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Entries in Schnitzer (14)


More Math For The General Counsel

Bruce Hinchey's post No Good Deed Goes Unpunished kicked up some dust around here. His effort to make sense of FCPA settlement numbers produced some exciting scholarship, which doesn't often happen.

We had meandered down that path a couple of years ago in our post Handicapping The FCPA, which looked at the amount of bribes paid compared to fines levied. That's one way to see things. But the settlements can also be viewed differently. Here's why.

The federal sentencing guidelines (chapter 8, part c) set out how fines should be calculated for organizations. There's a lot to consider. Like the size of the company, the number of employees, involvement of high-level management, prior history, whether there was voluntary disclosure, cooperation, and acceptance of responsibility, and finally the amount of gain or profit produced by the bribes (minus the amount paid through disgorgement).

Technically, then, disgorgement paid to the SEC is not part of the fine calculation under the sentencing guidelines. And removing disgorgement changes some of the ratios Bruce talked about.

In Baker Hughes' case, for example, the penalties without disgorgement were $21 million instead of $44 million. Baker's DPA at paragraph 24 of the statement of facts says: "Net revenues realized by Baker Hughes on the Karachaganak project were $189.2 million. After offsetting net revenues by the company's expenses, Baker Hughes recognized a profit of approximately $19.9 million."

The sentencing guidelines, then, would use the $19.9 million profit and not the amount of the bribes, which was $4.1 million. So the ratio for the penalty would be 1.05 -- not 10.73, as when looking just at the bribe paid. So is Baker Hughes an outlier and a harsh result as Bruce says? We're not too sure.

Schnitzer Steel is sometimes mentioned as an example of a self-reporting company not receiving any benefits. That appears to be true because it paid only $204,537 in bribes and $15.2 million in penalties. But $7.7 million was disgorgement. And, as the DOJ said in its June 2007 press release, the net profit to Schnitzer's subsidiary was $6.3 million, which would be a basis of the penalty calculation under the guidelines. (There was also a lot of management-level involvement in the bribery by Schnitzer's home-office people; as we said in an earlier post, the company "replaced the chairman of the board, hired a new CEO, and brought in a fresh team of senior management" as part of its corrective actions.)

One more thing to keep in mind. No study can account for cases where the DOJ doesn't charge a company that has voluntarily disclosed potential FCPA offenses. Those decisions aren't public but companies occasionally mention it themselves, Digi International being the latest. The ratios for them would be zero.

To be fair, Bruce didn't have the space in his post to get into a lot of detail. In his full paper, however, he talked about the sentencing guidelines and some of the issues we've mentioned above. And he'll have a chance to respond to this post soon, which we look forward to.


No Good Deed Goes Unpunished

While looking at FCPA enforcement data, Bruce Hinchey, left, made a startling and disturbing discovery about the consequences of self reporting.

Here's his story:

* * *

Dear FCPA Blog,

Many question the Department of Justice’s claim that there are tangible benefits to voluntary disclosure of a FCPA violation.

As a part of a yet unpublished paper, I consider the data from 40 FCPA cases from 2002 through 2009 and the differences between bribes paid and penalties levied against companies that do and do not self-disclose.

In the paper, linear regression analysis of the cases reveals a sound statistical relationship between the amounts a company bribes and the corresponding fine it receives. For now, I will focus on the fine-to-bribe ratio companies face for FCPA violations. The fine-to-bribe ratio is calculated by simply dividing the total penalty a company received by the amount it bribed.

Voluntary Disclosures

Within the voluntary disclosure group the fine-to-bribe ratios ranged from encouragingly low (Bristow Group Inc. and Latinode Inc. stand out with a fine-to-bribe ratio of 0 and .89, respectively) to strikingly high (Baker Hughes Inc. and Schnitzer Steel Industries Inc. had fine-to-bribe ratios of 10.73 and 8.46, respectively). On average, this group faced a 4.53 fine-to-bribe ratio. Thus, it appears as though a voluntarily disclosing company might expect a fine of $4.53 for every dollar given as a bribe.

