprises are 'instrumentalities' under the FCPA and their people are therefore 'foreign officials' is the law. Really.

#10: TSKJ keeps on giving. With a mega-settlement this year by JGC and a humongous forfeiture by Jeffrey Tesler, the feds' take on the case climbed to $1.65 billion. No wonder a dozen or so other countries want their own version of the FCPA. There's a fortune to be made in anti-corruption enforcement.

U.S. Charges Eight Former Siemens Execs

Three years after Germany's Siemens AG settled the biggest FCPA case in history, eight of its former executives and agents have been indicted for a criminal conspiracy to violate the FCPA, launder money, and commit wire fraud.

The defendants also face civil charges brought by the SEC for bribing government officials in Argentina.

A ninth man, Bernd Regendantz, has already settled the SEC's charges by agreeing to pay a civil penalty of $40,000. The penalty was 'deemed satisfied by Regendantz' payment of a €30,000 administrative fine ordered by the Public Prosecutor General in Munich, Germany.' He was not charged in the U.S. criminal indictment. That may indicate he's already cooperating with the DOJ's prosecutors.

The defendants named in the DOJ's indictment were:

•     Uriel Sharef, a former member of the central executive committee of Siemens AG

•     Herbert Steffen, a former chief executive officer of Siemens Argentina

•     Andres Truppel, a former chief financial officer of Siemens Argentina

•     Ulrich Bock, Stephan Signer, and Eberhard Reichert, former senior executives of Siemens Business Services, and

•     Carlos Sergi and Miguel Czysch, who served as intermediaries and agents of Siemens in the alleged bribe scheme.

The defendants allegedly bribed a series of Argentine government officials beginning in 1994 for ten years to win a billion dollar contract to produce national identity cards. After the contract was terminated, they paid bribes to reinstate it. They also paid further bribes to suppress evidence when the termination of the contract was being arbitrated.

The defendants live in Germany, Switzerland, or Argentina. They have not yet been arrested or extradited. 

'Over the course of the bribery scheme,' the SEC said, 'over $100 million in bribes were paid, approximately $31.3 million of which were made after March 12, 2001, when Siemens became a U.S. issuer subject to U.S. securities laws. As a result of the bribe payments it made, Siemens received an arbitration award in 2007 against the government of Argentina of over $217 million plus interest for the [contract]. In August 2009, after settling bribery charges with the U.S. and Germany, Siemens waived the arbitration award.'

Siemens AG's settlement in December 2008 with the DOJ and SEC for $800 million is still the biggest FCPA case of all time. It paid a criminal fine of $450 million in the DOJ settlement and $350 million in disgorgement of profits under its agreement with the SEC. Siemens' Argentina subsidiary was named in the 2008 enforcement action. In Germany, Siemens also paid €596 million in 2007 and 2008 to settle actions brought by the Munich Public Prosecutor.

The DOJ's Lanny Breuer said today: 'This indictment reflects our commitment to holding individuals, as well as companies, accountable for violations of the FCPA.'

The DOJ had faced criticism in the media and in Congress for not prosecuting individuals from 'issuers' that resolve FCPA cases.

The indictment charged the defendants with conspiracy to violate the anti-bribery, books and records, and internal control provisions of the FCPA; conspiracy to commit wire fraud; conspiracy to commit money laundering; and substantive wire fraud.

The most senior defendant, the SEC said, was Uriel Sharef, a former Siemens Managing Board member. It said all of the defendants allegedly 'falsified documents, including invoices and sham consulting contracts, participated in meetings in the United States to negotiate the terms of bribe payments, and made use of U.S. bank accounts to pay bribes.'

The DOJ's Breuer said, 'This is the first time we’ve charged a board member of a Fortune global 50 company with FCPA violations.'

Robert Khuzami, head of the SEC’s enforcement division, said it is the largest civil enforcement action ever brought by the SEC against defendants accused of bribing foreign officials.

The DOJ praised Siemens' 'laudable actions . . . in disclosing potential FCPA violations.' It said,

Siemens AG disclosed these violations after initiating an internal FCPA investigation of unprecedented scope; shared the results of that investigation; cooperated extensively and authentically with the department in its ongoing investigation; and took remedial action, including the complete restructuring of Siemens AG and the implementation of a sophisticated compliance program and organization.

Siemens AG's American Depositary Receipts trade on the NYSE under the symbol SI.

