The $1.6 billion fine handed down to Siemens in 2008 was much more than a record breaking fine, it was a lesson for other companies to learn from. Prior to the bribery scandal, Siemens had an ethics and compliance program in place, however, there was a missing link between leadership and the enforcement of the program. The company’s cooperation during the SEC investigation lead to a reduced penalty, but also gave way to a complete re-design of the company’s internal ethics and compliance controls. There are many lessons learned from the Siemens charges, the reaction to the investigation and the actions taken by Siemens to position the company as an ethics and compliance leader in the post-scandal era.

Bribery Investigation

An amnesty plan had been worked out with Siemens, as employees willing to come forward with information pertaining to the bribery scandal and identifying key players, would be free from prosecution. In a report from the Wall Street Journal, the amnesty program was offered to all Siemens employees (110 of which came forward with information), with the exception of the 300 employees who made up the company’s top executive team. One particular employee who provided inside information was indicted employee Reinhard Siekaczek. He reported that he managed an annual budget worth $40-50 million, which was considered to be a “bribery budget”. As reported in the New York Times article “At Siemens, Bribery Was Just a Line Item,” salepersons and managers within the company used this money- “slush fund”,  to maintain relations with corrupt government officials.

The level of cooperation in the investigation significantly reduced the cost of the settlement with the SEC. In comparison to other companies hit with scandals, Siemens responded quickly to put measures in place to detect and prevent future acts of bribery within the company. In the New York Times article “At Siemens, Bribery Was Just a Line Item,” they state Siemens was provided with additional leniency, only having to plead to accounting violations, “because pleading to bribery violations would have barred Siemens from bidding on government contracts in the United States.”

In the Ethisphere article “Prepared Remarks to Compliance Week 2010- 5th Annual Conference for Corporate Financial, Legal, Risk, Audit & Compliance Officers,” Assistant Attorney General Lanny A. Breuer states:

“In the end, the benefits Siemens received through its cooperation, even in the absence of a voluntary disclosure, were plain – the $450 million fine that was paid to the Justice Department, although quite substantial, was a far cry from the advisory range of $1.35 billion to $2.7 billion called for in the Sentencing Guidelines. Put another way, Siemens received a penalty that was 67 to 84% less than what it otherwise could have faced had it not provided extraordinary cooperation and carried out such extensive remediation.”

Ethical Recovery

An investigation was launched into the bribery scandal in 2006 and was completed in 2008. The cooperation exhibited by employees at Siemens allowed the investigation to be conducted in less time than originally predicted. Rather than replacing former executives with individuals from inside the company, Siemens filled the roles of major positions with outsiders- which was probably for the best. In 2007, Peter Solmssen was brought into to clean up the ethics and compliance disaster at Siemens.  Also in 2007, Siemens named Peter Löscher as the company’s new CEO.

Siemens has worked to improve their corporate reputation by ensuring that compliance is integrated into the furthest reaching corners of their business. Siemens hired Michael Hershman, of Transparency International, to help build a compliance and anti-corruption policy and training program. Similar to the actions taken by Ed Breen at Tyco, Löscher replaced many of the company’s top executives to start fresh. In most companies the ethics and compliance department remains fairly small, however, Siemens was determined to put their words into actions and created an ethics and compliance department consisting of 600 employees- one of the largest to date.

Since the Settlement, Siemens has divided the company into three divisions in order to clarify reporting lines and increase responsibility. In the New York Times article “Siemens’s Prosperity Doesn’t Obscure Bribery Scandal,” they discuss the reasoning behind the division:

“Mr. Löscher also put the leaders of those three sectors onto the central managing board in Munich. That puts an end to a system in which a leader of a major business, like power generating, had his own managing board and reported to Munich headquarters without being based there. Siemens officials say the old way allowed corruption to spread and inhibited accountability.”

Siemens has developed a training program, with employees at various levels receiving training in regards to issues faced based on employee role. The format and frequency of training also varies depending on level within the organization. On the Siemens corporate website, they communicate that training includes topics such as foreign laws and corruption risks. Employees are now required to sign a statement after reviewing the company’s code of conduct, in order to communicate their commitment and understanding of the code.

Here is a link to a slide deck I came across from a presentation prepared by Siemens titled “Compliance Program at Siemens,” presented at Strengthening Integrity In Private Sector Organized by UNDP, MENA-OECD. The slides contain specific information related to the ethics and compliance program currently in place at Siemens.

Anti-Corruption Work Booms as Business Grows Overseas- Silicon Valley / San Jose Business Journal

This article by Eli Segall discusses the implications of American companies conducting business overseas where bribery and corrupt payments are frequently made to gain business. These situations have resulted in an increase in FCPA related violations and enforcement. The article goes on to talk about the growth of firms, such as Deloitte and KPMG, which offer anti-corruption compliance services. As government regulators crack down on companies found guilty of violating anti-corruption laws, organizations are taking a proactive approach by seeking out services to help them avoid making mistakes that could land them in court next.