Involuntary Disclosures

The involuntary disclosure group also had surprisingly high ratios (Flowserve Corp. and Akzo-Nobel NV had fine-to-bribe ratios of 17.37 and 13.42, respectively) and low ratios (the Chevron Corp. and El Paso Corp.’s fine-to-bribe ratios were 1.5 and 1.41, respectively). This group, however, faced an average fine-to-bribe ratio of 3.22, suggesting a non-voluntarily disclosing company might expect a fine of only $3.22 per dollar bribed, compared to the voluntary disclosure group’s 4.53. This ratio would be even lower had it included the disproportionately low fine-to-bribe ratios levied in the cases against Siemens AG and KBR, which I dismissed as outliers.

Remaining Questions

Given the bribe-to-fine ratios in the published cases in recent years, the Justice Department appears not to be following up with its promised benefits. The seemingly disproportionate bribe-to-fine ratios outlined above raise questions about whether current FCPA enforcement is fundamentally fair.

Many thanks,

Bruce Hinchey


Bruce is a lawyer completing an LLM in government procurement law at the George Washington University Law School. His paper, "Punishing the Penitent: Disproportionate Fines in Recent FCPA Enforcements and Suggested Improvements," can be downloaded at SSRN here.

It was generous of Bruce to share his work with us and our readers. Thank you, Bruce, for blowing our mind.

He's currently looking for a position in an FCPA defense and government contracts practice and can be reached at


Asian Values, FCPA Risks

By Michael S. Diamant

Few FCPA compliance challenges are as vexing as the provision of everyday business courtesies, like gifts, meals, drinks, travel, and entertainment. Because the FCPA has no de minimis threshold, even minor expenditures could implicate the statute’s anti-bribery and accounting provisions. Although they are a necessary and common facet of international business, such benefits have led to enforcement actions against companies like Lucent Technologies, Avery Dennison, and UTStarcom.

Multinational companies that do business in China confront this challenge daily. The Chinese business environment particularly amplifies this risk for two reasons. First, the Chinese government owns a huge percentage of its domestic economy.  It is thought to own more than 70% of the country’s productive wealth, and it is the majority shareholder of 31% of publicly listed Chinese companies.

This has profound implications for FCPA compliance due to how the law is currently enforced: In their prosecution of companies like Schnitzer Steel, the U.S. regulators have taken an expansive view of the meaning of “foreign official.” The statute defines “foreign official” as an “any officer or employee of a foreign government or any department, agency, or instrumentality thereof.” According to the U.S. authorities, this includes for-profit businesses, like steel mills, that are only partially owned or controlled by a foreign government.

Therefore, China’s broad ownership of its publicly listed companies qualifies a huge percent of Chinese businesspeople as “foreign officials” according to U.S. regulators.  When you discuss a prospective deal over dinner or a drink with a Chinese business executive, you might be giving a thing of value to a foreign official!

Second, Chinese business culture typically values the provision of things of value to build relationships. This development of business connections, termed guanxi, is especially important for multinational companies trying to develop business in China and make inroads into that country’s booming economy. Further, the failure to reciprocate courtesies that have been provided by your business counterparties in the past may be seen as rude and could hamper business. The risk of offending on one hand may be balanced against the risk of violating the FCPA on the other.

Over the years, we have advised numerous multinational companies on how to handle this conundrum.  This month we published an article in the Virginia Law & Business Review that gathers some of our accumulated wisdom on the issue, both by performing a legal analysis of the FCPA’s anti-bribery provisions to determine why certain business courtesies are permissible while others are not and by providing some internal compliance suggestions to manage this risk with regard to a company’s Chinese operations. We hope readers of the FCPA Blog find it helpful. It can be downloaded here.

Michael Diamant is a member of the white collar defense and investigations practice group in the Washington, D.C. office of Gibson, Dunn & Crutcher. His practice focuses on white collar criminal defense, internal investigations, and corporate compliance. He has conducted internal investigations in eleven countries on four continents regarding possible FCPA violations and assisted clients in complying with government subpoenas and negotiating settlements with enforcement agencies.


Prosecuting Private Overseas Corruption

Hold on. When did the United States criminalize commercial overseas bribery? We're not talking about bribes to foreign officials under the Foreign Corrupt Practices Act.* But bribes overseas to private parties. When did that become a federal offense? Well, it happened this year when the Justice Department indicted California valve-maker Control Components Inc. (CCI) and six of its former employees. Here's how.

