Last month the UK Privy Council delivered an important decision on the extent to which a bank is obliged to make inquiries into the underlying commercial purpose of offshore financial arrangements.
Entries in Liechtenstein (9)
A unit of Alcoa agreed to plead guilty Thursday in the Western District of Pennsylvania to one count of violating the anti-bribery provisions of the FCPA with a 2004 corrupt transaction. Alcoa World Alumina LLC, a majority-owned subsidiary, will pay a criminal fine of $209 million and forfeit $14 million to settle the DOJ’s charges. Alcoa Inc., the corporate parent, also agreed to resolve civil charges brought by the Securities and Exchange Commission by disgorging $161 million.
The U.S. District Court for the Southern District of New York has authorized the IRS to issue summonses requiring five banks to produce records relating to the U.S. accounts they hold at certain institutions located abroad. The goal is to identify taxpayers who are trying to hide money overseas as a way to avoid federal taxes, the DOJ said Tuesday.
The Wall Street Journal reported yesterday (here) that the Justice Department is "investigating payments that Bahraini prosecutors allege were made by units of Japanese commodities-trading giant Sojitz Group to employees of an aluminum producer in Bahrain." The story says $8.7 million in alleged bribes to employees at Aluminum Bahrain BSC, or Alba, were paid into secret accounts they controlled in Liechtenstein banks. Some of the payments reportedly passed through U.S. banks.
Sojitz acts as a broker for Alba's products, including aluminum billet and alloys. It allegedly enjoyed lower prices in exchange for the payments. The DOJ investigation of Sojitz, which does some business in the U.S., is reportedly based on information provided by Bahraini authorities. The Journal said they "have shared their findings with U.S. Justice Department prosecutors, according to people briefed on the investigation." The payments were allegedly made by units of Nissho Iwai, which merged with Nichimen in 2004 to form Sojitz.
In March 2008, Alba -- majority owned by the government of Bahrain -- sued Alcoa Inc., its long-time raw materials supplier, for corruption and fraud. The federal court suit in Pittsburg alleged that Alba paid $2 billion in overcharges during a 15-year period. The money, according to the suit, first went to overseas accounts controlled by Alcoa's agent and some was then used to bribe Alba's executives in return for more supply contracts. The Justice Department quickly intervened in the case, asking the court for a stay while the government investigates possible criminal violations of the Foreign Corrupt Practices Act and other laws by Alcoa and its executives and agent. Alcoa has denied any wrongdoing and said it is cooperating with the DOJ.
The Wall Street Journal said Bahrain filed a money-laundering indictment against two former Alba employees accused of taking kickbacks from Sojitz.
The Justice Department hasn't commented on the Alcoa investigation or the Wall Street Journal's story naming Sojitz.
Read prior posts about Alba and Alcoa here.
No corporations and just a few individuals have fought Foreign Corrupt Practices Act charges in court, so only a handful of people have ever seen an FCPA defense up close. But for the first time, we have a chance to follow not one but three pending prosecutions -- in U.S.v. Kozeny (defendant Frederic Bourke, Jr., owner of the luxury handbag brand Dooney & Bourke), U.S. v. Green (husband-and-wife movie producers Gerald and Patricia), and U.S. v. Jefferson (former Rep. William J. Jefferson).
Because alleged FCPA violations usually involve some overseas behavior, prosecution and defense evidence has to be retrieved from beyond U.S. borders. There's no way to compel production from a foreign entity or individual outside the United States. So prosecutors usually work directly with foreign law enforcement agencies to exchange information on a voluntary basis; defendants don't have that option. Their route to foreign evidence is through letters rogatory. In United States usage, according to 22 CFR 92.54, "letters rogatory have been commonly utilized only for the purpose of obtaining [overseas] evidence. Requests rest entirely upon the comity of courts toward each other, and customarily embody a promise of reciprocity."
Mr. Bourke says for his defense he needs stock ownership and transfer records about a Liechtenstein corporation. In his case docket, item 135 is an order directing issuance of a letter rogatory. Attached to the order is the letter rogatory itself, formally called a "Request for International Judicial Assistance (Letter Rogatory) to the appropriate judicial authority of the Principality of Liechtenstein."
Again, a letter rogatory can't compel a foreign individual or entity outside the U.S. to produce evidence; it's only a polite request to a foreign court on behalf of one of the parties, in this case Mr. Bourke. We imagine the normally secretive authorities in Liechtenstein won't be anxious to release corporate ownership information. What happens if Mr. Bourke never sees the company records he's after? Can he describe the "missing" evidence to the jury? Can he argue that his right to a fair trial is somehow violated? We'll keep watching.
