COMMENTARY | COLUMNISTS | GORDON KAPLAN

The long arm of U.S. anti-bribery law in international business

In the largest case ever brought under the U.S. Foreign Corrupt Practices Act, (FCPA), Siemens AG -- the German industrial giant -- agreed in December 2008 to pay the Securities and Exchange Commission and the Department of Justice a total of $800 million. The sum was meant to settle civil and criminal charges that, for more than six years, Siemens had violated the FCPA by systematically paying bribes and using slush funds to win contracts for public works projects around the world. Siemens also agreed to pay German authorities another 395 million euros (about $569 million) to settle similar charges under German law. The point of the Siemens case is not schadenfreude, but the lessons it holds for U.S. companies in their own international business operations.


FCPA's long arm

In lawyer language the "jurisdictional reach" of the FCPA is global. It applies to all U.S. companies, both public and private, their subsidiaries, and all U.S. citizens and residents. It also reaches all foreign companies whose shares are traded on U.S. markets, the jurisdictional provision that snared Siemens, whose shares have been listed on the New Stock Exchange since 2001.

Put simply, the FCPA prohibits all companies and individuals subject to its reach from bribing foreign government officials by offering or paying anything of value in a corrupt effort to obtain or retain business. While this central anti-bribery rule of the FCPA is easy enough to state, the devil is in the definitions.

Under the FCPA a "foreign government official," for example, is any government employee who has discretionary authority over government purchasing decisions, including employees of state-owned enterprises. But the term is interpreted broadly and also covers foreign political parties and their officials, members of princely ruling families, members of legislative bodies, candidates for foreign political office and officials of international organizations.

The FCPA's prohibition on offering or paying "anything of value" to a foreign government official means just that, but is subject to an exception for what the statute calls "facilitating payments" for "routine government actions," otherwise known in plain language as "grease." The exemption for "grease" payments is itself problematical. While the FCPA lists examples such as payments to obtain permits, licenses or other official documents, payments for processing official papers or obtaining phone services or power and water supplies, or payments for loading and unloading cargo or protecting perishable goods, the statutory list is illustrative only. A company that seeks to rely on the "grease" exemption does so at its peril for anything but truly de minimis payments or token gifts to minor government functionaries to encourage them to do in their official capacity what they should be doing anyway.

To complete the picture, the anti-bribery rules of the FCPA are backed up by extensive accounting and internal controls provisions, applicable to all Securities and Exchange Commission reporting companies, the purpose of which is to prevent the use of slush funds, off-the-books transactions, and improper expense classifications in connection with illicit payments.


Lessons from the Siemens case

The massive recovery in the Siemens case illustrates in spades the compliance risk to U.S. companies of ignoring or treating lightly the anti-bribery, accounting and internal controls provisions of the FCPA. The charges against Siemens for its FCPA violations lay out a devastating record and virtual compendium of everything that a company must not do if it wishes to be in compliance with the statute. The charges include:

  • Paying bribes and kickbacks to foreign officials to obtain government contracts in Argentina, Bangladesh, China, Iraq, Israel, Italy, Mexico, Nigeria, Russia, Venezuela and Vietnam
  • Using slush funds, off-books accounts maintained at unconsolidated entities, and "cash" desks to funnel bribe money to government officials
  • Using business consultants and other middlemen who performed no legitimate services, sham supplier agreements, and phony intercompany accounts to facilitate and disguise illicit payments
  • Falsifying books and records by establishing and funding secret, off-books accounts, generating false invoices and other documents to justify payments, and recording bribes as legitimate management or consulting fees, commissions or expenses for supply contracts
  • At the highest corporate levels, failure to respond to a variety of "red flags" indicating that official bribery was widespread at Siemens, and routine circumvention by Siemens employees of the internal controls the company had in place but did not enforce effectively, indicating a corporate culture in which bribery was tolerated What emerges from this record is that once Siemens embarked on a policy of paying bribes to foreign government officials, the company then had to cover up the bribes by engaging systematically in false accounting and record-keeping. Siemens will now pay dearly -- in money as well as in damage to its reputation -- for both the bribes and the cover-up.

    Any U.S. company that doesn't have and enforce a rigorous FCPA compliance program for its own international business operations had better think again in light of the Siemens case.


    Kaplan is an international corporate and business law attorney in San Diego. Send comments to editor@sddt.com. All comments are forwarded to the author and may be used as Letters to the Editor.

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