International Corporate Corruption: The Need for Greater Action

JURIST Guest Columnist Dimitrios Ioannidis of Roach, Ioannidis & Megaloudis, LLC, says that several recent cases of corrupt practices by US companies operating overseas highlights the need for greater domestic and international enforcement mechanisms to prevent these practices...

On July 14, 2011, Rupert Murdoch's media empire came under intense pressure as key members of Congress called for an investigation into the allegations that one of the media mogul's US-based companies may have violated American bribery and corruption laws. It is not clear yet whether Congress will ultimately respond to the claims that News Corp. paid bribes to UK law enforcement officers to obtain information; however, the potential implications for Murdoch could be disastrous if such claims were prosecuted by the US authorities under the Foreign Corrupt Practices Act of 1977 (FCPA), which prohibits US nationals and firms from making "corrupt" payments to foreign officials for the purpose of securing or maintaining business. Transparency International, a global civil society organization fighting corruption, claims that it is impossible to quantify the total amount of bribery in the world as it is not publicly recorded. "No one knows exactly how much money is being 'invested' in corrupt officials annually. And bribes do not take only monetary form: favours, services, presents and so on are just as common."

Congress enacted the FCPA in 1977 to stop the bribery of foreign officials as these business practices were against the integrity of the US business model. The legislative history of the FCPA clearly demonstrates that this kind of corruption was rampant and ran the "gamut from bribery of high foreign officials in order to secure some type of favorable action by a foreign government to so-called facilitating payments that allegedly were made to ensure that government functionaries discharged certain ministerial or clerical duties." The FCPA imposes fines and criminal sanctions while its anti-bribery provisions prohibit direct bribes and bribes of a domestic concern and its officials through intermediaries. At the same time, the tax code does not allow deductions for bribes while issued securities must meet the accounting standards set forth at 15 USC § 78m(b)(2). Specifically, the FCPA's anti-bribery provisions prohibit any issuer of publicly traded securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934, "from making use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to pay, or authorization of the payment of money or anything of value to any person, while knowing that all or a portion of such money or thing of value would be offered, given, or promised, directly or indirectly, to a foreign official for the purpose of obtaining or retaining business for or with, or directing business to, any person or securing any improper advantage."

Both the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) have the authority to bring charges against those that violate the FCPA. US companies and companies with operations in the US must therefore be well versed with the provisions of the FCPA and must take company-wide steps to prevent violations whenever executives and/or consultants transact business in foreign markets. Corruption in many countries is so prevalent that it is inconceivable to expect to finalize a contract unless certain "arrangements" are made. There is frequently a dilemma for US companies in that competition really means suitcases of cash being passed to officials and the transfer of funds to offshore bank accounts. These activities are often identified as "consulting fees," and are all targeted at winning contracts through bribery. What often secures contracts is the personal relationship with a government official and the financing of such relationship (through consulting fees) rather than the quality of the products and services or competitive pricing. The current commentary includes three cases involving Siemens, Daimler and Johnson & Johnson, all having been charged with violations of the FCPA. Both the SEC and the DOJ brought suits against them alleging that they promoted their worldwide business through bribes and corruption.

The Siemens Case

On December 12, 2008, the SEC filed an action [PDF] against Siemens Aktiengesellschaft (Siemens), alleging that the Munich-based company violated the FCPA's anti-bribery, books and records and internal controls provisions. On the same day, the DOJ filed an action [PDF] against Siemens in the US District Court for the District of Columbia, alleging violations of the FCPA and detailing the manner, methods and conduct of Siemens in securing contracts through bribes and corruption. As part of the settlement with the SEC, Siemens offered to pay a total of $1.6 billion in disgorgement and fines, the largest amount a company has ever paid to resolve corruption-related charges. Specifically, Siemens agreed to pay $350 million in disgorgement to the SEC, $450 million in criminal fines to the DOJ and a fine of €395 million (approximately $572 million) to the Office of the Prosecutor General in Munich, Germany. In October of 2007, Siemens also paid a fine of €201 million (approximately $291 million) to the Munich Prosecutor.