Almost two weeks ago, I was reading through a local paper, and stumbled across an article discussing the arrest of Nazir Karigar, a Canadian citizen accused of bribing an Indian official. Since our company is located in Canada, the article prompted me to dig a bit deeper and look into the implications faced by those charged under the Canadian Corruption of Foreign Public Officials Act (CFPOA). According to CBC News, it’s been reported that this is only the second time a charge has been made under the CFPOA.

Canada is part of the OECD, which enacted the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions on February 15th, 1999. Canada has identified the need to work harder to crack down on the bribery of foreign public officials. As mentioned in the Wrageblog post “Questioning Canada’s Commitment to Combating the Corruption of Foreign Public Officials: Watching Bill C-31,” the country was labeled as a “laggard” by the OECD in 2009 for their lack in action when it comes to enforcing anti-corruption laws.

Canadian Department of Justice

On February 14th, 1999, the CFPOA was introduced as law in Canada. The CFPOA states that an offence is committed against the act:

“In order to obtain or retain an advantage in the course of business, directly or indirectly gives, offers or agrees to give or offer a loan, reward, advantage or benefit of any kind to a foreign public official or to any person for the benefit of a foreign public official.”

The act applies to everyone, Canadian or not, and isn’t limited to individuals, as it includes corporations. In the OECD Convention against bribery, the offence of bribing foreign public officials refers to the conduct of “international” business. According to the Department of Justice in Canada, a violation of the CFPOA occurs if the bribery of a foreign public official takes place “in the course of business.” This means that bribery doesn’t need to occur through cross border transactions in order to violate the CFPOA, it must however, have close ties to Canada. In an example provided by the Department of Justice, it would be illegal to bribe a foreign public official in Canada to obtain a business contract to build a new wing on an embassy in Canada.

The consequences for violating the CFPOA consist of a five-year maximum term of imprisonment if found guilty of bribing a foreign public official- this ensures that it is an extraditable offence. Since corporations cannot be imprisoned, they can be fined. If a corporation is found guilty of violating the CFPOA, the dollar value of the fine has no maximum and is set at the discretion of a judge. As outlined on the website for the Department of Justice in Canada:

“The Act allows for “facilitation payments,” which are made to expedite or secure the performance by a foreign public official of any “act of a routine nature” that is part of the foreign public official’s duties or functions.”

In response to the OECD’s “laggard comment” mentioned above, the Department of Justice in Canada created a new division in the RCMP (Royal Canadian Mounted Police), with a commissioned officer responsible for overseeing the anti-corruption programs. The unit investigates tips related to corrupt acts to increase enforcement of the CFPOA.

Export Development Canada (EDC)

As part of EDC’s social responsibility commitments, they require companies to sign a statement of declaration that denies any presence of corruption in EDC supported business transactions. If the declaration is signed without knowledge of corruption related to the transaction, liability will be voided, unless “willful blindness” is proven. We have previously addressed this issue in a post written about control person liability.

Technip to Pay $338 Million to Settle Bribery Case- Bloomberg Businessweek

According to the article, Technip SA, the second largest provider of oilfield services in Europe, has agreed to pay a settlement to the tune of $338 million, in order to avoid U.S. prosecution for violating the FCPA. It had been claimed that the company paid bribes of more than $182 million to gain $6 billion in contracts from Nigerian officials. Just another example of the steep fines companies are facing for violating the FCPA and committing fraudulent acts.

Reputations Don’t Return When Prosecutors Drop Charges- Bloomberg

Following the stories of those who have been charged, only to have their cases dropped, this article takes a deeper look at the damage done to the reputations of business professionals that have been falsely accused of illegal acts, such as fraud and bribery. The article states that “the collapse of so many cases is surprising, legal experts say, because U.S. prosecutors are expected to have thoroughly investigated the facts and law before asking a grand jury to bring charges.” Even if the charges are dropped and innocence is proven, regaining one’s reputation may not be possible.

It seems to be that each week is busier than the last. Here are some of the things we blogged about this week- as well as some other pieces that caught our attention regarding internal investigation, human resources and ethics:

Monday:

• Blog Post- Surveys Continue to Report Increases in Workplace Fraud

“The state of the economy and selecting countries to expand into are only two of the many factors raising questions related to the risks of workplace fraud. There have been a number of studies completed to determine changes in the levels of workplace fraud and the factors impacting them. In recent years, surveys and reports consistently conclude workplace fraud is increasing. The risks associated with fraud can be mitigated as ethics and compliance enforcement continues to grow. However, it’s important to remember the focus on ethics and compliance varies globally.”