For practical advice about how to prepare, obtain and use letters rogatory, the State Department runs an excellent resource site here.
Download the Order Directing Issuance of Letter Rogatory on behalf of Frederic Bourke, Jr., with a copy of the letter rogatory attached (entered October 17, 2008) here.
[Updated and Corrected] It was a corporation that tolerated fraud, deceit and concealment. There were slush funds used to bribe public officials. There were phony contracts and fake invoices to cover up the corruption, and there was a boardroom that knew for years what was happening but feigned ignorance. And yet it was one of the world's most important companies, a global powerhouse in electronics and electrical engineering, with nearly 400,000 employees and yearly revenues above $100 billion.
As reported Friday, Siemens AG will plead guilty as early as Dec. 15th to Justice Department charges of violating the Foreign Corrupt Practices Act, likely resulting in fines of $450 million. And once an expected agreement with the Securities and Exchange Commission is signed, the company will also be required to disgorge at least $350 million of its tainted profits.
The Justice Department's Information charging Siemens in the biggest FCPA enforcement action ever tells of more than 4,000 payments worth at least $1.4 billion to foreign officials to obtain or retain business -- and systematic and intentional violations of the internal controls and books and records provisions that might have prevented or detected the payments (15 U.S.C. §§ : 78m(b)(2), 78(b)(5) and 78ff(a)).
How could it have happened? Because of the corporate structure Siemens created and the culture it nourished. Where operating groups and foreign subsidiaries were accountable for their bottom line but little else. Where ethics training didn't happen. Where compliance personnel and inside auditors were choked off from resources and hobbled by internal restrictions and a confused mission. Where reliable reports to headquarters of large-scale corruption weren't investigated. Where senior employees known to have paid bribes and cooked the books were never disciplined -- but instead were allowed to retire with benefits, bonuses and severance packages.
And then there's the story in the Sentencing Memorandum of Siemens' eventual road to redemption. Because of the scope of its bribery, the company faced fines under the Federal Sentencing Guidelines of up to $2.7 billion. But the DOJ's prosecutors are asking for a penalty reduced to $450 million. And they haven't charged Siemens under the FCPA's antibribery provisions, so it probably won't be barred from U.S. government contracts. Why? The Justice Department said it views as exceptional Siemens’ wide-ranging cooperation efforts throughout this investigation, which included a sweeping internal investigation, the creation of innovative and effective amnesty and leniency programs, and exemplary efforts with respect to preservation, collection, testing, and analysis of evidence. ... More on that in later posts.
For today, here are some key allegations from the 36-page Information:
- In April 2006, in response to a special audit request by the board of directors, Siemens’ outside auditors reported at least 250 suspicious payments made through the parent to companies in foreign jurisdictions. The audit report was provided to the board of directors, members of management and the Corporate Compliance Office. But no one made any attempt to investigate these facts, or explore whether they were related to other similar instances of wrongdoing.
- From 2004 to 2006, in addition to learning of corruption issues involving Siemens in Nigeria, Italy, Greece, Liechtenstein, and elsewhere, the company's senior management learned of government investigations into corruption by Siemens in Israel, Hungary, Azerbaijan, Taiwan, and China. Nevertheless, executives and senior management failed to adequately investigate or follow up on any of these issues.
- Siemens also failed to take effective disciplinary measures with respect to any of the employees implicated in the various investigations. For example, the three managers implicated in the Italian cases each received a severance package standard for early retirees, despite the fact that certain Siemens board members knew that at least two of the managers had already admitted to paying bribes at the time of their retirement.
- From 2004 to 2006, the Corporate Compliance Office continued to lack resources, and there was an inherent conflict in its mandate, which included both defending the company against prosecutorial investigations and preventing and punishing compliance breaches. In addition, there were extremely limited internal audit resources to support compliance efforts. All of these factors undermined the improved policies because violations were difficult to detect and remedy, and resources were insufficient to train business people in anti-corruption compliance.
- There was a consistent failure on the part of certain members of management to alert the Audit Committee to the significance of the compliance failures discovered within Siemens. Reports to the Audit Committee by the Chief Compliance Officer were principally status reports on prosecutorial investigations and often conveyed incomplete information. In some instances, management provided inaccurate information in response to Audit Committee inquiries. At no time did management convey to the Audit Committee a sense of alarm or growing crisis.
