S.E.C. v. SIEMENS (2008)

In 2008, Germany-based Siemens was a global giant in electronics and engineering. It was one of the world’s most important companies, garnering the distinction as the largest electronics company in the world as well as Europe’s largest engineering conglomerate. However, on December 15th of that same year, Siemens became known worldwide for a more dubious distinction after settling an extensive Foreign Corrupt Practices Act (FCPA) investigation. The company plead guilty to corruption charges and agreed to pay the sum of $1.6 billion in disgorgement and fines. It was, and still remains to this day, the largest enforcement action by the United States Department of Justice (DOJ) and the Securities and Exchange Commission (SEC).
The DOJ and SEC alleged that, between the years of 2001 and 2007, Siemens made nearly 5500 illegal payments to government officials and various third parties with the goal of securing business around the world. These payments amounted to nearly $1.8 billion in total. More specifically, Siemens violated section 30A of the Security and Exchange Act of 1934 (Exchange Act) which prohibits a company from making illicit payments to foreign government officials in order to obtain business. The company violated Section 13(b)(2)(B) of the Exchange Act by failing to establish a “sufficiently empowered and competent” compliance department. Lastly, they violated Section 13(b)(2)(A) of the Exchange Act by utilizing improper bookkeeping and recording methods.
One may ask how could this have happened? The answer lies in a corporate culture which, for years, regarded the practice of bribing foreign government officials as regular course of business. Fraud, deceit, and concealment were not only tolerated, they were rewarded at the highest levels of the company. Reliable reports of fraud and corruption were ignored and left uninvestigated. The company failed to discipline senior employees who were known to have paid bribes. As a result, several of those employees were allowed to retire early with generous severance packages. The company provided no ethics training for its employees. Inside auditors and compliance personnel were often denied resources and hindered by cumbersome internal restrictions.
Siemens utilized various creative methods to circumvent the law and conceal the true nature of its illegal payments. The company entered into sham business consulting agreements. Employees kept false books and records throughout the company. Large amounts of cash, often carried in suitcases, were transported across international borders. Secret off-books accounts and slush funds were created. Payments were justified using false invoices. One particularly interesting method of authorizing illegal payments was to place them on Post-It notes so that they could later be destroyed.
In addition to the unprecedented fines levied, another notable aspect is that this case is the first ever instance where the DOJ has criminally charged a company for failing to establish adequate internal controls. Siemens failed to do so despite ample proof that fraud and corruption were widespread throughout the company and its subsidiaries. The DOJ alleged that the company’s top officials provided weak messaging regarding adherence to anti-corruption policies. It was not until 2007 that the company instituted a mandatory FCPA training program and the position of chief compliance officer became full-time. Additionally, the compliance department lacked independence and was inadequately staffed.
As stated previously, this case represents the largest criminal fine in the history of the FCPA. However, based upon U.S. Sentencing Guidelines, the fine could have been significantly greater if not for one significant mitigating factor. Primarily, Siemens avoided receiving the maximum possible fine of $2.7 billion in large part due to its extensive cooperation with the U.S. government. The DOJ cited the company’s “substantial assistance, cooperation, and remediation efforts” as its prime justification for recommending that the court not impose the maximum penalty. Some of the company’s cooperative efforts included terminating senior managers who were implicated in misconduct, providing detailed information about third parties who aided in concealing illegal payments, providing forensic analyses of bank records, and conducting a broad and thorough internal investigation, spanning dozens of countries and involving over 100 million documents. Finally, Siemens agreed to undergo a complete overhaul of its compliance organization.
The massive investigation, prosecution, and punishment of Siemens led to many sweeping changes throughout the company. As of 2015, Siemens now employs approximately 600 employees in one consolidated compliance division under the guidance of a Chief Compliance Officer. Compliance training is now mandatory and has been received by over 300,000 employees worldwide. Compliance metrics have been built into the compensation of approximately 5500 top managers worldwide.
In summary, since 2008 few companies around the world have undergone a such a major transformation in their attitudes and practices regarding compliance as Siemens.