They were all charged under both the FCPA and the Travel Act (18 U.S. C. §1952). The latter prohibits traveling between states or countries or using an interstate facility in aid of any crime, and carries a 5-year jail sentence for most offenses. Here's the thing. The underlying crime doesn't have to be a federal offense. Traveling around or using the mails to violate a state law can also trigger a Travel Act violation.

In the cases of CCI and the six ex-employees, the federal government alleged they violated or conspired to violate California's anti-bribery law (California Penal Code section 641.3). It bans corrupt payments anywhere of more than $1,000 between any two persons, including private commercial parties. In the federal indictments, the Travel Act charges relied on alleged violations of California's anti-corruption law. CCI pleaded guilty to its three-count indictment; the six ex-employees have pleaded not guilty and are presumed innocent unless convicted at trial.

When it announced CCI's guilty plea, the DOJ talked about the company's private overseas bribery. It said:

According to the information and plea agreement, from 1998 through 2007, CCI violated the FCPA and the Travel Act by making corrupt payments to numerous officers and employees of state-owned and privately-owned customers around the world, including in China, Korea, Malaysia and the United Arab Emirates, for the purpose of obtaining or retaining business for CCI. Specifically, from 2003 through 2007, CCI paid approximately $4.9 million in bribes, in violation of the FCPA, to officials of various foreign state-owned companies and approximately $1.95 million in bribes, in violation of the Travel Act, to officers and employees of foreign and domestic privately-owned companies.
We've seen references to private bribery in other FCPA enforcement actions. Schnitzer Steel is one example. The DOJ said its employees had bribed people not only at government-owned enterprises but also at private companies abroad. But Schnitzer was charged only under the books and records and internal controls provisions of the FCPA and not the Travel Act, so specific allegations about private bribery weren't part of the actual charges.

In CCI's case, however, its private overseas bribery violated California law. That's what formed the basis of the Travel Act charge in the indictment. And in its plea agreement, one of CCI's undertakings was directed specifically at private bribery that fell outside the scope of the FCPA. The plea agreement said:

CCI shall truthfully disclose . . . all matters relating to corrupt payments to foreign public officials or to employees of private customers . . . about which CCI has any knowledge . . . .
What does it all mean? That the DOJ is now prosecuting (and monitoring) not just bribes to foreign officials that violate the Foreign Corrupt Practices Act but also corrupt payments to private overseas parties that violate state law. Is this a massive expansion of the DOJ's battle against foreign corruption by U.S. companies and their employees? Oh yes.

What's next? All of a sudden, it seems like a very good time to re-evaluate compliance programs -- and make sure they cover both public and private overseas bribery.

We're grateful to an extremely astute reader in Asia for helping us understand the importance of the Travel Act charges in the CCI-related indictments.

* Foreign official is defined in the FCPA at 15 U.S.C. §78dd-1(f)(1)(A), §78dd-2(h)(2)(A) and §78dd-3(f)(2)(A). "The term 'foreign official' means any officer or employee of a foreign government or any department, agency, or instrumentality thereof, or of a public international organization, or any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality, or for or on behalf of any such public international organization."

Download the DOJ's July 31, 2009 release about CCI's guilty plea here.

Download a copy of CCI's July 22, 2009 plea agreement here.

Download the July 22, 2009 criminal information against CCI here.

Download the indictment of the six former executives of CCI here.


The SEC Takes It Back

Disgorging profits is a common and prominent feature these days in Foreign Corrupt Practices Act settlements with the Securities and Exchange Commission. Last year Siemens disgorged $350 million and this year KBR paid $177 million. Maybe because disgorgements now happen so often, or because the payments have become so enormous, we automatically accept them as a suitable remedy. We don't question why the SEC uses disgorgement, where the remedy came from, or where it's going.

But at least one person has asked those questions. He's David C. Weiss (Dartmouth College, Michigan Law School), student-author of an extended note in the January 17, 2009 edition of the Michigan Journal of International Law.

According to Weiss, disgorgement never appeared in an FCPA enforcement action until just five years ago. That's right -- 27 years passed without a single FCPA-related disgorgement order. Then, in 2004, ABB Vetco Gray, Inc. paid $16.4 million in disgorgement and prejudgment interest. Next came Titan Corp. in 2005, paying $15.5 million. That same year, Diagnostics Products Corp. disgorged $2.8 million and DPC (Tianjin) Co. Ltd. $2.8 million. In 2006, Schnitzer Steel Industries, Inc. disgorged $7.7 million and Statoil $10.5 million. In 2007, Baker Hughes Inc. disgorged $23 million, El Paso Corp. $5.5 million, and York International $10 million.

