This is How We Roll: Russians Learn How to Pronounce FCPA

What a difference a month makes. Back in April, the only Western company generating corruption-related headlines was IKEA, which I dutifully summarized here and here. One of the reasons why IKEA garnered so much attention was that up until that moment, most companies had avoided public imbroglios over corrupt adventures in Russia. Indeed, for all the talk of increased enforcement of the U.S. Foreign Corrupt Practices Act (FCPA), only three major cases – Baker Hughes, Control Component Inc. (CCI), and Siemens – involved any conduct in Russia. Also, the CCI case doesn’t really count because the Russia conduct consisted of commercial bribery to an executive at Power Machines [Силовые Машины], reached by the DOJ through California’s commercial bribery statute via the Travel Act). And most of the Baker Hughes case involved bribes in Kazakhstan, plus it’s the oil industry.
What about Siemens? The Russia-related element to this case ended up as a footnote, with most attention paid to the jaw-dropping scale of the bribery, the international cooperation between U.S. and German authorities, and the huge fine – a combined $1 billion. The case got a little attention in Russia. One of the alleged bribes in Russia was $741k used to rig tenders on a World Bank-funded project for the design and installation of a $27 million traffic control system in Moscow (“Moscow Third Ring Project”).  Siemens made payments through a “business consultant” whose day job was working as a technical consultant for the Moscow Project Implementation Unit (MPIU), a quasi-governmental unit in charge of the Third Ring Project. The MPIU hired the consultant at Siemens’ suggestion, and the company proceeded to make payments to the consultant through three different associated entities, in exchange for designs incorporating Siemens products and other favorable tender treatment. Siemens also colluded with a competitor to inflate tender bids and create a sham traffic study, in addition to funneling cash to 60 senior officials at the MPIU. 
Siemens also allegedly made $55 million in improper payments to a Dubai-based business consultant, who was used as an intermediary to direct the funds to government-owned customers in Russia. Such ill-gotten business allegedly accounted for up to 80 percent of Siemens’ medical business in Russia. One specific transaction in 2006 involved a payment of approximately $288k in connection with a $2.5 million sale of CT scan equipment to a public hospital in Ekaterinburg. Here, the bribes were allegedly routed through the Dubai consultant in addition to a second consultant registered in corruption hot spot Des Moines, Iowa. In this case, Russia actually reacted and prosecuted the former Deputy Chief of the City Health Service, Aleksandr Shastin, for bribes received from Siemens and other unrelated corruption offenses, including the receipt of a 1.5 million ruble ($51k) ‘elite’ cottage from a private company. In February 2010, Shastin was acquitted of the Siemens-related charges but found guilty of the cottage-bribery charges. He was sentenced to 700k ruble fine and eight years hard labor (where do they send you if you’re already in Siberia?).  Another Russia official allegedly bribed by Siemens – Nikolai I. Galevko, former Technical Director of Elektrosvyaz Kaluga – was recently interviewed by the New York Times. Asked about the Siemens case, Galevko said, “I thought I might be questioned, but that never happened. I was never afraid I would be arrested.”
Daimler Comes Crashing In
Then out of nowhere, the Daimler case dropped like a bomb. The case was a surprise even for those of us who monitor FCPA enforcement on a daily basis – we knew it was coming, but didn’t know how important it would be. The surprise factor was due at least in part to the fact that the investigation has been going on since 2004! The case arose after David Bazzetta, a former Audit Director at DaimlerChrysler, claimed he was fired for raising concerns over the company’s corrupt practices abroad. Evoking Las Vegas, the head of Corporate Audit allegeldy said to Bazzetta, “[The] issues that arise in Corporate Audit must remain in Corporate Audit” (hint: it’s the opposite). Bazzetta sued for wrongful termination and his complaint triggered a DOJ-led investigation (Daimler eventually settled with Bazzetta out-of-court). So, six years after the fact, the nature of the case was all but forgotton.
The Daimler case had special significance for two reasons, one obvious and one not so obvious. The obvious reason was that this was the first FCPA case in which the Russian subsidiary – DaimlerChrysler Automotive Russia SAO – pleaded guilty in U.S. court. And with that, a previously little-known U.S. law took on a whole new significance for executives and managers at Russian subsidiaries of U.S. companies. 
The second, lesser-known reason has to do with growing hostility in the Russian population towards Mercedes-Benz vehicles, both as symbol and metaphor. Visitors to Russia may notice black Mercedes-Benz sedans with blue lights – or migalki (мигалки) on top. In theory, these are official vehicles for high-level Russian officials to use for official business. The blue light says, “Pull over or else” and Russian drivers tend to react to blue lights and not, say, ambulances, fire trucks, or road police. Recently, the use of the blue lights has been a growing source of angst as official cars have increasingly been at fault in fatal traffic accidents (without punishment). Also, it is a public secret that the blue lights are handed out to non-official VIPs, including oligarchs. 
