Siemens AG Pleads Guilty to FCPA Violations and …FCPA) by Siemens and its subsidiaries. Pursuant...

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Siemens AG Pleads Guilty to FCPA Violations and Agrees to Pay $800 Million in Penalties and Disgorgement of Profits December 24, 2008

Full Article

On December 15, 2008, the Department of Justice (DOJ), the Securities and

Exchange Commission (SEC), and Siemens AG (Siemens) announced that they had reached agreements with respect to violations of the Foreign Corrupt Practices Act (FCPA) by Siemens and its subsidiaries. Pursuant to these agreements, Siemens pleaded guilty to two counts of violating the books and records and internal controls provisions of the FCPA. Siemens subsidiaries in Argentina (Siemens Argentina), Bangladesh (Siemens Bangladesh), and Venezuela (Siemens Venezuela) each pleaded guilty to separate one-count informations charging conspiracy to violate the anti-bribery and books and records provisions of the FCPA. In connection with these guilty pleas Siemens agreed to pay a criminal fine of approximately $448.5 million and each of the subsidiaries agreed to pay criminal fines of $500,000 for a combined total of $450 million. In connection with the SEC agreement, Siemens agreed to disgorge profits of approximately $350 million to resolve civil FCPA charges. The $800 million combined total is the largest monetary sanction ever imposed in an FCPA case. In addition to the monetary penalties, Siemens must retain an independent compliance monitor for four years to “oversee the continued implementation and maintenance of a robust compliance program,” and continue cooperating fully with DOJ in its ongoing investigations of corrupt payments by company employees and agents. The criminal and civil charges stem from admissions by Siemens that it had paid approximately $1.36 billion through various mechanisms for unknown purposes and corrupt payments to foreign officials.

Siemens also announced that it had reached an agreement with the Munich Public Prosecutor’s Office relating to charges that the former Managing Board of Siemens AG failed to fulfill its supervisory duties. In relation to this agreement, Siemens AG agreed to pay € 395 million in fines and disgorgement of profits. In October 2008, Siemens telecommunications group entered a separate agreement with the prosecutor and agreed to pay € 201 million. In dollars, the two agreements result in payments by Siemens in Germany of approximately $856 million.

The total payments to be made by Siemens to date as a result of this investigation are approximately $1.6 billion and are not likely the end of penalties to be paid by Siemens as there are outstanding investigations in several other countries involving bribes paid by Siemens subsidiaries. According to the Director of the SEC’s Division of Enforcement, Linda Chatman Thomsen, “The pattern of bribery by Siemens was unprecedented in scale and geographic reach … involv[ing] more than $1.4 million in bribes to government officials in Asia, Africa, the Middle East and the Americas.”

Basis of Siemens AG Criminal Charges

According to the information filed in the case, prior to February 1999, Siemens operated in a largely unregulated environment as to international corruption because German law did not prohibit overseas bribery, and in fact, permitted tax deductions for bribes paid to foreign officials; and Siemens was not yet listed on the New York Stock

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Exchange (NYSE). Furthermore, Siemens operated in many countries in which corruption was endemic.

From 1999 to 2001, the regulatory environment changed, but little changed in Siemens manner of doing business. In 1999 German law similar to the FCPA implementing the OECD Convention on Combating Bribery of Foreign Officials in International Business Transactions came into force. And in 2001, Siemens became listed on the NYSE subjecting it to the US FCPA. In response to these legal changes and to investigations of Siemens business practices in various countries around the world, officers of Siemens raised red flags about Siemens practices to other officers and board members and recommended several changes, but few recommendations, if any, were implemented and little was done in response to the various investigations. Those recommendations that were implemented were largely ignored. For example, in 2001, Siemens issued Business Conduct Guidelines that stated “No employee may directly or indirectly offer or grant unjustified advantages to others in connection with business dealings, neither in monetary form nor as some other advantage.” The guidelines also required that no gifts should be made to public officials or other civil servants,” and employees entering agreements with consultants and agents were to ensure that those parties offered no “unjustified advantages.” Yet, the corrupt business practices continued long after the implementation of that policy, with no discernible effect on employee behavior until 2006 when German authorities raided Siemens facilities. Following the raid, Siemens voluntary disclosed the investigation to US authorities and instituted an internal investigation. Violation of the FCPA Internal Controls Provisions