The SEC and the DOJ complaints describe the web of corruption in graphic detail. Prior to 1999, German law did not prohibit foreign bribes and companies could deduct such payments made in foreign countries as expenditures. Despite foreign laws that prohibited bribery, Siemens had payment mechanisms in place which included cash and off-book accounts that were used to make the necessary payments to win contracts. The SEC complaint describes how "Siemens developed a network of payment mechanisms designed to funnel money through third parties in a way that obscured the purpose and ultimate recipient of the funds." There were no internal controls that targeted corruption related activities and there was a consensus on bribery within the company at all levels of senior management, compliance, internal audit, legal and finance departments.

From 1999 to 2003, the managing board of Siemens "was ineffective in implementing controls to address constraints imposed by Germany's 1999 adoption of the Organization for Economic Cooperation and Development (OECD) anti-bribery convention that outlawed foreign bribery." Siemens was also ineffective in meeting the US regulatory and anti- bribery requirements following its March 12, 2001 listing on the NYSE. The SEC complaint alleged that "Siemens made 4,283 separate payments totaling approximately $1.4 billion to bribe government officials in foreign countries throughout the world. An additional approximately 1,185 separate payments to third parties totaling approximately $391 million were not properly controlled and were used, at least in part, for illicit purposes, including commercial bribery and embezzlement."

Facing unprecedented fines and criminal sanctions unless it cooperated, Siemens retained Debevoise & Plimpton, a US-based law firm to conduct an internal investigation and to share information with the federal authorities.

As German and American investigators worked together to develop leads, Debevoise and its partners dedicated more than 300 lawyers, forensic analysts and staff members to untangle thousands of payments across the globe, according to the court records. American investigators and the Debevoise lawyers conducted more than 1,700 interviews in 34 countries. They collected more than 100 million documents, creating special facilities in China and Germany to house records from that single investigation. Debevoise and an outside auditor racked up 1.5 million billable hours, according to court documents. Siemens has said that the internal inquiry and related restructurings have cost it more than $1 billion.

The Daimler Case

On March 22, 2010, the SEC filed an action [PDF] against Daimler AG (Daimler), and certain of its subsidiaries and affiliates, alleging that it violated the anti-bribery, books and records and internal controls provisions of the FCPA by making illicit payments, directly or indirectly, to foreign government officials in order to secure and maintain business worldwide. On April 1, 2010, Daimler agreed to pay $91.4 million in disgorgement to settle the SEC's charges and also agreed to pay $93.6 million in fines to settle charges in separate criminal proceedings filed by the DOJ. The conduct of Daimler was similar to the business practices utilized by Siemens as it created a labyrinth of payments to government officials to avoid detection by US authorities.

The SEC's complaint alleged that Daimler used bribes to promote government sales in Russia, China, Vietnam, Nigeria, Hungary, Latvia, Croatia and Bosnia.

Among other means, Daimler used dozens of ledger accounts, known internally as "interne Fremdkonten" or "internal third party accounts" to maintain credit balances for the benefit of government officials. These credit balances were controlled by Daimler subsidiaries or outside third parties, including foreign government officials or Daimler's dealers, distributors or other agents who were at times used as intermediaries to make payments to foreign government officials.
According to the SEC:
[T]he accounts were funded through several bogus pricing mechanisms, such as "price surcharges," "price inclusions," or excessive commissions. Daimler also used artificial discounts or rebates on sales contracts to effectuate bribes. In those instances, all or a portion of the discount was kicked back through a ledger account to a foreign government official, rather than credited to the purchasing government customer.
The SEC also alleges that Daimler paid $56 million in improper payments over a period of more than 10 years:
The payments involved more than 200 transactions in at least 22 countries. Daimler earned $1.9 billion in revenue and at least $90 million in illegal profits through these tainted sales transactions, which involved at least 6,300 commercial vehicles and 500 passenger cars. Daimler also paid kickbacks to Iraqi ministries in connection with direct and indirect sales of motor vehicles and spare parts under the United Nations Oil for Food Program.

