Ex-Siemens execs found guilty in Nigeria bribery case

The news that Hewlett-Packard is the target of a German-Russian bribery investigation spotlights a seldom mentioned reason for the U.S. government’s recently stepped-up enforcement of the Foreign Corrupt Practices Act: other countries are finally starting to crack down on corruption cases.

Earlier a Munich court found two former Siemens managers guilty of breach of trust and abetting bribery for their roles in a corruption scandal that rocked the German engineering group. The bribery scandal occurred in Russia and Nigeria.

U.S. firms have their own government to thank for closing the pinchers: the Justice Department has been leaning on foreign governments for years to enact, and enforce legislation that backs up long-standing OECD anti-bribery conventions. Now that they are, Uncle Sam has also stepped-up enforcement of the FCPA law, which has been on the books since 1977. The prior laxity in enforcement could well have come about because the US government was loathe to put U.S. firms at a disadvantage to overseas competition. But with the international investigation into HP, the rules seem to have changed.

“Candidly, the level of enforcement outside the U.S. is not where we’d like it to be,” Mark Mendelsohn, Justice’s top FCPA enforcer, acknowledged in a recent interview. (Mendelsohn recently announced he’ll be leaving for the private sector, spinning once again the revolving door between regulators and industry.) But, “there are pockets of progress.”  

Michael Kutschenreuter, former financial head of Siemens telecoms unit and the most senior executive found guilty so far, was placed on probation for two years and fined 160,000 euros ($215,300), ruling judge Joachim Eckert said on Tuesday. 

A second defendant, the former head of accounting at Siemens’ telecoms unit, was placed on probation for 1-1/2 years and fined 40,000 euros. Kutschenreuter, who now lives in Dubai, had admitted that he covered up slush funds and bribing practices of his employees. 

According to the prosecution, the funds were used to bribe government officials and business contacts to win telecom contracts in Russia and Nigeria. 

Siemens has identified around 1.3 billion euros ($1.8 billion) in dubious payments that changed hands between 2000 and 2006. 

The trial of Kutschenreuter and his alleged accomplices could be the last in the case. Legal experts think the nearly 300 people still under investigation could get summary punishments.

The affair — the biggest bribery case in German history — has cost the company around 2.5 billion euros in fines, investigations and back taxes. In 2008, Siemens agreed to pay $1.3 billion to end corruption probes in the United States and Germany.

Carmaker Daimler has also come under investigation for bribing foreign government officials with money and gifts to win contracts. Last month it agreed to pay $185 million to settle U.S. charges by the Justice Department and the Securities and Exchange Commission 

International Corruption Enforcement: Possible Tit-for-tat 

Yet even stepped up enforcement by the world’s major developed economies seems dwarfed by both the crimes and the punishments that could have been doled out. Germany targeted, as its first prey, a high-profile American firm — for allegedly paying an 8 million euro bribe to secure a 35 million euro contract with the Russian prosecutor general’s office, seven years ago. 

Observers believe that the move may have been a way of returning the favor to the U.S. for bagging and fining two of Germany’s most prominent companies, Siemens and Daimler. The speculation is just that though — and may be off the mark. After all, it was German officials who first raided Siemens. The Americans piled in later, splitting the $1.6 billion in fines with Germany. 

However, an examination of the Justice Department’s three most recent high-profile corruption cases involving foreign firms seems to give weight to the theory that geo-political and “too big too be nailed” calculations and are being weighed from the moment an FCPA investigation gets underway. 

BAE, Siemens and Daimler 

Take the BAE case. Although snagged in the FCPA net, the firm was merely charged with making false statements — claiming it had enacted FCPA compliance reforms after earlier alleged violations — not for actual bribery charges. 

This softer settlement allowed the company to avoid debarment from government contracts, which would have been mandatory under EU directives, and possibly ruinous to the British firm. BAE recently added former Homeland Security czar Michael Chertoff to its board, a savvy move for the sixth largest U.S. defense contractor and burgeoning homeland security player.

Investment banks face scrutiny 

Meanwhile, the settlement reached with German firm Siemens in December allows it to continue doing business with the U.S. government, enabling it to win a new contract from the Justice Department. So much for taking a damaging reputational hit; some firms, it seems, are simply too big to do without. 

Daimler also dodged potentially lethal bullets by virtue of corruption investigations, in a deal blessed by a U.S. judge this month that focused criminal charges on two of its subsidiaries, rather than the German parent company, which the Justice department said “saw foreign bribery as a way of doing business.” 

The complaint said Daimler engaged in “a brazen scheme that lasted at least a decade and involved ten of millions of dollars of “improper payments” to “foreign officials in at least 22 countries … to assist in securing contracts with government customers for the purchase of Daimler vehicles valued at hundreds of millions of dollars” It stretches credulity that senior executives at HQ did not know this was going on. That, or their financial controls were a shambles. 

Did the fines fit the crimes? 

The fines exacted by Justice and the SEC in these cases were all reached by settlement rather than potentially embarrassing trials, and were all far higher than anything seen in the past – $185 million from Daimler, $400 million from BAE and $800 million from Siemens. Yet they were also significantly below minimum sentencing guidelines, and far less than the hundreds of millions in revenue the firms earned during the time their criminal activity took place — typically over many years. 

That means all the firms charged emerged with a net bottom-line gain. That hardly seems to fulfill the Justice Department’s aim of instilling maximum deterrence, and could, cynically and expensively, be seen by big firms as just another cost of doing business. 

All that troubles some observers, probably none more than Michael Koehler, who after ten years at a law firm working on such cases, now teaches at Butler University, and blogs with brio on the subject. 

“There are individuals sitting in jail this morning eating their breakfast for violating the FCPA anti-bribery provisions,” says Koehler. “What do you say to those people who are in jail for conduct that those other companies [e.g., BAE, Siemens, Daimler] and those companies’ employees were essentially immune from? It just rubs me the wrong way.” 

One answer is that legal principles may have hit real world constraints: these behemoth companies have benefited from being “too big” to be hit by the full punch of the statute. They did deservedly get credit for cooperation — thus lowering their culpability score, in the sentencing guideline formula. On the other hand, that cooperation came after — not before — the firms were busted. 

If the book were thrown at them, the firms could possibly suffer fatal wounds. Indeed, the specter of the Arthur Anderson, which imploded in 2002 after a criminal conviction, may give prosecutors pause. Essentially driven out of business due to its connection to Enron, the Supreme Court vacated the convictions against it in 2005, long after the damage was done. 

These are early days in the new FCPA arena, but the Department of Justice already has some 140 cases under investigation, and defense lawyers and compliance consultants are ramping up to match them. Justice and SEC will now work up their own investigations into HP, and exact a pound of flesh, if they can. Shareholders too, might follow with a lawsuit of their own. 

Under the stepped-up FCPA enforcement, which began under Bush but has been ramped-up by the Obama Administration, executives are also being targeted for personal criminally liability. 

If prosecutions start reaching into boardrooms, as U.K. authorities already have in a case involving ALSTOM, the French power company, anti-corruption enforcement could finally turn serious. To top of page

Credit: CNN Money 

and Reuters