On the charge that Siemens violated the FCPA internal control provisions, the information filed by DOJ says that,

Siemens knowingly circumvented and knowingly failed to implement a system of internal accounting controls sufficient to provide reasonable assurances that i) transactions were executed in accordance with management’s general and specific authorization; ii) transactions were recorded as necessary (I) to permit preparation of financial statements in conformity with generally accepted accounting principles and any other criteria applicable to such statements, and (II) to maintain accountability for assets; iii) access to assets was permitted only in accordance with management’s general and specific authorization; and iv) the recorded accountability for assets was compared with the existing assets at reasonable intervals and appropriate action was taken with respect to any differences.

According to the information, the following is a list of specific acts and failures to

act committed by Siemens supporting the internal controls violation. 1) Knowingly failing to implement sufficient anti-bribery compliance policies and

procedures.

2) Knowingly failing to implement sufficient controls over third party bank accounts and the use of cash.

3) Knowingly failing to appropriately investigate and respond to allegations of corrupt payments.

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4) Knowingly failing to discipline employees involved in making corrupt payments.

5) Knowingly failing to establish a sufficiently empowered and competent Corporate Compliance Office.

6) Knowingly failing to report to the Audit Committee substantiated allegations of corrupt payments around the world.

7) Limiting the quantity and scope of audits of payments to purported business consultants.

8) Creating and utilizing certain mechanisms for making and concealing approximately $1,361,500,000 in payments to third parties.

9) Engaging former Siemens employees as purported business consultants to act as conduits for corrupt payments.

10) Continuing to use off-books accounts for corrupt payments even after compliance risks associated with such accounts were raised at the highest levels of management.

11) Using removable Post-It notes to affix signatures to approval forms authorizing payments to conceal the identity of the signors and obscure the audit trail.

12) Allowing third party payments to be made based on a single signature in contravention of Siemens “four-eyes principle,” which required authorization of payments by two Siemens managers.

13) Changing the name of purported business consulting agreements to “agency agreements” or similar titles to avoid detection and conceal noncompliance with the 2005 business consulting agreement guidelines.

14) Knowingly failing to exercise due diligence to prevent and detect criminal conduct.

15) Knowingly including within substantial authority personnel individuals whom Siemens knew had engaged in illegal activities and other conduct inconsistent with an effective compliance and ethics program.

16) Knowingly failing to take reasonable steps to ensure Siemens compliance and ethics program was followed, including monitoring and internal audits to detect criminal conduct.

17) Knowingly failing to evaluate regularly the effectiveness of Siemens’ compliance and ethics program.

18) Knowingly failing to have and publicize a system whereby employees and agents could report or seek guidance regarding potential or actual criminal conduct without fear of retaliation.

19) Knowingly failing to provide appropriate incentives to perform in accordance with the compliance and ethics program.

20) Knowingly entering into purported business consulting agreements with no basis, and without performing any due diligence, sometimes after Siemens had won the relevant project.

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Violation of the FCPA Books and Records Provisions

On the charge that Siemens violated the FCPA books and records provisions, the information filed by DOJ says that “[f]rom on or about March 12, 2001 to in or about at least November 2006, Siemens knowingly falsified and caused to be falsified books, records, and accounts required to, in reasonable detail, accurately and fairly reflect the transactions and dispositions of Siemens.”

According to the information, the following is a list of specific acts committed by Siemens supporting the books and records violation. 1) Using off-books accounts as a way to conceal corrupt payments.

2) Entering into purported business consulting agreements with no basis, sometimes after Siemens had won the relevant project.

3) Justifying payments to purported business consultants based on false invoices.

4) Mischaracterizing bribes in the corporate books and records as consulting fees and other seemingly legitimate expenses.

5) Accumulating profit reserves as liabilities in internal balance sheet accounts and then using them to make corrupt payments through business consultants.

6) Using removable Post-It notes to affix signatures to approval forms authorizing payments to conceal the identity of the signors and obscure the audit trail.

7) Drafting and backdating sham business consulting agreements to justify third party payments.

8) Falsely describing kickbacks paid to the Iraqi government in connection with the Oil-for-Food program in its corporate books and records as commission payments to agents.

Examples of Conduct by Siemens Supporting the Charges

Mechanisms Facilitating Bribe Payments

Siemens utilized several mechanisms to facilitate bribe payments. Such mechanisms included 1) multiple “cash desks” where employees could withdraw large sums of cash to be transported overseas, sometimes in suitcases; 2) off-books accounts in Austria, Switzerland, Liechtenstein and elsewhere funded via special checks issued to managers; 3) off-shore slush fund accounts; 4) a confidential payment system with no evidence of the payments in the accounts payable detail, thereby hiding the audit trail, providing flexibility regarding which project to charge and eliminating any record in the project accounting of the exact purposes of the payments; 5) internal commission accounts where regional companies reserved percentages of the customer prices from certain projects and allocated them to the internal commission accounts as liabilities; 6) direct payments to business consultants and other third-party intermediaries, knowing that some or all of the payments would go to foreign officials; and 7) through other mechanisms such as sham supplier agreements, sham resale transactions, and receivables manipulation.

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Failure to Investigate and Address Credible Allegations of Bribery

In September 2000, a foreign public prosecutor began investigating bribes to a

former Nigerian dictator allegedly paid from Siemens’ off-books accounts. In response, foreign authorities froze assets in at least one Siemens’ bank account and granted a Swiss prosecutor’s request for judicial assistance regarding two of Siemens’ off-book bank accounts. Despite becoming aware of the problems with the off-books accounts, Siemens continued to use such accounts even after Siemens became an issuer on the NYSE.

In July 2003, public prosecutors in Italy and Germany announced investigations

into bribes of € 6 million paid by managers at a Siemens division to managers of the Italian energy company, Enel, routed through a slush fund in Liechtenstein and an account at Emirates Bank. The US law firm engaged for advice on how to respond to the cases, reported to several of the Executive Board members that the case provided ample evidence for the SEC and DOJ to start an investigation. The US law firm recommended conducting an internal investigation, a review of the company’s FCPA compliance program, and discipline of the employees involved in any wrongdoing. Siemens then engaged a local law firm to investigate some of the facts underlying the allegations, but ultimately did nothing to investigate further or address their discoveries.

In its first report on the Enel investigation, the local law firm noted questionable

payments from Siemens to a Dubai-based business consultant and to certain off-book accounts in Liechtenstein. When Siemens’ Executive Board received a report with the name of the Dubai-based business consultant, it took no action to “investigate the broader aspects of the report.”

At the culmination of its investigation into the Enel matter, the local firm had

uncovered 126 payments totaling € 190 million to Liechtenstein accounts from 1997-1999 for which recipients could not be identified. After learning about these payments at a meeting in May 2005, the Executive Committee received another report at the same meeting that Liechtenstein authorities were investigating a former Siemens employee accused of siphoning money from Siemens through sham consulting agreements and identified five off-book accounts seized in Liechtenstein. Yet the Executive Committee took no action to investigate the payments or accounts further.

In connection with the Enel investigation, Siemens not only did not investigate

the potential violations local counsel discovered, but it did not mandate compliance with the investigation, nor discipline employees involved in established violations. Local counsel investigating the Enel matter reported that several key Siemens employees had refused to submit to interviews, but Siemens never disciplined those employees for their failure to cooperate. Additionally, the three managers implicated in the Enel cases each received a severance package standard for early retirees, despite the fact that several of the Executive members knew that at least two of the managers had admitted to paying bribes at the time of their retirement.

In another incident in October 2003, outside auditors discovered that € 4,120,000

in cash had been brought to Nigeria by Siemens personnel. A Siemens compliance lawyer conducted a one-day investigation and discovered that it was not an isolated occurrence, and warned of numerous possible violations of German law, including anti-bribery law. Only select members of the Executive Committee received the report and asked the divisional CFO to deal with the problem. Those members conducted no follow-

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up, however, to determine if the problem was resolved, and the employees involved were not disciplined.

In March 2006, a Siemens manager in Greece admitted to a Corporate

Compliance officer that he had received substantial funds to make bonus payments to managers at the Greek national telephone company, but neither the Executive Board, nor the Compliance Office undertook a comprehensive investigation aimed at discovering the full extent of corruption in Greece or within the manager’s operating division.

Finally, in April 2006, Siemens’ outside auditors reported at least 250 suspicious payments made through Intercom to companies in foreign jurisdictions on behalf of one of Siemens’ operating groups and its Italian subsidiary. Although the audit report was submitted to the Executive Board and to the Compliance Office, neither made any attempt to investigate the facts or explore whether they were related to other similar instances of wrongdoing. A Compliance Program on Paper Only

While Siemens slowly began to develop compliance policies in 2000, its compliance program prior to 2006 was largely on paper only. Following the Executive Board’s rejection of recommendations in April 2000 to create a company-wide list of agents and consultants and a committee to review those relationships due to “different business practices” in each division, in July 2000, Siemens issued a policy requiring all contracts with agents, consultants, brokers, or other third parties to include the following language, “The agent shall strictly comply with all laws and regulations regarding the performance of the activities applicable to the agent. Without limitation, the Agent agrees to comply with the requirements of the anticorruption laws applicable to the parties.” Yet, this policy was routinely ignored and corrupt payments continued even after the policy was instituted.

Siemens went further in its efforts to control the third-party agreements in June

2002 when it issued principles and recommendations, but not mandatory policies, regarding business-related internal controls and agreements with business consultants. The policy suggested that agreements should be in writing, transparent and as detailed as possible, but provided no guidance as to how to conduct due diligence. Nonetheless, agreements were often only drafted after Siemens won a contract and needed documentary support for a payment. Furthermore, many of the agreements were form agreements containing no substance particular to the engagement, and most called for success fee payments.

Only in 2005, after becoming embroiled in numerous corruption investigations in

different countries, did Siemens mandate guidelines regarding agreements with business consultants that prohibited success fees and required relevant compliance officers to sign off on consulting agreements. The policy also attached a due diligence questionnaire. Yet when Siemens tried to collect business consulting agreements from the regions after the requirements were instituted, Regional Compliance officers said that the agreements did not exist or “that the possible infringements of the laws of the Business Conduct Guidelines [were] not visible.” When presenting these results to the Executive Committee, the Officer expressed doubts about the correctness of the statements, but the Executive Committee did nothing to follow-up to attempt to find the missing documents.

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Siemens issued other policies as well that failed to do more than look good on paper. For example, in November 2003, Siemens issued a Code of Ethics for Financial matters to comply with Sarbanes-Oxley, yet corrupt payments continued for years after. Additionally, despite high level knowledge of problems with off-book accounts, the first time a policy was implemented on the use of bank accounts and external payment orders was in August 4, 2004. The policy restricted the use of bank accounts controlled by Siemens employees or third parties.

In July 2001 Siemens set up a new position of Corporate Officer for Compliance

and expanded the existing antitrust compliance system to cover anti-corruption issues. Nonetheless, through at least July 2005, the Compliance Office was significantly understaffed, lacked resources, and faced an inherent conflict in its mandate. As of July 2005, the compliance department consisted of only six lawyers compared to 300 “ombudsmen” at GE, whose company was seen by Siemens compliance counsel as being “more efficient than Siemens’ at diffusing Compliance principles throughout the entire company.” The Compliance office also faced an inherent conflict in its mandate, which included both defending against prosecutorial investigations and preventing and punishing compliance breaches. Finally, the Compliance office had very limited resources to support compliance efforts such as training business people in anti-corruption compliance. Inadequate Reporting to the Audit Committee

According to the information, from 2004 to 2006, “[r]eports to the Audit Committee by the Chief Compliance Officer were principally status reports on prosecutorial investigations and often conveyed incomplete information. In some instances, management provided inaccurate information in response to Audit Committee inquiries,” and at no time conveyed “a sense of alarm or growing crisis.”

For example, in January 26, 2005, when an Executive Committee member reported to the Audit Committee about the Enel investigation, one of the audit committee members asked if the investigation indicated gaps in the internal control system and the Executive Committee member said that “the existing rules were comprehensive and clearly written down.” The Executive Committee member never acknowledged the significant control weaknesses of which the Executive Committee had become aware.

Again in April 2005, the Executive Committee reported to the Audit Committee

regarding the off-books account in Liechtenstein and an Audit Committee member asked if there might be other cash deposits outside Siemens. Despite the knowledge of investigations relating to other off-books accounts, the Executive Committee member responded that there was no indication of other such accounts, but if there were, the company would look into them.

