March 31, 2015
March 30, 2015
March 29, 2015
Siemens Whistleblower Complaint Underscores Need for "Top-Down" Anti-Corruption Compliance
In 2008, Siemens AG paid $800 million to settle charges that it had violated the Foreign Corrupt Practices Act, which generally prohibits bribery of foreign officials for the purpose of obtaining or retaining business. That settlement amount remains the largest in the history of FCPA enforcement. In addition, the company agreed to substantially improve its procedures for identifying and preventing improper payments that could be used as bribes. According to a recently filed whistleblower complaint, however, since the 2008 settlement, Siemens employees have regularly circumvented the company’s internal controls, allowing “intermediaries” to pay kickbacks to government officials.
Meng-Lin Liu, a former Siemens compliance officer, filed a complaint in the United States District Court for the Southern District of New York on January 15, 2013, claiming that “senior Siemens executives, compliance officers and legal officers knowingly allowed Siemens due diligence and anti-corruption internal controls to be evaded and consciously disregarded, and deliberately ignored numerous ‘red flags’ that should reasonably have alerted them to an extremely high probability that bribes were being paid to Chinese officials.” Siemens allegedly sold medical equipment to middlemen designated by Chinese procurement officers, who then resold the equipment to state-owned entities in China and North Korea at marked-up prices. According to the complaint, the middlemen’s resale prices ranged from 20 to 130% above Siemens’ prices. Liu alleges that “this had all of the hallmarks of a classic bribery or ‘kickback’ scheme [as] there was no legitimate explanation for the huge price differentials that existed between the prices at which Siemens sold the equipment and the prices paid by the end-user[s].” Implicit in Liu’s allegation is that the price differentials were used to fund corrupt payments.
These transactions should have triggered heightened scrutiny under Siemens’ anti-corruption policy, the complaint says, because they involved third parties in China and North Korea – known hotbeds of public corruption. To the contrary, Liu claims, the CEO of Siemens’ health care division directed subordinates to ignore the middlemen, thereby shielding the sales from mandatory risk assessments and due diligence. Had the sales gone through the proper review process, Liu believes, any improper payments would have been avoided.
Liu’s allegations, if they prove to be true, provide a vivid illustration of the executive-level misconduct that the DOJ and SEC warned against in their jointly published Resource Guide to the FCPA. “A well-designed compliance program that is not enforced in good faith, such as when corporate management explicitly or implicitly encourages employees to engage in misconduct to achieve business objectives,” the Guide opines, “will be ineffective.” It continues, “DOJ and SEC have often encountered companies with compliance programs that are strong on paper but that nevertheless have significant FCPA violations because management has failed to effectively implement the program even in the face of obvious signs of corruption.”
Could Siemens be one of these companies? We will have to wait to see whether the allegations hold water. In the meantime, however, Liu’s allegations provide a poignant reminder that, in the words of the Resource Guide, “compliance with the FCPA and ethical rules must start at the top” because “managers and employees take their cues from . . . corporate leaders.” A robust and sophisticated anti-corruption compliance program isn’t worth much if no one bothers to use it.