From at least March 2001 to November 2006, Siemens knowingly falsified and caused to be falsified books, records, and accounts required to, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the company. In doing so, Siemens:
(a) used off-books accounts as a way to conceal corrupt payments;
(b) entered into purported business consulting agreements with no basis, sometimes after Siemens had won the relevant project;
(c) justified payments to purported business consultants based on false invoices;
(d) mischaracterized bribes in the corporate books and records as consulting fees and other seemingly legitimate expenses;
(e) accumulated profit reserves as liabilities in internal balance sheet accounts and then used them to make corrupt payments through business consultants as needed;
(f) used removable Post-It notes to affix signatures to approval forms authorizing payments to conceal the identity of the signors and obscure the audit trail; and
(g) drafted and backdated sham business consulting agreements to justify third party payments; and
(h) falsely described kickbacks paid to the Iraqi government in connection with the Oil for Food Program in its corporate books and records as commission payments to agents when Siemens and Siemens France, Siemens Turkey and others were aware that a substantial portion of these payments was being passed on to the Iraqi government in exchange for being awarded contracts with the Iraqi government.
Download a copy of the DOJ's Information charging Siemens AG here.
Download the DOJ's Sentencing Memorandum here.
Download the Joint Statement here.
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Our special thanks to readers who assisted in compiling the documents filed by the DOJ in U.S. District Court in Washington, D.C. Friday. Those linked above are at the heart of this extraordinary FCPA enforcement action.
In July this year, we posted about the U.S. Senate's investigation into how Swiss bank UBS AG hid around $18 billion for 19,000 Americans that went unreported to the IRS. We mentioned that the Senate's 115-page report cited a memo from LGT Bank, run by the royal family of Liechtenstein, describing the use of secret offshore accounts for bribery in the U.S. and elsewhere.
The Senate report didn't specifically refer to potential Foreign Corrupt Practices Act violations, but we thought the Justice Department might turn some attention to foreign-bank clients who could be involved in the alleged bribery. To do that, though, the DOJ would first need to crack European bank secrecy laws that protect the identity of account holders.
Now comes a report that the DOJ may be succeeding. The Washington Post said this week that Swiss authorities have revealed the identities of "about 70 UBS clients for use by Justice Department investigators." The DOJ has also obtained names of an additional 30 or so American holders of undeclared UBS accounts from other parties, the Post said. And Reuters reported that 250 U.S. customers of UBS were given 30 days to appeal against Switzerland's plan to hand over their details to U.S. investigators.
Yesterday, however, Swiss authorities and UBS denied disclosing information about Americans suspected of tax evasion. The Swiss said cooperation between Washington and Bern was ongoing, without giving any details. UBS also said it had not given any information to U.S. authorities.
Assuming the Washington Post is right, the Swiss disclosures follow an earlier leak to the IRS of confidential information by a former employee at LGT Bank in Lichtenstein. The IRS used the information to begin enforcement proceedings earlier this year against about 100 U.S. taxpayers, some of whom were named in the Senate report. The U.S. government, the Post said, has been offering whistleblowers up to 30 percent of any money they help the IRS recover. IRS Commissioner Douglas Shulman said the strategy is working: "[W]e've got a lot of names that we're combing through and will be pursuing aggressively." He advised anyone using secret accounts to make voluntary disclosures to the IRS right away.
(Even President-Elect Obama has weighed in. He labeled UBS as one of the banks who helped "tax cheats," and he co-sponsored a Senate bill last year to crack down on offshore tax havens. The Stop Tax Haven Abuse Act listed 34 jurisdictions, including Switzerland, as potential tax-evasion countries.)
Foreign account holders should also be worried about a report that Liechtenstein and Washington have agreed to exchange confidential bank information in connection with tax-related investigations. Liechtenstein's bank secrecy laws had been seen as stronger than Switzerland's. But tax scandals during the past year traced back to clients at Lichtenstein banks have forced the country and its ruling family to start cooperating with tax fraud investigations.
None of this confirms that the DOJ is looking for FCPA violators among holders of undeclared foreign bank accounts, or that it will find any if it is looking for them. But as we said in June, the story is worth watching.
The Wall Street Journal's July 22 Page One story on public corruption in Kazakhstan involving the ruling family is extraordinary. Reporters Glenn Simpson and Susan Schmidt have dug deep, with help from the former son-in-law of the country's president.
We watch for Simpson's stories -- he follows the money for the Journal, often writing about financial crimes that intersect with the Foreign Corrupt Practices Act. Slate said about him, "His sophisticated dispatches from the banking / terrorism / money-laundering / organized crime nexus routinely advance well-covered subjects."
Here's part of the lead from "Kazakhstan Corruption: Exile Alleges New Details." You'll want to read the extensive report (nearly 1,900 words) for yourself. What's clear is that Kazakhstan presents enormous and perhaps insurmountable risks and challenges for compliance-minded companies.