Finally, the Executive Committee members never informed the Audit Committee

regarding his doubts about the truthfulness of the Regional Compliance Officers’ reports on the status of business consulting agreements. The facts surrounding the guilty pleas of the Siemens subsidiaries and the SEC agreement can be found in Attachment A to this alert.

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How DOJ Determined the Disposition of the Case According to DOJ’s sentencing memorandum, DOJ followed “the Department’s Principles of Federal Prosecution of Business Organizations,” in determining the appropriate criminal penalties. The factors considered by DOJ included, but were not limited to:

1) Siemens’ cooperation and remediation efforts;

2) any collateral consequences, including whether there would be disproportionate harm to the shareholders, pension holders, employees, and other persons not proven personally culpable, as well as the risk of debarment and exclusion from government contracts;

3) impact on the public; and

4) related cases of other governmental authorities.

DOJ also acknowledged that the penalty ultimately agreed upon by DOJ and

Siemens was well below the advisory sentencing guidelines, but said that it was justified in light of Siemens’ extraordinary efforts of cooperation, Siemens substantial compliance and remediation efforts, and its extraordinary rehabilitation. Siemens Extraordinary Efforts of Cooperation In discussing Siemens extraordinary efforts of cooperation, DOJ preliminarily noted that Siemens only voluntarily disclosed its conduct after the Munich Public Prosecutor raided its offices, which resulted in a smaller downward departure than would otherwise be given in the case of a voluntary disclosure. DOJ then went on to discuss Siemens cooperation. Substantial Assistance in the Investigation of Third Parties

In its discussion on Siemens assistance in investigating third parties, DOJ stated that Siemens “developed and timely provided detailed and significant information regarding third parties, including individuals and entities that were used as conduits to conceal corrupt payments made to foreign government officials.” Some of the information involved individuals and entities, including banks, in the United States. The information came from interviews of employees, corporate records, and bank and other financial records. Where pertinent documents were in German or other foreign languages, Siemens provided translations, saving DOJ time and expense.

Siemens also provided forensic analyses of bank records and payments that would have been difficult for DOJ to identify and obtain. The analyses assisted in the tracing of multi-layered financial transactions that frequently wound throughout different countries. Additionally, Siemens undertook similar efforts to cooperate with foreign law enforcement authorities and international development banks. Their cooperation facilitated communication between DOJ, SEC, and the foreign authorities in a way that has “set a standard going forward for the type of multi-national cooperation that can

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greatly enhance worldwide law enforcement efforts involving corruption of foreign officials.”

Siemens Exceptional Cooperation in its Internal Investigation According to the sentencing memorandum filed by DOJ, as part of Siemens Exceptional Cooperation, Siemens conducted an extensive internal investigation. Siemens retained outside counsel immediately following the Munich Public Prosecutor’s raid on Siemens’ offices “to conduct an independent and comprehensive investigation to determine whether anti-corruption regulations have been violated and to conduct an independent and comprehensive assessment of the compliance and control systems at Siemens.” There was no evidence of Siemens placing any limitations as to scope or duration on the investigation. Siemens estimated that over 1.5 million hours had been logged by the independent investigators, including attorneys, forensic accountants, and support staff. The investigation took place in 34 countries, involved over 1,750 interviews, and over 800 informational meetings. The investigators collected and preserved over 100 million documents and produced over 24,000 documents, amounting to over 100,000 pages. Siemens stressed to all employees that they must fully cooperate in the investigation and put in place systems to ensure this would happen. Siemens established a Project Office staffed by 16 full-time employees to facilitate interviews and document collection. It also designed and implemented a company-wide amnesty program in consultation with DOJ. The amnesty program covered all but the most senior employees and provided that those who voluntarily disclosed to the investigators truthful and complete information about possible corruption violations would not be unilaterally terminated nor subject to claims for damages by Siemens. While the amnesty program could not protect the employees from government investigators, Siemens assured employees that it would bring their cooperation to the attention of the authorities if they were investigated. A similar program was instituted later in the investigation for senior employees. As a result, “over 100 employees provided information in connection with the programs, including numerous employees who previously provided incomplete or less than truthful information and employees who had not come forward previously.” Finally, Siemens was aggressive from the outset of the investigation in preserving and collecting all paper and electronic evidence relating to financial transactions, corporate books and records, records of any payments to government officials, and records concerning consultants, agents, or other third parties that assisted Siemens in obtaining business. First, Siemens instituted a worldwide data preservation policy instructing employees to secure and preserve such data. Then the Project Office, as one of its primary functions, ensured that employees complied with the policy. Because of the enormous numbers of records, Siemens established special offices in Germany and China to collect, review, process, and store documents in connection with the investigation. Siemens worked hard to take necessary steps and obtain approvals from foreign authorities where necessary to make the documents available to DOJ and SEC in compliance with various laws around the world. According to DOJ, “Siemens’ extensive efforts in preserving and making available documents from foreign countries have been exemplary and serve as a model to other multi-national companies seeking to cooperate with law-enforcement authorities.”