These concerns erupted in March when a black, blue-lighted Mercedes-Benz carrying LUKoil VP Anatoly Barkov smashed into an oncoming car on a Moscow street. The oncoming car – a Citroen carrying two female doctors  – took the worst of the crash and both occupants died. The police rushed to the scene, but instead of attempting rescue efforts, they instead focused their energy on ferrying Barkov away from the scene and allegedly destroying the video feed from a nearby traffic camera. It’s hard to find one event that is able to crystallize a moment in society so perfectly. Just consider – here is a country stifled from reaching its potential by an old-guard Soviet elite with its tentacles in the lucrative but unsustainable extractive industries and which has perfected the ‘legal nihilism’ described by Pres. Medvedev. Meanwhile – two law-abiding (no nihilism), female (always the source of Russia’s strength), middle class (future source of Russia’s economic growth), doctors (essential to reversing demographic decline) are killed for what? Because LUKoil’s VP was in a hurry? As you can imagine, this event generated popular outrage as a symbol and metaphor for everything that’s wrong with Russian society. It even led Russian politicians to report that they are considering restrictions on the use of the blue lights, most of which can be found atop a Mercedes E-Class.
So it was in this context that the Daimler case was reported in Russia. Initially, we did not hear much – either from Russian officialdom or commentators. And then the increasingly influential Russian blogosphere started to play with the case as a cat does with a mouse. U.S. investigation, German investigation…Why no Russian investigation? Who really needs to be bribed before agreeing to be driven around in a luxury vehicle? The President drives one, so does the PM, are their cars tainted? The sound and fury peaked when Russian corporate lawyer, minority shareholder activist, and ZheZhe star, Aleksei Navalny best summed up what everyone wanted to know with his April 5th post, Who did Daimler pay? (1,473 comments and counting). In the post, Navalny gave instructions and pre-written statements for readers to submit at the online portals of the Prosecutor’s Office, MVD, etc. 
Based on my monitoring of the story’s development in Russia, I would argue that Navalny’s post pushed the story up to a critical mass that forced a Russian government response, which changed over time as follows: April 6th – Russian authorities state that they will not investigate the Daimler case (despite Daimler’s offer to help) —-> April 22nd – MVD (principal culprit in Daimler case) announces investigation into Mercedes-Benz purchases; April 23rd – Federal Protective Service (FSO) announces investigation into Daimler allegations; April 26th – reports surface that Medvedev personally ordered Daimler investigation at MVD. Throughout this three-week time period, the rumblings from Russia’s blogosphere and business press did not cease. If you search the Google for exact phrase results of Navalny’s post, you get 105,000 results, which means it has been referenced, republished, or replicated that many times in one month.
Daimler’s schemes in Russia are actually not that interesting. In short, DaimlerChrysler Automotive Russia SAO made payments to high-level officials at various government-owned purchasing entities, including the Special Purpose Garage (SPG), Machinoimport, and Dorinvest, and at the MVD itself. The methods for generating kickbacks typically involved over-invoiving government customers and paying excess balances to government officials. The overpayments were maintained on debtor accounts which were then wired through multiple offshore bank accounts in the U.S. and Latvia, which were beneficially owned by various shell companies (some U.S.-registered corporations).The payments were then booked as “commissions,” “special discounts,” and “N.A.,” which apparently translates to “useful payment” or “necessary payment.” Overall, between 2000-05, Daimler and its subsidiary made over $4 million in improper payments to Russian government officials employed at state-owned customers, which helped generate approximately $85.4 million in sales to Russian government customers. This results in a bribe/contract ratio of 4 percent, which is suspiciously close to the universally accepted 5 percent margin.
HP – the Bribe is Personal Again
Perhaps influencing the Medvedev’s reported order to MVD regarding the Daimler investigation was the mid-April breaking of an ongoing investigation into alleged bribery by Hewlett-Packard in Russia (the release of the new Anti-Corruption Strategy and Chaika’s report to the Federation Council on the War on Corruption also coincided). Indeed, on April 15, the Wall Street Journal reported that German and Russian authorities are investigating whether HP executives paid millions of dollars in bribes to win contracts with the Prosecutor General’s Office (i.e., the office responsible for investigating and prosecuting all corruption offenses). By the following day, the WSJ reported that the DOJ and SEC had joined the investigation. 
Like Daimler, HP also stands out for a few reasons. First, it’s the first corruption case against a U.S. company that was initiated by non-U.S. authorities – i.e., the same Munich police who raided Siemens a few years back. Second, it would also be the first time that Russian authorities are full-fledged members of the investigation (unless, of course, the Swedish-Russian investigation of IKEA finishes first).