A former member of the first family of oil-rich Kazakhstan is accusing its authoritarian ruler of extensive corruption, potentially complicating U.S. efforts to improve relations with the strategically important Central Asian state.
From a hiding place in Europe, the former son-in-law of Kazakh President Nursultan Nazarbayev asserted in interviews with The Wall Street Journal that Mr. Nazarbayev has diverted billions of dollars in state assets and long taken commissions from companies doing business in his mineral-rich land. . .
While by no means making the first claims of corruption in Kazakhstan, Mr. Aliyev alleged that its president personally profits from his country's economic riches to a much greater extent than previously documented. He painted a picture of a Kazakh economy in which the president not only routinely takes illicit commissions but also holds hidden stakes in the copper, uranium and hydrocarbon industries, and maintains a network of offshore bank accounts.
Although it wasn't possible to corroborate all of his assertions, Mr. Aliyev backed up some of them with bank statements from Lebanon and copies of checks drawn on banks in Indonesia and Liechtenstein. . . .The story can be found here. Access to the Journal online still requires a subscription.
We're exercising our Friday liberty to post a story that's not about the Foreign Corrupt Practices Act -- at least not yet. It's about a world-class financial institution -- a market leader with 80,000 employees in 50 countries, the heavyweight champ of global wealth management -- that allowed its sales force to run wild and in the process trample numerous U.S. laws.
We often say that what matters most for compliance is not the policy manual. It's management's commitment to obey the law. This story shows what happens when that commitment is pushed aside and replaced by a mad scramble for growth at any cost.
In the U.S. Senate this week, in hearings of the Permanent Subcommittee on Investigations, witnesses told how Swiss bank UBS AG hid around $18 billion for 19,000 Americans that went unreported to the IRS. Although foreign offices and employees of UBS weren't licensed to solicit or service U.S.-based clients, that group was targeted by the bank's huge and elaborate marketing efforts.
To keep their U.S. thrust a secret, UBS's Swiss bankers encrypted emails, used pay phones, and gave a code name to each client. The bankers then taught their clients not to write down account numbers or locations and never to use their own names in phone calls to the bank.
A witness from UBS described its Swiss-based U.S. sales team this way: "As I remember, there [were] around 25 people in Geneva, 50 people in Zurich, and five to ten in Lugano. This is a formidable force."
The Senate released a 115-page investigative report the day before the hearings started. It said 20 Swiss bankers made more than 300 trips to the U.S. since 2003 to solicit Americans at UBS- sponsored yachting regattas, art shows, and golf tournaments. The report cites an e-mail from a senior UBS private banker to colleagues saying, "The markets are growing fast, and our competition is catching up. The answer to guarantee our future is GROWTH."
Most top executives at UBS lost their jobs because of the scandal and the bank's poor performance in the market downturn. Among those who are gone are the former chairman, the chief executive officer, the head of the investment bank and its chief financial officer. Bradley C. Birkenfeld, an American and former top UBS banker, is waiting to be sentenced after pleading guilty in the U.S. last month to fraud. He helped an American client conceal $200 million in assets from the IRS. He said he once smuggled diamonds for a client in a toothpaste container.
UBS is cooperating with the IRS and the Justice Department. In the Senate hearings, the bank said it has stopped offering offshore-banking services to U.S. clients through non-U.S. branches.
"We have decided to exit entirely the business in question,'' said Mark Branson, chief financial officer of UBS's global wealth-management unit. "UBS will no longer provide offshore banking or securities services to U.S. residents through our bank branches. Such services will only be provided to residents of this country through companies licensed in the United States.''
CFO Branson said UBS "genuinely regrets any compliance failures that may have occurred. We will take responsibility for them. We will not seek to minimize them. On behalf of UBS, I am apologizing, and committing to you that we will take the actions necessary to make sure this does not happen again.''
Meanwhile, the Senate subcommittee released what it calls a list of "Tax Haven Bank Secrecy Tricks" aimed at helping U.S. clients hide assets overseas and avoid paying taxes:
- Code Names for Clients
- Pay Phones, not Business Phones
- Foreign Area Codes
- Undeclared Accounts
- Encrypted Computers
- Transfer Companies to Cover Tracks
- Foreign Shell Companies
- Fake Charitable Trusts
- Straw Man Settlors
- Captive Trustees
- Anonymous Wire Transfers
- Disguised Business Trips
- Counter-Surveillance Training
- Foreign Credit Cards
- Hold Mail
- Shred Files
The Senate report also mentioned a memo from LGT, a private bank run by the royal family of Liechtenstein, that describes the use of secret offshore accounts for bribery in the U.S. and elsewhere. So we may hear about related Foreign Corrupt Practices Act investigations as the DOJ learns more.