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Siemens Exceptional Remediation Efforts Siemens’ exceptional remediation efforts include 1) replacing nearly all of its top leadership, including the Chairman of the Supervisory Board

(similar to a Board of Directors in the United States), the Chief Executive Officer, the General Counsel, the Head of Internal Audit, and the Chief Compliance Officer;

2) terminating members of senior management implicated in the misconduct;

3) reorganizing the Company to be more centralized from both a business and a compliance perspective, including adding a position to the Managing Board (Officers of the company) with specific responsibility for legal and compliance matters;

4) overhauling its compliance organization, which now totals over 500 full time compliance personnel worldwide;

5) appointing a Chief Compliance Officer who reports directly to the General Counsel and the chief Executive officer;

6) reorganizing its audit department, with a newly appointed Chief Audit Officer who reports directly to the Siemens’ Audit Committee;

7) enacting new anti-corruption compliance policies, including a new anti-corruption handbook, sophisticated web-based tools for due diligence and compliance matters, and a confidential communications channel for employees to report irregular business practices, and a corporate disciplinary committee to impose appropriate disciplinary measures for substantiated misconduct;

8) organizing a working group to implement the new compliance initiatives, which consists of employees from Siemens Corporate Finance and Compliance departments, and outside professionals from an accounting firm, and which developed an “Anti-Corruption Toolkit” and a step-by-step guide on the new compliance program. Over 150 people provided support in implementing the Anti-Corruption Toolkit at 162 Siemens entities, and dedicated support teams spent six weeks on the ground at 56 of those entities deemed to be “higher risk;”

9) imposing a moratorium on entering into new business consulting agreements or making payments under existing agreements until a complete collection and review was undertaken of the agreements;

10) undertaking a review of all third party agents with whom it has agreements;

11) enhancing its review and approval procedures for business consultants via a state-of-the-art computer system, which assess the risk of the engagement and directs the request to the appropriate supervisors for review and approval;

12) increasing corporate-level control over company funds and centralizing and reducing the number of company bank accounts and outgoing payments to third parties.

Final Analysis

There are several notable observations stemming from the Siemens settlement. The first is that while the settlement was large, it could have been much larger and much harsher. Under the sentencing guidelines the criminal penalty range was between $1.35 billion to $2.7 billion. The sentence reduction is a reflection of Siemens extraordinary cooperation with investigative authorities both in the United States and abroad, and its

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commitment to rooting out the problem and making extensive changes to the company’s leadership and its compliance program. These extraordinary efforts were sufficient to result in a downward departure from the sentencing guidelines despite not making a voluntary disclosure. In reading DOJ’s sentencing memorandum, it also appears likely that the fact that Siemens AG was not required to plead guilty to the anti-bribery portions of the FCPA was related to an interest in preserving Siemens ability to contract with the US government given Siemens high level of cooperation and remedial efforts. The question that remain to be seen in future FCPA prosecutions is whether the same level of internal investigation and remediation will be required from future companies under investigation.

Another lesson to be taken from the Siemens case is that where there is

systematic noncompliance with the FCPA, compliance on paper only will lead to greater problems. Many of the charges against Siemens resulted from only mild attempts to comply with anti-corruption laws in Germany and the United States that did nothing in reality to solve the problem. Instead, substantial efforts are needed to solve the problem. While Siemens paid a hefty penalty in this case, as noted, it could have been much larger were it not for its substantial efforts to remedy its corruption problem.

This settlement has likely also changed the international landscape of corruption

investigations given the much greater cooperation among law enforcement personnel around the world. It is likely that there will be an increase in joint corruption investigations among law enforcement officials around the world in the future.

