Swiss Shipper, Like Siemens, Cooperates in U.S. Bribe Probe

Panalpina World Transport Holding Ltd., like Siemens AG and others before it, faced potentially crippling penalties when U.S. prosecutors began investigating the bribes it paid to government officials around the world.

The Swiss freight forwarder could battle the probe and risk an indictment, or clean up its practices and help prosecutors unearth its wrongdoing. Like Siemens, Panalpina chose cooperation. On Nov. 4, the Justice Department rewarded Panalpina, letting it avoid prosecution by paying $81.5 million, admitting “a culture of corruption,” and strengthening compliance programs.

Surrender by companies such as Panalpina and Siemens is now the norm under the 33-year-old Foreign Corrupt Practices Act. No company has risked an FCPA court fight in two decades out of fear that a conviction could lead to a loss of public contracts and higher penalties, lawyers said. After resolving two or three cases a year, the U.S. settled 47 corporate cases since 2005 without trial, reaping $3.3 billion for the U.S. treasury.

“Publicly traded companies cooperate in FCPA matters because they can’t afford the potential consequences of fighting with the government,” said Kirk Ogrosky, a partner at Arnold & Porter LLP who supervised Justice Department fraud cases. “After 33 years, there is shockingly little court precedent to rely on.”

Settlements this year involved BAE Systems Plc, Europe’s largest defense company, which agreed to pay $400 million; Daimler AG, maker of Mercedes-Benz cars, which will pay $185 million; and Royal Dutch Shell Plc, Europe’s largest oil company, which agreed Nov. 4 to pay $48.1 million.

Siemens Fines

In December 2008, Siemens, Europe’s largest engineering company, agreed to pay $800 million to the U.S. and $814 million to German authorities. The company said it spent another $1 billion on lawyers and accountants and on strengthening internal controls.

In three other settlements, joint venture partners who built liquefied natural gas facilities in Nigeria admitted using agents to funnel $182 million in bribes to government officials for $6 billion in contracts. The partners agreed to pay a total of $1.28 billion, with Houston-based Kellogg Brown & Root LLC settling last year, and Paris-based Technip SA and Amsterdam-based Snamprogetti Netherlands BV reaching accords this year.

“Prosecutors know from the outset that they hold the upper hand because companies have to find terms to which they can agree,” said George Terwilliger III, a lawyer at White & Case LLP.

‘Uncapped Liability’

Cooperating and settling to avoid the possibility of an indictment allows companies to erase uncertainty and remove the “uncapped liability” of a trial, said Joseph Warin, an FCPA lawyer at Gibson, Dunn & Crutcher LLP.

Lawyers cite Arthur Andersen LLP, once the world’s fifth-largest accounting firm, which was convicted at trial in 2002 of obstructing an SEC probe into Enron Corp. Andersen collapsed before the U.S. Supreme Court overturned its conviction in 2005.

The FCPA bars corrupt payments to foreign officials for obtaining or keeping business. The law requires companies with securities listed in the U.S. to keep accurate books and records of transactions and maintain internal accounting controls.

Critics Provoked

The intensity of U.S. enforcement has provoked critics.

The U.S. Chamber of Commerce’s Institute for Legal Reform said the Justice Department and the U.S. Securities and Exchange Commission, which has civil authority in FCPA cases, “almost exclusively” define gray areas of the law without judicial oversight.

Congress should clarify ambiguities in the law that “have had a chilling effect” on U.S. businesses, some of which have “ceased foreign operations rather than face the uncertainties of FCPA enforcement,” the institute said in a paper last month.

Michael Koehler, an assistant professor of business law at Butler University in Indiana, assails settlements reached without judges having input on questions such as whether employees of state-owned companies are foreign officials. Many instances of “clear-cut bribery,” as in Siemens, are resolved through lesser books-and-records or internal controls charges, he said.

“The most egregious cases are not being resolved under the FCPA’s anti-bribery provisions,” said Koehler, who writes the FCPA Professor blog. “These untested and dubious legal theories have increased the compliance burden on companies.”

The Sarbanes-Oxley Act, passed in 2002, added to the burden with tougher standards for internal controls. Companies also faced more exposure to FCPA charges as businesses expanded internationally.

38 Countries

The U.S. and 37 other countries are fighting transnational bribery through the Paris-based Organization for Economic Cooperation and Development.

FCPA enforcement is a rising priority at the Justice Department, where about 30 to 40 lawyers might work at any time on FCPA cases, including 15 who are full-time. The SEC has assigned more than 30 lawyers to FCPA cases, and the Federal Bureau of Investigation has an entire squad of agents on foreign anti-bribery cases.

More than 50 people were charged with FCPA-related crimes in the past two years. A married couple who worked as Hollywood film executives were convicted at trial last year of violating the FCPA, and another man was convicted in a separate case of conspiring to violate the anti-bribery law.

Jefferson Convicted

Former U.S. Congressman William Jefferson was convicted of soliciting bribes, racketeering and conspiring to violate the FCPA. In January, the U.S. charged 22 people after an FBI undercover operation that focused on the military and law-enforcement products industry.

