Seattle, WA and Boise, ID
6 January 2009
For over 30 years, companies operating in the global energy arena have had to comply with the U.S. Foreign Corrupt Practices Act ("FCPA"). During the past 10 years, other countries have enacted their own versions of the FCPA. International energy companies that have thus far discounted or ignored these anti-corruption laws recently received a $1.6 billion warning from the U.S. and German governments.
• | Vicarious Liability for Third Parties: Siemens’ foreign business consultants played a significant role in bribing foreign officials to secure business advantages in the energy industry. The FCPA can leave companies and individuals vicariously liable for the conduct of third parties, like consultants, distributors, and sales agents, even if the company lacks actual knowledge of their wrongdoing. Accordingly, the mere failure to recognize and investigate a foreign business consultant’s suspicious activities may expose a company to FCPA liability. Such vicarious liability makes it especially important for companies to (1) conduct due diligence on their potential business consultants; (2) include FCPA-specific representations, warranties, covenants, audit rights, and termination rights in all business consultant contracts; and (3) train employees on how to recognize the red flags associated with business consultants’ unsavory activities and report these red flags to management. Even compliance-conscious energy companies can become entangled in FCPA enforcement actions if they do not have robust compliance programs that are tailored to specific industries and geographic locales. | |
• | Tone at the Top: The DOJ and the SEC have publicly criticized Siemens’ senior management for tacitly condoning bribery of foreign officials as a legitimate business strategy. Both agencies have also acknowledged an intention to pursue FCPA criminal penalties (which could include jail time) against Siemens executives, employees, and consultants who participated in the bribery schemes. In short, Siemens lacked the necessary "tone at the top" to foster a culture of FCPA compliance within the company. Companies can take a crucial first step toward avoiding this scenario by working with their attorneys to draft a clearly articulated policy against FCPA violations. This policy should highlight prohibited behavior, accommodate employees who blow the whistle on compliance violations, and set forth disciplinary procedures to address such violations. | |
• | Internal Accounting Controls: The DOJ and the SEC based their charges against Siemens almost exclusively on the FCPA’s accounting and record-keeping provisions. Siemens’ subsidiaries attempted to cover up bribes by routing the money through slush funds or intercompany accounts and recording the illegal payments with misleading labels like "commissions." To avoid illegal accounting tactics, businesses should centralize their accounting systems to ensure corporate headquarters review all foreign financial transactions. Careful analysis of the financial records of employees and business partners abroad can enable businesses to quickly detect and eliminate conduct prohibited under the FCPA. | |
• | FCPA’s Jurisdictional Scope: Siemens is a German corporation with its principal place of business in Germany, and many of the bribes it paid abroad did not implicate U.S. territory in any way. Nevertheless, Siemens is subject to the FCPA because it has listed its securities on the New York Stock Exchange since 2001 and, therefore, qualifies as an "issuer" under the FCPA. Moreover, in many instances, Siemens routed bribes through U.S.-based banks, providing the U.S. government with an additional jurisdictional basis for pursuing Siemens under the FCPA. These facts serve as a reminder of the FCPA’s sweeping jurisdictional reach. All U.S. companies with international operations—and many non-U.S. companies—have FCPA liability exposure. | |
• | Cross-Border Enforcement: The cooperation exhibited in the Siemens case between the DOJ and the SEC, on the one hand, and the German enforcement agencies, on the other, is a noteworthy development in cross-border FCPA enforcement. Companies should recognize that the DOJ, the SEC, and their foreign counterparts share FCPA-related information about the non-U.S. operations of companies subject to the FCPA. | |
• | Cooperation with Government Investigations: The DOJ and the SEC have indicated that Siemens’ total FCPA penalty could have been considerably larger than $800 million. Indeed, application of the Federal Sentencing Guidelines would have resulted in an FCPA criminal fine of between $1.35 and $2.7 billion. Due to Siemens’ "exceptional" cooperation with the U.S. government’s investigation and demonstrated commitment to remediating its operations, however, the DOJ and the SEC exhibited leniency. Siemens’ strategy of cooperating with authorities, rather than attempting to stonewall them, provides a model for future targets of FCPA enforcement actions. For more information, contact Ashley Henry, Energy Industry Liaison, 503-294-9506, ahenry@stoel.com |
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