Want to hear the rest? In 2008, Fiat disgorged $7.2 million, Siemens $350 million, Faro Technologies $1.8 million, Willbros $10.3 million, AB Volvo $19.6 million, Flowserve $3.2 million, and Westinghouse Air Brake Technologies Corp. $289,000. And so far this year, ITT Corporation has disgorged $1.4 million, and KBR $177 million.

Disgorgement, then, has a short but intense history in FCPA enforcement actions, and it seems to have appeared out of the blue. As Weiss puts it, "The SEC has developed the 'law' of disgorgement with neither the input, contemplation, nor blessing of Congress, and it is for this reason that one should ask normative questions about the role of disgorgement in the future enforcement of the prohibition on foreign bribery."

He points out that the SEC began requiring disgorgement just when other countries (with U.S. encouragement) started enacting their own extra-territorial anti-corruption laws. So here's the question: When more than one country enforces antibribery laws against a single company, which jurisdictions, if any, should use disgorgement as a remedy? Who decides, for example, if Siemens should forfeit ill-gotten gains to the United States Treasury or the German Chancellery? How about Italy or Norway, Greece or Argentina?

Weiss looks at laws around the world aimed at punishing foreign public bribery, and particularly those with disgorgement-like remedies. "The penal codes of at least twenty-one countries," he says, "include provisions for 'forfeiture' or 'confiscation' of the proceeds of a crime, or they base the amount of a fine on such proceeds." His survey shows just how new most of the laws are -- the majority coming into force either following enactment of the OECD anti-corruption convention in 1998 or after the events of 9/11 in 2001.

There's no evidence, Weiss says, that "Congress intended that the SEC pursue disgorgement as it has done since 2004. This fact alone should at least make one question the normative function of disgorgement." Disgorgement, he says, wasn't mentioned when the FCPA was first debated and adopted in 1977, nor when Congress amended the law in 1988 or 1998. Weiss himself doesn't say the SEC lacks the legal mandate to pursue disgorgement or that the remedy is somehow improper. But he does point out that the "lack of any statement that disgorgement should be part of the SEC’s enforcement arsenal, and the rarity of the remedy at the time that Congress passed the FCPA and its amendments, are reasons that some commentators have used to question the impropriety of the remedy."

It's great to see the Foreign Corrupt Practices Act as the object of some fresh research and scholarship. And at 47 pages and 238 footnotes (a couple of which mention the FCPA Blog), Weiss' work is thorough and thoughtful.

The cite for the note is: Weiss, David C.,The Foreign Corrupt Practices Act, SEC Disgorgement of Profits, and the Evolving International Bribery Regime: Weighing Proportionality, Retribution, and Deterrence, Michigan Journal of International Law, Vol. 30, No. 2 (January 17, 2009).

It's available from SSRN here.


Understanding the KBR, Halliburton Charges

With the Halliburton / KBR settlement in mind, we asked readers last week (here) to help us understand how decisions are made to charge companies or individuals under the Foreign Corrupt Practices Act with violations of the antibribery provisions -- criminally or civilly. The best responses, we said, would earn both our gratitude and a copy of Bribery Abroad. We're sending a copy today to David P. Burns (left). His comments are below, and they're great.

Burns (Boston College '91, Columbia Law '95) is a partner in the D.C. office of Gibson, Dunn & Crutcher, where he has a white-collar criminal defense practice. From 2000 to 2005, he was an Assistant United States Attorney in the Southern District of New York, earning in 2004 the DOJ's Director's Award for superior performance. He works with the FCPA -- helping clients handle internal and government investigations, dealing with the DOJ and SEC, developing and running compliance programs -- and on securities and accounting fraud, criminal antitrust violations, government procurement fraud and public corruption investigations. His full bio is here.

Here's what he told us:

Dear FCPA Blog,

In your Waters So Deep post, you raised two separate questions regarding the distinction between civil and criminal charges under the FCPA's anti-bribery provisions: (1) Is there any difference in the elements required for a civil versus a criminal violation of the anti-bribery provisions; and (2) In the KBR / Halliburton case, why did the SEC charge Halliburton and KBR Inc. with civil anti-bribery violations, while the DOJ charged only Kellogg Brown and Root LLC?