A typical corporate probe involves a couple of prosecutors and FBI agents working with lawyers and accountants hired by a company, said Steven Tyrrell, a former Justice Department fraud section chief who is now at Weil, Gotshal & Manges LLP.

“Law firms and companies set out to see how big their problem is so they can then figure out the appropriate way to proceed with the government,” Tyrrell said.

Companies often voluntarily disclose internal probes to the Justice Department and turn over documents, e-mails and employee interviews to prosecutors. They would rather do their own investigations than have a grand jury bring in subpoenaed witnesses, said Peter Clark, who prosecuted the first FCPA cases during his 25 years at the Justice Department.

‘A Full View’

“The government isn’t going to tell you what occurs in a grand jury,” said Clark, now at Cadwalader, Wickersham & Taft LLP. “In an internal investigation, the company’s lawyers are interviewing employees and agents, and the company is able to have a full view of what’s being learned.”

After German authorities raided Siemens in 2006, the company helped prosecutors unravel years of bribery around the world while overhauling its corporate culture. Two years later, Siemens admitted funneling $806 million in bribes to foreign officials from 2001 to 2007 through direct payments, slush funds, shell companies and cash-stuffed suitcases.

Two subsidiaries pleaded guilty in the U.S. to anti-bribery charges, with Siemens and a third unit admitting internal controls violations. In paying $1.6 billion to U.S. and German authorities, Siemens avoided an FCPA bribery conviction that would have barred it from public contracts in the European Union.

Siemens, with 475,000 workers in 190 countries, oversaw an internal probe with interviews of 1,750 workers and reviews of 82 million electronic documents and 38 million financial transactions.

Compliance Program

Under its plea agreement, Siemens hired a monitor for four years to oversee its compliance program. Monitors are often imposed in so-called deferred prosecution agreements, where prosecutors file criminal charges they agree to withdraw after a period if the company meets required improvements in governance and compliance.

The Justice Department reached deferred prosecution agreements, or DPAs, in at least 23 cases since 2005 and non-prosecution agreements with financial penalties, or NPAs, in 13 cases. The department doesn’t say how many cases it declines to prosecute.

An internal investigation can help move prosecutors “from believing a conviction is necessary to believing that a DPA or an NPA or even a declination may be appropriate,” said Denis McInerney, chief of the department’s fraud section.

“And we absolutely do decline on cases,” he said.

Nine-Step Guide

The Justice Department uses a nine-step guide on business prosecutions in deciding how to resolve cases. The criteria include the seriousness of the crimes, a company’s history of wrongdoing, its willingness to cooperate, the extent of compliance programs, and the harm that charges would bring to employees and others. Prosecutors use federal sentencing guidelines to set fines.

In the Panalpina case, the company admitted bribing government officials in Angola, Azerbaijan, Brazil, Kazakhstan, Nigeria, Russia and Turkmenistan. The bribes from 2002 to 2007 let its clients, most in the oil and oil-services business, avoid the customs process, pass off phony documents or smuggle contraband including medicines and explosives, Panalpina said in a statement of facts.

After an “initial reluctance to cooperate” in 2007, the internal probe included “a comprehensive review of operations in nine countries” and a “detailed review of 102 additional issues in another 36 countries,” according to a memo filed in federal court in Houston by prosecutors and Panalpina.

The OECD’s Working Group on Bribery said in a report last month that while the U.S. still leads the world in battling corruption, the Justice Department should make clearer the thinking behind deferred-prosecution or non-prosecution agreements.

‘Enhance Accountability’

“Publishing more detailed reasons for entering in DPAs and NPAs would give more insight into the DOJ’s choice of settlement agreements and thus enhance accountability and transparency of the process,” OECD said the report.

Lawyers who defend companies in FCPA cases also say the department doesn’t offer clear benefits for companies that voluntarily disclose wrongdoing.

“It has been hard to discern in the last few years what benefit companies have received from the settled cases,” said Lucinda Low of Steptoe & Johnson LLP.

Some general counsels and boards of directors have questioned whether it makes sense to disclose wrongdoing that the Justice Department might not otherwise uncover, said Robert Tarun of Baker & McKenzie LLP.

Asking Questions

“A number of really quality companies will ask off-the- record if it’s really worth it for our company to completely do an investigation, fully cooperate, and still get a fine within the U.S. Sentencing Guidelines range when the U.S. might never be able to prove any of the allegations,” Tarun said.

“The DOJ and SEC could spend 10 years on some of these cases where companies have cooperated to track down evidence in foreign jurisdictions,” Tarun said. “The resources that have been expended through deputized lawyers is extraordinary.”

McInerney, the DOJ fraud section chief, said that over the past decade, the department “has given a lot of guidance on the criteria it uses for evaluating a company.”

He said any company is free to defend itself in court.

“The courts are available to companies if they dispute the department’s interpretation of the law,” McInerney said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE