Financial Times (3.26.10)

US DoJ plays European contract card

By Stephanie Kirchgaessner in Washington

Daimler, the German carmaker, this week agreed to pay $185m in civil and criminal fines under the terms of a deferred prosecution agreement with US prosecutors following allegations that it engaged for years in an elaborate bribery scheme in 22 countries.

The US Department of Justice considers fighting bribery one of its top law enforcement priorities, and the Daimler case was the latest in a string of corporate settlements that underlined how aggressively prosecutors are pursuing such cases.

But a close look at hundreds of pages of court records show that the maker of Mercedes-Benz was never formally charged with paying bribes, though two of its subsidiaries were.

Instead, it was charged with conspiracy to commit bribery – an allegation that is usually reserved for defendants who plan, but do not execute, crimes – and a violation of “books and records provisions” of a US anti-bribery law.

German scandals trigger a change in attitude towards corruption

Daimler and Ferrostaal this week became the latest in a series of German companies to be embroiled in bribery scandals, Daniel Schäfer reports from Frankfurt.

The cases have again put the spotlight on a country where bribes have long been regarded as a normal part of the business culture.

Daimler is set to pay $185m to settle allegations by the US justice department. Munich prosecutors this week raided the Essen-based office of Ferrostaal, an industrial services group majority-owned by an Abu Dhabi-based investor.

Prosecutors are investigating several Ferrostaal managers and have detained one of them, said Barbara Stockinger, spokeswoman for the prosecutor.

A Ferrostaal spokesman said the group would co-operate closely with prosecutors, adding that the investigations were not directed against the company itself.

Ferrostaal is a former subsidiary of MAN, the German truck and engineering group that is also entangled in a large-scale bribery scandal that led to the departure of several management board members and ongoing investigations against about 100 suspects.

An even bigger bribery scandal at fellow Munich-based engineering company Siemens led to a €1bn ($1.3bn) fine paid to US and German authorities in 2008.

Foreign bribes were even tax-deductible as recently as a decade ago.

But the impression that the payment of bribes is normal business practice for German companies is probably out of date.

The Siemens scandal shocked German boardrooms and triggered a fundamental change in the attitude towards corruption.

“Siemens has woken up corporate Germany. Ever since the scandal erupted, compliance has gained enormous attention in the boardrooms of both large co-operations and Mittelstand companies,” said Wendelin Acker, a partner at Lovells.

Having entered into a “deferred prosecution agreement”, Daimler did not plead guilty to any charges, including the lesser conspiracy charge.

The technicalities might seem inconsequential.

But the small print of the European Union’s public procurement rules forbids any company from receiving an EU contract if it has been found guilty or convicted of bribery.

Thus the DoJ’s decision not to formally charge Daimler with bribery, in effect, radically reduced any risk that the company would be shut out from European government contracts were it to have been convicted of such a charge.

The case is not an anomaly. Last month, BAE Systems, the British defence group, paid $400m in fines to the DoJ after prosecutors alleged in court documents that it doled out millions of dollars in improper payments to foreign government officials.

But BAE, which did not dispute the description of its conduct, was charged and pleaded guilty to allegations that it made false statements about its anti-bribery compliance programme. The DoJ’s case against Siemens in 2008, in which the German conglomerate paid $800m in US penalties, similarly centred on “books and records” violations.

There are several reasons why the justice department might not bring criminal bribery charges against a company even if it has clear evidence of corrupt acts. In some cases, it might lack evidence that a company had criminal intent.

Under US law, however, the DoJ must also consider the “collateral consequences” of such charges. Indeed, legal experts say the recent string of big US bribery cases emphasises the significant impact EU “debarment” policies – which regulate when a corporation must be barred from competing for government contracts – have had on the DoJ’s ability to negotiate settlements with companies.

“We’re seeing severely contorted settlement agreements to avoid pleading guilty to conduct that would result in automatic debarment,” says Alexandra Wrage, the president of Trace, a non-profit organisation that specialises in corporate anti-bribery compliance programmes.

Companies with deep pockets can afford steep penalties. But the severe consequences they face in Europe and sometimes the US if they are found guilty of actual bribery might be insurmountable, giving the DoJ a strong hand in negotiations.

US corporate attorneys who work on bribery cases say the DoJ never explicitly threatens that companies ought to settle lesser allegations in order to avoid bribery charges.

But they acknowledge that the risks associated with a bribery conviction can hang over negotiations with prosecutors like a dark cloud.

The DoJ does not always shy away from directly bringing bribery cases. Subsidiaries of Siemens and others have been faced with substantive bribery charges.

“While I can’t comment on any specific case or charging decision, I can say that we follow the facts, available evidence and the law where it leads,” a spokeswoman for the justice department said.

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