1. Civil versus Criminal Anti-bribery Violation
According to the statute, the elements necessary for a criminal violation of the anti-bribery provisions are identical to those required for a civil violation, except where the defendant is a natural person. Where the defendant is a natural person, in order for criminal liability to attach, the government must additionally prove that the defendant acted "willfully." See 15 U.S.C. § 78ff(c); 15 U.S.C. § 78dd-2(g). Of course, the level of proof required to establish a criminal violation (beyond a reasonable doubt) versus a civil violation (by a preponderance of the evidence) also is different.

2. Why DOJ Charged Kellogg Brown & Root but not Halliburton
The SEC did not charge Halliburton with civil anti-bribery violations. Rather, the SEC charged only KBR Inc. with anti-bribery violations; it charged Halliburton solely with books-and-records and internal controls violations. The DOJ charged Kellogg Brown & Root LLC with anti-bribery violations and made no books-and-records or internal controls charges.

Why did neither the SEC nor the DOJ charge Halliburton with anti-bribery violations? There are at least two possible answers. First, the charges likely were the result of intense negotiations between the companies and the SEC and DOJ, and the result may have been something that all parties agreed to live with. The DOJ, for example, frequently exercises its prosecutorial discretion to charge only those entities most directly responsible for the FCPA violation at issue. See, for example, Schnitzer Steel (SSI Korea charged), Flowserve Corporation (Flowserve Pompes charged), and Fiat S.p.A. (Iveco, CNH Italia, and CNH France charged).

Second, it is possible that the SEC and DOJ did not believe they had evidence that Halliburton acted "corruptly," an element required for both civil and criminal applications of the anti-bribery provisions. (Note that "corruptly" is a separate element from "willfully" which, as described above, applies only to criminal violations of the anti-bribery provisions by natural persons.) The SEC's complaint states that although Halliburton was aware of KBR's use of United Kingdom and Japanese "agents" in relation to the Nigerian joint venture, KBR officials "did not tell the Halliburton officials that the UK Agent would use the money to pay bribes" (SEC Complaint at 10). With regard to the Japanese agent, the SEC alleged that "senior KBR officials…effectively hid the true nature of the relationship" (SEC Complaint at 11).

FCPA legislative history and courts have defined "corruptly" to mean acting with an evil purpose and with an intent to influence a foreign official to misuse his official position. See, e.g., Stichting v. Schreiber, 327 F.3d 173 (2d Cir. 2003); United States v. Kay, 513 F.3d 432 (5th Cir. 2007). Without knowledge that bribes were being paid by its subsidiary, Halliburton could not have "corruptly" authorized the payments.

David P. Burns
Gibson, Dunn & Crutcher LLP (Washington, D.C)


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.


A Spectacular Leap

Bob Beamon's long jump of 29 feet 2½ inches in Mexico City in the 1968 Olympics broke the world record by an astounding 21¾ inches. With that one jump Beamon became the first man to reach both 28 and 29 feet, and the word Beamonesque was born -- meaning a spectacular event. We'd describe Siemens' $800 million settlement on Monday of Foreign Corrupt Practices Act violations as Beamonesque, considering that it surpassed the existing FCPA settlement record by $755.9 million.

Before Siemens, Baker Hughes' April 2007 payment of $44.1 million (including penalties and disgorgement) was the biggest in an FCPA case. Baker Hughes, we think, won't be sorry to relinquish the top spot on the settlement list since being there gets you mentioned in the press about as often as Madonna.

Among other notable settlements, Willbros paid $32.3 million in May this year and Chevron's violations related to the U.N.'s oil for food program cost it $30 million last year. Titan Corporation held the record after it paid $28.5 million in 2005 for its FCPA settlement. Vetco's resolution cost it $26 million in 2007 and Lockheed paid $24.8 million in 1994, the biggest case of its time. York International spent $22 million last year to end its enforcement action. Statoil was close behind in 2006, paying $21 million. AB Volvo's 2008 case settled for $19.6 million, and ABB's violations cost it $16.4 million in 2004. Schnitzer Steel agreed to pay $15.2 million in 2006 and Flowserve $10.5 million this year.