Also notable in this case is that it is the first time DOJ has criminally charged a

company with a violation of the internal controls provision of the FCPA. Finally, the length of the independent compliance monitor was extended from the usual three years to four years and the monitor for the first time in an FCPA case is not a US citizen; whether these features of the Siemens settlement will have an impact on future FCPA settlements remains to be seen.

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ATTACHMENT A TO SIEMENS FCPA ALERT FACTS RELATING TO FCPA VIOLATIONS BY FOREIGN SUBSIDIARIES

Kickbacks Paid in the Oil-for-Food Program

From 2000 to 2002, Siemens France, Siemens Turkey, Osram Middle East, and GTT, each a wholly-owned subsidiary of Siemens, were awarded 42 contracts with a combined value of more than $80 million with an Iraqi Ministry under the Oil-for-Food program. To obtain these contracts the Siemens entities paid as much as $1,736,076 in kickbacks to the Iraqi government, earning a gross profit of over $38 million. All of the subsidiaries paid the kickbacks via agents depositing the kickbacks into a Jordanian bank account held by the Ministry. The Siemens subsidiaries paid the agents via sham invoices for commissions. The subsidiaries then recorded the kickbacks as commissions in their accounting records. In several cases, subsidiary employees had signed side-agreements with the Ministry that it would provide a letter of credit or irrevocable bank guarantee for approximately 10% of the contract amount.

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Basis of Siemens Argentina Charge According to the information filed against Siemens Argentina, a wholly owned subsidiary of Siemens AG, from September 1998 to 2007, Siemens Argentina paid bribes to various Argentine officials, both directly and indirectly, in order to secure and retain business related to a national identity card project. From 1998-1999, Siemens officials paid at least $19 million to business consultants for bribes and promised an additional $30 million to the president and his Cabinet ministers. When the Argentine President ended his term in 1999, the new president threatened to terminate the contract because of fraud, which led to Siemens paying an additional $6 million to officials in the new administration. Although the Argentine government cancelled the contract in May 2001, over the next four years, Siemens paid over $23 million to settle payment demands and threats against its employees in Argentina if it did not fulfill its past commitment to pay additional bribes. Siemens officials involved included a member of the Siemens Executive Committee who in 2003 went to the United States to meet with Siemens’ principal intermediary and the CEO and CFO of Siemens Argentina to negotiate payment terms. Payments were routed in various ways to avoid detection. Approximately $9.5 million was routed through the books of an unrelated transmission project in China. Other payments were routed through US bank accounts based on fictitious invoices for nonexistent past services in connection with the identity card project and other projects in the region. Basis of Siemens Venezuela Charge According to the information filed against Siemens Venezuela, between 2001 and 2007, Siemens Venezuela and a Siemens entity in the United States paid approximately $16.7 million in bribes to Venezuelan government officials to obtain contracts connected to the construction of metro transit systems in two Venezuelan cities, Valencia and Maracaibo. Siemens revenue on the two projects was approximately $642 million. Both contracts were partially financed by the US Export-Import Bank in Washington DC. The metro project in Valencia was initially awarded to the Siemens entity in the United States, but transferred to the Siemens Venezuela. The metro project in Maracaibo was awarded to Siemens Venezuela, but part of the work was assigned to the Siemens entity in the United States. The two entities used four separate schemes in order to facilitate the corrupt payments:

1) Off-books bank accounts in Panama and in Miami: The first scheme used two off-books accounts located in Panama and Miami for making payments. These accounts were controlled by two CEOs and two CFOs of Siemens Venezuela.

2) A Venezuelan “Fixer”: The second scheme paid millions of dollars to four US based entities controlled by a longtime Siemens business consultant, known as a political “fixer” in Venezuela, and who had been an advisor to former Venezuelan presidents. The payments were justified using sham consulting agreements and by artificially inflating the terms of a contract with a US engineering firm.

3) Cyprus-based business consultant: The third scheme used a Cyprus-based business consultant as an intermediary who was paid via Sham agreements that purported to be for other Siemens projects, but were actually to transfer bribe payments to Valencia.

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4) Dubai-based business consultant: The fourth scheme involved a sham agreement with a Dubai-based business consultant to supply Metro Maracaibo with approximately $2.6 million in workshop equipment, although the equipment was actually provided by another supplier, not the business consultant. When this contract came under suspicion as a result of the ENEL investigation, the contract was assigned to another Dubai-based business consultant.