Daimler did not maintain proper books and records and had inadequate internal controls to detect and prevent these payments, all of which were in violation of Sections 30A, 13(b)(2)(B) and 13(b)(2)(A) of the Securities Exchange Act. According to the SEC's complaint:

[T]he bribery permeated several major business units and subsidiaries, was sanctioned by members of Daimler's management, and continued during the course of the SEC's investigation. Daimler's corrupt practices were authorized by or known to the former heads of Daimler's Overseas Sales and Commercial Vehicles departments, the former head of Daimler Export and Trade Finance (a subsidiary of Daimler Financial Services), and the former heads of Daimler subsidiaries in numerous foreign countries.

The Johnson & Johnson Case

On April 7, 2011, the SEC filed an action [PDF] against Johnson & Johnson (J&J) that it violated the FCPA by bribing public doctors in several European countries and paying kickbacks to Iraq to illegally obtain business. The SEC alleges that

[S]ince at least 1998, subsidiaries of the New Brunswick, N.J.-based pharmaceutical, consumer product, and medical device company paid bribes to public doctors in Greece who selected J&J surgical implants, public doctors and hospital administrators in Poland who awarded contracts to J&J, and public doctors in Romania to prescribe J&J pharmaceutical products. J&J subsidiaries also paid kickbacks to Iraq to obtain 19 contracts under the United Nations Oil for Food Program.
As part of the settlement, J&J agreed to pay more than $48.6 million in disgorgement and prejudgment interest to settle the SEC's charges and to pay a $21.4 million fine to the DOJ to settle criminal charges.

Recommendations

These bribery cases only represent the tip of the iceberg of FCPA violations committed by global enterprises in the course of their worldwide operations. It is not easy to compete with slush funds paid under the table and it is even more difficult to establish a presence in places where corruption is the only business model. US companies vying for business abroad are at a great disadvantage as they cannot compete with foreign companies that are engaging in corrupt practices without being bound by legal prohibitions imposed by their home countries. Needless to say, those that receive bribes are as much responsible as those that offer them and a global enforcement initiative must be promoted on two levels.

First, there must be an international mechanism that uniformly targets individuals and companies that pay bribes. Specifically, there has to be a system that disqualifies companies from doing business in markets where they engaged in corruption, in addition to all the penalties and criminal charges that may be brought under the FCPA. As part of the settlement agreement with US authorities, Siemens, Daimler and J&J should also have been temporarily restricted from engaging in new business in countries where bribes were used to obtain contracts. Disgorgement of past profits, penalties and fines may not be sufficient to discourage future violations, and there must be an uncompromising approach to violations that entails stiff penalties on all aspects of the operational spectrum. This way, the authority of the FCPA and similar US anti-corruption mechanisms will be enhanced.

The second component must be delegated to the countries where officials accepted bribes; each country must prosecute such conduct consistent with the domestic legislation. There has to be some uniformity, however, and failure by the authorities of a country to adequately deal with the corrupt officials must yield a backlash in terms of future enforcement actions.

Finally, stronger incentives for whistleblowers must be afforded that include significant payouts from the overall recoveries, confidentiality measures that truly protect the identity of such individuals, no prosecution for crimes relevant to the disclosed conduct and the creation of employment opportunities in government and/or organizations that combat corruption.

Dimitrios Ioannidis is a partner at Roach, Ioannidis & Megaloudis LLC., and counsel to the Consulate General of Greece in Boston, Massachusetts. He has done investigations for large financial institutions abroad and has served as an expert witness in international business transactions and regulatory compliance matters.

Suggested citation: Dimitrios Ioannidis, International Corporate Corruption: The Need for Greater Action, JURIST - Sidebar, July 19, 2011, http://jurist.org/sidebar/2011/07/dimitrios-ioannidis-corrupt-practices.php.




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