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The criminal case is U.S. v. Sharef, 11-01056, U.S. District Court, Southern District of New York (Manhattan).

View the DOJ's December 13, 2011 release here.

View the SEC's Litigation Release No. 22190 and Accounting and Auditing Enforcement No. 3342 (both dated December 13, 2011) in Securities and Exchange Commission v. Uriel Sharef, Ulrich Bock, Carlos Sergi, Stephan Signer, Herbert Steffen, Andres Truppel and Bernd Regendantz, Civil Action No. 11 civ 9073 (Judge Scheidlin/Pitman) (S.D.N.Y.) here.

Download the SEC's civil complaint here.

Sixty-Four Million Reasons To Comply

Since the start of 2008, 58 companies (by our count) have settled FCPA-related enforcement actions with the DOJ or SEC or both. Together they paid $3.74 billion in penalties, disgorgement, and interest -- an average of $64.5 million per enforcement action.

The yearly numbers break down this way:

In 2011 year-to-date, 13 companies have paid $405.6 million, for an average settlement of $31.2 million (including $28 million paid in an FCPA settlement that also included a price-fixing count).

In 2010, 23 companies paid $1.8 billion for an average settlement of $78 million.

In 2009, 11 companies paid $644 million, averaging $58.5 million per corporate FCPA enforcement action.

In 2008, 11 companies paid $890 million for an average of $80 million. Excluding Siemens' $800 million resolution, 10 companies paid $90 million for an average of $9 million (Siemens is included in the $64.5 million overall average for the period in question).

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Managing compliance risks. More than 100 companies -- many of them global leaders -- took part in the Anti-Corruption Compliance Program Benchmarking Survey. The findings (available here) should help those seeking to assess or improve their compliance programs.

Second Thoughts About The Second Sting Trial

Another group of defendants went on trial this week in federal court in the District of Columbia in the Africa sting case. 

Patrick Caldwell, John Mushriqui, Jeana Mushriqui, Stephen Giordanella, John Godsey, and Marc Morales each face one count of conspiracy to violate the FCPA. Except for Giordanella, they also face multiple substantive FCPA counts. And the government has included a forfeiture count against all of them.

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Twenty two individuals were charged in the case. All but one were arrested early last year while attending a trade show in Las Vegas. Three have pleaded guilty.

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The trial of four other defendants charged in the case -- Pankesh Patel, Andrew Bigelow, John Benson Weir, and Lee Allen Tolleson -- ended in a mistrial in July when the jury was deadlocked after five days of deliberations.

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During a three-year undercover operation, FBI agents posed as representatives of the president of Gabon. The DOJ alleges the defendants conspired to pay bribes to the phony government officials to win contracts to supply ammunition and body armor to the country's presidential guard.

Richard Bistrong, the DOJ's cooperating witness, introduced the undercover FBI team to his friends and colleagues in the military and police equipment industry. Bistrong had already pleaded guilty to unrelated FCPA violations and has been trying to earn a lighter sentence.

Although they're all on trial for being part of a common conspiracy, some defendants have said they didn't even know each other and were brought together by Bistrong.

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In Mike Koehler's Congressional testimony last year about FCPA enforcement, he described this case and some others involving multiple individual defendants as 'manufactured.'

He said:

Prosecuting individuals is a key to achieving deterrence in the FCPA context and should thus be a 'cornerstone´ of the DOJ's FCPA enforcement program. However, the answer is not to manufacture cases or to prosecute individuals based on legal interpretations contrary to the intent of Congress in enacting the FCPA while at the same time failing to prosecute individuals in connection with the most egregious cases of corporate bribery.

As we said after the mistrial of the first four sting defendants, the feds never needed to use their bag of tricks to dig up FCPA defendants.

'There are plenty of real targets out there,' we said, 'and they're easy to find. Just listen to the whistleblowers. Or look inside Tyson Foods, Siemens, BAE, Daimler, and dozens of other companies that have admitted violating the FCPA, paid big fines, but produced no individual FCPA defendants.'

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An account this week in the Blog of the Legal Times said prosecutor Laura Perkins referred to the sting defendants as 'savvy business people' who knew what they were doing and deserve to be punished.

Is that true?

In July, a law enforcement officer told us many of the defendants and their companies were 'so small or regional that I haven’t heard of them.' He thought any juror would wonder why the government is trying to get rid of some of the same 'hardworking' people who supported America's wars in Iraq and Afghanistan by providing equipment for the troops.

Good question.