Payments were made to, among others, government officials and other politically-connected individuals including a high ranking member of the central government, two prominent Venezuelan attorneys acting on behalf of government officials, a former Venezuelan defense minister and diplomat, and a relative of a local politician, all of whom had influence over the metro and other Siemens contracts in Venezuela. Basis of Siemens Bangladesh Charge According to the information filed against Siemens Bangladesh, a Siemens subsidiary, from 2004 to 2006, Siemens Bangladesh paid approximately $5.3 million in bribes to government officials in Bangladesh to secure and retain a contract with the Bangladesh Telegraph and Telephone Board (BTTB) to install mobile telephone services. The approximate value of the contract was $40.9 million. Bribe payments were approved at the highest levels of Siemens Bangladesh, including a former CEO and a director. The bribe payments were funneled through three business consultants via sham agreements for services related to the mobile phone project. Most of the payments to the business consultants were routed through accounts in the United States, with at least one payment originating from a US account. One of the business consultants has been a US resident since 2004. While this business consultant was residing in the United States, at least $1.7 million of the bribe payments funneled through him were paid into a Hong Kong bank account. Bribe payments were made to the son of the then-Prime Minister in Bangladesh and the BTTB Director of Procurement. In addition to the bribe schemes, Siemens Bangladesh hired relatives of two other BTTB and Ministry of Post and Telecom officials. Other Allegations of Corruption Found in SEC Complaint The Complaint filed by the SEC contains additional allegations of bribes paid by Siemens and their subsidiaries. Examples of the additional allegations include 1) China, $22 million: Approximately $22 million was paid to business consultants who used some portion of those funds to bribe foreign officials in China in connection with seven projects for the construction of metro trains and signaling devices from 2002 to 2007. The total value of the projects was approximately $1 billion. Backdated agreements and phony work product were used to support some of the payments. In at least one project, payments to four subsidiaries of a business consultant were routed through a US correspondent bank and then to various Swiss accounts. 2) Israel, $20 million: Approximately $20 million was paid in bribes to a former Director of the state-owned Israel Electric Company (IEC) from 2002 to 2005 in connection with four contracts to build and service power plants in Israel. The total value of the contracts was approximately $786 million. The payments were made via sham contracts with a business consultant owned and managed by the brother-in-law of the CEO of Siemens Israel, a Siemens subsidiary. Despite contracts offering services related to the projects in Israel, the business consultant was a Hong Kong based clothing company with no expertise in the power generation industry. Some of the payments passed through US bank accounts.

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3) South China, $25 million: Approximately $25 million was paid in bribes to government officials in connection with two projects for the installation of high voltage transmission lines in South China. The total value of the projects was approximately $838 million. The payments were made by a Siemens division and approved by that division’s senior management. They were funneled through various intermediaries including a Dubai-based consulting firm controlled by a former Siemens employee and then paid to several entities associated with a Chinese business consultant who held a US passport and maintained a US residence. In another instance payments were funneled through US banks to another business consultant whose principal shareholders held US passports. In both cases, the payments were supported by sham business consultant agreements.

4) Nigeria, $12.7 million: Approximately $12.7 million in suspicious payments were made relating to Nigerian projects, with at least $4.5 million paid as bribes in connection with four telecommunications projects with the Nigerian government. The total value of the four contracts was approximately $130 million. Bribe payments in Nigeria, long-standing and systemic, were typically supported using fictitious business consultant agreements. The CEO of Siemens Nigeria would request “commission” payments from Siemens headquarters in Germany. The money would then be transferred through various means, including through large cash withdrawals from cash desks that were then hand-carried in suitcases to Nigeria. Approximately $2.8 million of the bribe payments was routed through a bank account in the United States., in the name of the wife of a former Nigerian Vice President, a dual US-Nigerian citizen living in the United States. She served as the representative of one of the business consultants with whom Siemens had sham business consultant agreements. Other corrupt payments included $172,000 in watches for Nigerian officials.

Jennifer Fischer [email protected] 202.828.3469 Kay C. Georgi [email protected] 202.857.6293

Siemens AG Pleads Guilty to FCPA Violations and …FCPA) by Siemens and its subsidiaries. Pursuant...

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