Bob Beamon's great leap stood as a world record for 23 years and earned him a postage stamp in Burundi (pictured above). We're fairly sure Siemens won't be appearing soon on any postage stamps, but it could hold the FCPA settlement record for a very long time.

Our thanks to Joe Hixson for helping assemble the settlement data in this post. He's with the strategic communications firm The Abernathy MacGregor Group Inc., which has represented some very well-known companies in connection with FCPA enforcement actions. Despite Joe's help, any mistakes in what's written above are all ours.


Was Justice Served?

Its historic settlement on Monday of Foreign Corrupt Practices Act violations was bound to raise the questions: Did Siemens enjoy checkbook justice? Did it achieve something ordinary criminal defendants can't? Did it use its extraordinary wealth and power to arrange a rather painless resolution with the U.S. government? By paying $800 million in penalties and disgorgement, did the German giant get off easy?

By any measure, Siemens' crimes were terrible. Evidence the company itself gathered and disclosed shows that for at least ten years it operated as a corrupt global enterprise. How much of its profit came through kick-backs and bribes we'll never know, but it amounted to billions. The company spread sleaze all over the globe, distorting government decisions and hurting millions by its lawlessness. But how many of its 400,000 employees were directly involved in the criminal acts? How many arranged or paid the bribes? How many had a hand in cooking the books to cover up the fraud? Was it a dozen employees? Or more like a hundred, or even a thousand? Whatever the number, the crooked ones were a minuscule part of Siemens' total workforce.

The question, then, is how much punishment should be inflicted on the corporation because of a few bad apples, relatively speaking? Should the DOJ have put Siemens on trial for bribery and sought the harshest sanctions available? Prosecutors, after all, had the company cold. Under the doctrine of respondeat superior, an organization is generally guilty per se when one of its employees commits a crime within the scope of his or her employment. In this case, then, Siemens was defenseless -- a sitting duck awaiting execution.

But the DOJ is understandably reluctant to hit corporations head on. The Arthur Andersen prosecution in the aftermath of the Enron scandal demonstrated the catastrophic consequences that can result from a corporate felony charge. For Andersen it was an instant death sentence, even though the firm was later exonerated. That's why the DOJ has since adopted a softer approach to FCPA and other white collar offenses. It offers companies that want to cooperate alternatives in the form of negotiated settlements.

The idea is that no company is beyond redemption. That each one can change -- most dramatically by changing its board and top management, as Siemens had already done. Schnitzer Steel did that a couple of years ago in an FCPA case involving outrageous criminal conduct, and it saved itself. Like Siemens, Schnitzer wasn't charged with bribery. Instead a subsidiary was allowed to plead guilty to violating the FCPA's antibribery and books and records provisions. And Bristow Group Inc. settled serious FCPA violations last year with the SEC without paying a dollar in penalties, mainly because its all-new management showed their commitment to compliance. Is there anything more a corporate body can do?

And even though corporations might escape the harshest aspects of the law, their culpable employees aren't always so fortunate. From the time the DOJ began backing off its stiff-armed approach to corporate prosecutions, the number of individuals held accountable under the FCPA has shot up. So nobody's getting away with anything.

In Siemens' case, were the goals of criminal sentencing -- retribution, deterrence, incapacitation and rehabilitation -- all met? Once the company had new leaders who uncovered and confessed its crimes, who adopted an effective compliance program, accepted a monitor, agreed to pay fines and disgorge profits, was there any reason to punish the organization further? Wouldn't more strokes of the cane merely have bloodied innocent employees, partners, shareholders and customers, while doing nothing about the long-gone crooks?

Peter Löscher became Siemens' CEO in July 2007, just as the frightening scope of its wrongdoing was becoming clear. In an interview a year ago this week, this was his assessment:

It's completely clear that the management culture failed. Managers broke the law. But this has nothing to do with a lack of rules. Siemens had and still has an outstanding set of rules. The only problem is that they were apparently being violated on an ongoing basis. The management culture was simply not practiced consistently and uniformly. This is why my job now is to install a new culture. And I can guarantee you that senior management will practice what it preaches -- to a T.
Löscher committed himself and everyone around him to a clean company. That's what saved Siemens -- not its money or its power. The most important ingredient in its survival was its leader's decision to fix things by demanding real change. As Löscher said last year: Siemens endorses clean business. Period. I am not interested in deals that can only be had through corruption. That's it, then. Compliance first, profit second.