Tuesday:

• Blog Post- Recognized For Ethics- CSR Press Release

“Good ethics pay off. Recently, Visa, Capital One, Best Buy, Carnial, DirecTv and Tawuniya were presented with OECG GRC Achievement Awards. These companies have each developed a project to better integrate governance, risk management and compliance into their respective companies. Projects such as employee blogs, defining risk structures and ditching spreadsheets for software are some of the solutions these companies have used to conduct consistent investigations and improve data analysis.”

Wednesday

• Blog Post- Thomson Reuters Media: Improving Business With Information

“Thomson Reuters is responsible for delivering current, accurate information to global decisions makers. Thomson Reuters is consistently recognized for commitments to ethics and social responsibility. Through securing spots on Ethisphere’s World’s Most Ethical Companies, Fortune’s World’s Most Admired Companies and Corporate Knight’s Best Corporate Citizens listings, Thomson Reuters demonstrates a commitment to developing innovative ways to improve business process through the use of information. Thomson Reuters brings information into emerging markets, helping breakdown social barriers.”

Thursday:

• Blog Post- Fighting Bribery in the UK

“Corruption and the bribery of foreign public officials has gained significant public attention- especially since the verdict in the Siemens case.  The company was fined $1.6 billion, which is the largest fine administered to-date for violating the FCPA. The severity of the fines handed out are intended to send a message to all corporations, informing them of the consequences they will face if found to be engaging in corrupt practices. According to the Ministry of Justice in the United Kingdom, bribery ” is a serious crime that destroys the integrity, accountability and honesty that underpins ethical standards both in public life and in the business community.” “

Corruption and the bribery of foreign public officials has gained significant public attention- especially since the verdict in the Siemens case.  The company was fined $1.6 billion, which is the largest fine administered to-date for violating the FCPA. The severity of the fines handed out are intended to send a message to all corporations, informing them of the consequences they will face if found to be engaging in corrupt practices. According to the Ministry of Justice in the United Kingdom, bribery ” is a serious crime that destroys the integrity, accountability and honesty that underpins ethical standards both in public life and in the business community.”

Passed in April, the UK Bribery Act is one of the latest developments in the fight against corporate corruption. Previously criticized for relaxed views on corruption, the UK has now introduced legislation that’s relevant to the current challenges imposed on organizations engaging in international business transactions.

UK Bribery Act

According to the Guardian.co.uk article “New Bribery Law Puts Overseas Payments Under Scrutiny,” the anti-corruption law overhaul in the UK is described as “one of the most significant reforms to corporate criminal law in a century.” Many of the requirements outlined in the UK Bribery Act are similar to those in the US Foreign Corrupt Practices Act.  However, the UK Bribery Act goes further than the FCPA to include prosecution for acts of bribery in both the public and private sectors. The study “Will You Act Now or Pay Later,” released by PricewaterhouseCoopers, provides insight into the Bribery Act, stating:

“Although the UK has anti-bribery legislation in place, the Act represents a notable enhancement, particularly in the area of corporate liability. Many companies appear unaware of the full implications of the Act and unprepared to deal with the practical consequences. In our experience, establishing adequate processes and procedures for compliance with anti-bribery legislation that are effective in practice takes considerable time, commitment (from top management downwards) and resources. Companies need to be taking action now.”

The Ministry of Justice in the UK outlines some of the elements included in the Act:

• An offence is committed for offering, promising or giving bribes, as well as requesting, agreeing to receive or accepting bribes.
• An offence is committed when a company engaging in business in the UK fails to take action to prevent bribery- even if the company originates in a different country.
• An offence is committed when a person bribes a foreign public official in order to influence decisions regarding obtaining business or related contracts.
• The Secretary of State must publish guidance relating to procedures that relevant commercial organizations can enact to prevent persons associated with them from bribing, revisions can be made by the Secretary of State.
• An offence is committed by a commercial organization should it fail to prevent a bribe being paid for or on its behalf.  It will be a defense if the organization has adequate procedures in place to prevent bribery.

Consult the Bribery Act in it’s entirety to view a complete list of offences and preventative measures companies must establish if they plan on doing business in the UK- or with anyone connected to the UK for that matter.

Grey Area

The UK Bribery Act contains elements requiring further clarification. The interpretation of these areas by regulators, enforcement agencies and courts, may have a significant impact on the outcome of the penalty administered for violating the Act. It’s important to pay attention to and refrain from involvement in the acts listed below in order to further reduce unexpected risks related to Bribery Act violations.

As outlined in the study “Will You Act Now or Pay Later,” released by PricewaterhouseCoopers, some examples of these “grey areas” include:

“• “Facilitation” or “grease” payments- These continue to remain illegal under the Act as they are under current UK law. Historically, prosecution discretion has been used to allow some flexibility in this area; this is set to continue but potentially with additional guidance as to how this discretion will be exercised.