We believe in corporate redemption -- in well-earned second chances. And we're glad Siemens is getting one now.

For some great observations about Siemens' sentence, take a look at Ellen Podgor's post on the White Collar Crime Prof Blog here.


Intent On Complying

The shocking news last week about Jack Stanley's guilty plea teaches again that not all FCPA violations can be prevented. No compliance program or compliance training would have kept Mr. Stanley on the right side of the law. Leaders with bad intentions -- with criminal intent -- can always find a way to cheat, and putting a compliance program in their path won't help.

But Jack Stanley isn't a typical company leader. Unlike him, most want to comply with the FCPA. They want to stay in their jobs and out of jail. They want to protect their companies and the people in them. They want to be proud of the way they do business. For the overwhelming majority of executives, compliance is the goal and compliance training is the tool -- because it works.

That's why regular, repeated training is required for an effective compliance program. The 2005 Federal Sentencing Guidelines say:

The organization shall take reasonable steps to communicate periodically and in a practical manner its standards and procedures, and other aspects of the compliance and ethics program, to the individuals [responsible for compliance] by conducting effective training programs and otherwise disseminating information appropriate to such individuals’ respective roles and responsibilities.
The Sentencing Guidelines don't dictate content or format. That's up to each organization. But the objective is clear: make sure everyone knows what the Foreign Corrupt Practices Act says, requires and prohibits, and do that through training.

Aside from filling heads with knowledge, training sessions sometimes start a dialogue with weird surprises. Schnitzer Steel Industries Inc., the story goes, learned about its public bribery problem after an employee came back from a company-sponsored FCPA training course. He told his supervisors that he and his co-workers were doing all the things the trainers just said were illegal. That triggered Schnitzer's internal investigation, which led finally to a company clean-up and a favorable settlement with the government.

During training sessions, it's best if senior executives are part of the program. They can tell everyone face-to-face that the company really and truly expects 100% compliance. No kidding. And if someone decides on their own not to follow company policy but instead to do something illegal, then they'll likely end up unemployed and facing the full wrath of the law.

Employees working outside the U.S. are especially susceptible to the notion that more sales are always the goal. They need to hear that the first priority is compliance -- and that sales landed illegally aren't wanted. A general counsel told us last month that her CEO often says he isn't interested in being in a market where the company can't operate legally. The CEO has stayed out of at least one rich but dicey African country, sending his compliance message to everyone, loud and clear.

One more thing. FCPA training doesn't need to be elaborate to be effective. In fact, sometimes less formal settings produce the best results. Even the Federal Sentencing Guidelines say organizations, especially smaller ones, can train employees "through informal staff meetings, and monitoring through regular 'walk-arounds' or continuous observation while managing the organization." In other words, effective FCPA training can be woven into the fabric of the organization. That, after all, is the hallmark of a real compliance culture.

We hear from managers, sales people, engineers and others about the daily pressure in the marketplace to win. The temptation to take shortcuts is always huge. Jack Stanley couldn't resist. But most people want to stay straight. They want to avoid hurting themselves, their families, colleagues and companies. Compliance training helps them do that.

View Chapter 8 - PART B - §8B2.1. ("Effective Compliance and Ethics Program") of the 2005 U.S. Federal Sentencing Guidelines here.



Another Look At China

Yesterday we talked about a recent story in the Chinese press blaming foreign companies for more than half of the PRC's corruption, and singling out U.S. companies that violated the Foreign Corrupt Practices Act in China. On reflection, we may have been unduly skeptical about China's motives for publishing the story. So today we want to set the record straight.

To be clear, the PRC's economic policies and the results they've produced are phenomenal. Last year the country attracted nearly $75 billion in foreign direct investment. Total FDI has topped $700 billion. There are now some 120,000 foreign-invested enterprises in the PRC, double the number from just 2002. The economy is still growing at over 11% a year, and in a country of more than 1.3 billion people, per capita income has reached around $5,500. Foreign businesses in China are getting bigger. McDonald's this week said it plans to open 125 more outlets there in 2008, and Dunkin' Donuts wants 100 new locations in Shanghai alone over the next 10 years. What's the growth look like at street level? Our first visit to China was in 1993. Crossing main roads in Beijing was nearly impossible because of the streaming bicycles pedaled by factory workers wearing black Mao suits. The same blocks now make up some of the world's fanciest neighborhoods -- upscale condos and cafes filled with world-class fashionistas, and streets flowing with BMWs and Audis, Lamborghinis and more.

With such a staggering level of foreign activity in the economy, it's logical that a lot of the corruption over the past ten years can be traced to foreign companies. We thought 64% -- the amount noted in the aforementioned story -- sounded too high. But it could be close to the mark after all. For sure, the number of Foreign Corrupt Practices Act enforcement actions and investigations related to China has ballooned over the past few years. Among the companies involved are Lucent Technologies Inc., Faro Technologies, Inc., York International Corporation, Paradigm B.V., Schnitzer Steel Industries Inc., InVision Technologies, Inc., Diagnostics Products Corporation, Alltel Corporation, BearingPoint Inc. and UTStarcom Inc. Siemens may have FCPA issues in China, and there could be others. That's a long list in the rather limited FCPA universe. So what gives?

We've wondered before if some companies go into certain countries -- China, Nigeria and Indonesia come to mind -- expecting to find a corrupt environment. And once there -- no matter what they find -- they lower their compliance standards instead of raising them. Some pundits in Nigeria have talked about this syndrome and how it victimizes the local economy and the people in it. Perhaps the Chinese press is now sensitive to the same thing.

So in the spirit of the approaching Lunar New Year -- the beautiful character above means "rat," the sign next up on the Chinese calendar -- we acknowledge that ten years ago China put out the welcome mat to the world's entrepreneurs on a scale never seen before. Since then people by the billions have enjoyed the fruits, both in China and around the globe. At the same time, the Chinese government has struggled with public corruption -- as most developing economies do. It has fought against it using all available weapons. [Sometimes we cringe to read about executions for bribe-taking there.] Now China is telling the international community that a big part of its corruption problem is imported from overseas -- even from the United States. It's a good reminder to foreign companies -- especially those required to comply with the FCPA -- that instead of being part of the problem they should be part of the solution.


Schnitzer's Former Boss Settles FCPA Charges

The former chairman and ceo of Schnitzer Steel Industries, Inc. resolved charges on December 13, 2007 brought by the Securities and Exchange Commission under the U.S. Foreign Corrupt Practices Act. Robert W. Philip, 60, of Portland, Oregon, will pay about $250,000 to settle charges that he violated the antibribery, books and records and internal controls provisions of the FCPA (Section 30A of the Securities Exchange Act of 1934 [15 U.S.C. § 78dd-1], Section13(b)(2)(A) [15 U.S.C. § 78m(b)(2)(A)], and Section 13(b)(2)(B) [15 U.S.C. § 78m(b)(2)(B)]). He served as Schnitzer's president beginning in 1991, as its chief executive officer from 2002, and as chairman from 2004. He left the company in May 2005.

In October 2006 -- after an internal investigation and self-disclosure to authorities -- Schnitzer paid more than $15 million to resolve FCPA violations with the SEC and the Department of Justice. In June 2007, Si Chan Wooh, Schnitzer's former executive vice president and head of a foreign subsidiary, agreed with the SEC to pay about $40,000 in disgorgement, interest and penalties for FCPA violations.

The SEC's complaint against Mr. Philip said that from at least 1999 through 2004, Schnitzer paid more than $1.9 million in bribes to managers of steel mills in China and South Korea to induce them to purchase scrap metal from Schnitzer, generating over $500 million in gross revenue for the company. He authorized the payment of the bribes, aided and abetted Schnitzer's failure to make and keep accurate books and records, and failed to implement internal controls reasonably designed to detect and prevent Schnitzer's FCPA violations. The SEC's complaint alleged that after approving the improper payments, he instructed that they be falsely recorded in Schnitzer's books as "sales commissions," "commission to the customer," "refunds," or "rebates."

Schnitzer Steel Industries Inc. trades on NASDAQ under the symbol SCHN.

View prior posts about Schnitzer Here.

View the SEC's Litigation Release No. 20397 (December 13, 2007) Here.

View the SEC's complaint in Securities and Exchange Commission v. Robert W. Philip, Case No. CV 07-1836 (MO) (D. Or. filed December 13, 2007) Here.