• “Adequate procedures”- What constitutes as “adequate procedures” in the context of a corporate defense of failing to prevent bribery will be the subject of non-statutory guidance to be published shortly. This guidance will adopt a principles and examples approach, and will therefore leave organizations to interpret the appropriate response in their circumstances.

• The Act allows for unlimited fines but does not clarify how they will be calculated. The Government has stated that it may ask the Sentencing Council to provide additional guidance.”

To mitigate risk, companies must look beyond the reputation of the company or group they hope to do business with when making decisions. Companies need to consider the reputation of the country in which they plan to expand into, as each country has different views on corporate corruption. Bribery imposes significant costs on society, hindering global economic advancement.

Chemring Halts Deal on Corruption Probe- Telegraph.co.uk

Chemring has decided to renegotiate plans to takeover Allied Defense Group due to a bribery related investigation the company is undergoing in the United States. This article demonstrates another risk companies face when employees engage in illegal, corrupt acts. As demonstrated by the halt in acquisition by Chemring, businesses don’t want to partners with others who have tarnished reputations.

The state of the economy and selecting countries to expand into are only two of the many factors raising questions related to the risks of workplace fraud. There have been a number of studies completed to determine changes in the levels of workplace fraud and the factors impacting them. In recent years, surveys and reports consistently conclude workplace fraud is increasing. The risks associated with fraud can be mitigated as ethics and compliance enforcement continues to grow. However, it’s important to remember the focus on ethics and compliance varies globally.

As companies look to reduce costs by expanding overseas, it’s important to consider the risks organizations will face by making the move.

Fraudulent Findings

The 2009/2010 Annual Global Fraud Report published by Kroll, along with the Economist Intelligence Unit also concluded an increase in workplace fraud levels. Based on the responses gathered from the study:

“The economic crisis in isolation has raised some fraud risks. 30% of survey respondents say that the global financial crisis has increased the levels of fraud at their organizations, compared with just 5% who saw a decline. Lower profits heighten some risks. 1 in 6 companies are seeing greater vulnerability from reducing internal controls to save money, 1 in 7 from pay restraint, and one in eight from reduced revenues overall.”

Ernst and Young released their 11th Global Fraud Survey on May 19th. Many of the conclusions drawn from this report are similar to the findings in other studies published since the start of 2010.

Ernst and Young’s Global Fraud Survey

Ernst and Young sought out Chief Financial Officers (CFO), as well as heads of legal, compliance and internal auditing departments to report on managing fraud, bribery and corruption risks. The respondents come from 36 countries, providing excellent insight into the risks and occurrences of fraud around the globe. In the press release for the study, Ernst and Young report:

“Despite the significant time and money already spent by many companies, our respondents’ confidence in the effectiveness and level of adherence to internal compliance programs varied widely, both by geography and role.”

Some of the conclusions generated from the survey are:

In the past year, fraudulent acts have increased globally, while they have decreased in the United States.

Senior level executives are increasingly concerned about personal liability as opposed to the financial hit taken by the company as a result of fraud.

Corporate boards in Latin America (95%), the Middle East and Africa (87%), Central and Eastern Europe (84%) and Australia (81%) are concerned about personal liability for company fraud, bribery or corruption.

72% of directors in North America are concerned about these risks.

More than half of the North American compliance officers see data security as the most significant compliance concern in the next 18 months, followed by concerns over unethical business conduct and health and safety.

1 out of 7 respondents has never formally conducted a fraud risk assessment.

Moving Forward

Understanding cultural differences and evaluating the level of risk in each country are considerations that must be made if a company wishes to reduce the risk of fraud. Overcoming the risks associated with expanding business operations overseas will continue to take time. In North America, there have been significant resources devoted to fighting workplace fraud. Companies are responsible for complying with a number of laws and regulations involving workplace fraud that have yet to be adopted on a global scale.

There have been cases of fraud in the US where control person liability has been used, holding supervisors or managers responsible for unethical employee actions. This remains inline with the growing personal concerns faced by CFOs, compliance professionals and auditors, as it’s possible for them to be held accountable for fraudulent acts they were not aware of. Control person liability requires stricter controls and oversight within the workplace in order to ensure company policies and laws are abided by.

Anti-bribery Act Could Weigh on Corp Ratings: Fitch- Reuters

It will be interesting to see the impact of FCPA violations on corporate image. As enforcement and fines increase, the media surrounding FCPA lawsuits doesn’t look like it’s slowing down anytime soon. The article reports in April alone, Avon, Hewlett-Packard and BHP Billiton- which happen to be Fitch rated companies, were all in the news because of FCPA-related actions.