The message the HP case sends is that the anti-corruption enforcement environment is truly global – with the OECD Anti-Bribery Convention now in force and implemented, you have more or less identical laws everywhere in the developed world (if anything, the FCPA is weaker than its foreign cousins). Also, we are witnessing a highly sophisticated and independent investigative capability emerging in Germany out of the DOJ’s shadow. As an EU member and crossroad between east and west, Germany’s enforcement efforts are much more likely to generate rapid, reciprocal responses from other EU states and major trading partners, which leads to the next point…
A German-led investigation against an American corporation is the ideal ‘test case’ for Russian participation. It provides all sorts of opportunities for shenanigans like Russia showcasing its excellent relationship with Germany will giving a cold shoulder to the American prosecutors. I recommend that those at the DOJ brush up on Russian culture and negotiating tactics. Also, based on the facts known thus far, HP is a good ‘test case’ for Russia from a domestic political perspective. The reason is that all of the alleged corrupt conduct reported on so far occurred during the tenure of the previous Prosecutor General, Vladimir Ustinov. Ustinov has long been dying a slow political death, starting with his demotion from Prosecutor General to Minister of Justice in 2006 and followed by his most recent demotion to Presidential Envoy to the Southern Federal District. In case it doesn’t ring a bell, this was the District that was recently split in two, with the more relevant half put under the tutelage of Alexander Khloponin. 
Well the HP train is just in time to take Ustinov to the end of the line, since I assume Putvedev want to put someone serious down in the Southern Federal District in anticipation of the 2014 olympics (Sochi is in Krasnodar, one of the regions in the Southern District). What do you know, maybe they will uncover massive corruption down in Sochi as well, allowing the Russian authorities to pin the blame squarely on a disgraced Ustinov.
The substantive aspects of the HP case are also not that remarkable. High-level executives at the company made payments to the Prosecutor General’s office in order to obtain a contract to supply computers to that office. As with Daimler, we see a rather complicated financing scheme used to route payments to offshore accounts beneficially owned or controlled by officials. Indeed, it was during the audit of HP’s office in Saxony[!] that German authorities first discovered evidence of bribery.  Overall, HP reportedly paid $10.6 million in bribes for a $46.2 million contract (a whopping 23 percent margin!) (image: HP’s financing schemes – 
What’s Next?
In light of these recent actions, I think we cannot undervalue Russia’s participation in the HP case, even if it may be encouraged by political expediency. First, this is the first anti-corruption case in which a major emerging market, high risk country is playing a leading role. China’s politically-motivated prosecution against Rio Tinto executives obviously does not count. Instead, Russia is being given the opportunity to prove its anti-corruption bona fides (a claim China does not make) and help itself along the way. This leads to the second point – Russia brought this attention on itself – Medvedev’s anti-corruption campaign has actually caught on with the population and now with the magic of the internet, Russian citizens can read the DOJ charging document against Daimler, and their complaints about official inaction reverberate throughout Russia’s vibrant online community. 
As a result, Russia is finding itself in the awkward position of being a vocal proponent of a campaign in which it refuses to participate. With OECD membership – and hence OECD anti-corruption convention ratification – right around the corner, Russia would do itself well to accept this mantle and let the chips fall where they may. Sure, someday a scandal will miss the Ustinov and hit the Sechin or Reiman – we all know that the Russian political and business elite is rotten to the core. The issue is not whether Russia can purge the guilty, but instead whether it can purge its kickback culture. A major step in bringing about such a change would be a depoliticized enforcement weapon which no krysha can block.

Update: the news just keeps getting worse for HP. Today, Indian customs officials announced that an investigation of HP revealed the use of systematic undervaluing of the company’s imports, allowing it to evade approximately $323 million in customs duties. Though a specific connection is not immediately apparent, keep in mind that “customs violations” in one country are “bribery violations” in another country (i.e., the United States). Indeed, HP or its agents likely relied on bribes in order to clear Indian customs with undervalued goods (note: India has a substantial tech industry and the people over there are relatively sophisticated on prices). Worst case scenario – the Indian investigators’ figure is accurate and a majority of that sum represents “illegal profits” to HP. This would dwarf Daimler’s $94 million in illegal profits and possibly is just the tip of an extremely large non-compliance iceberg. If such a nightmare scenario is what HP is looking at, it might explain the company’s relatively withdrawn posture vis a vis the ongoing investigations, which other FCPA practitioners have noted.  

This entry was posted in anti-corruption legislation, corruption, daimler, daimler ag, daimlerchrysler, fcpa, hewlett-packard, hp, siemens, war on corruption. Bookmark the permalink.

1 Response to This is How We Roll: Russians Learn How to Pronounce FCPA

  1. Nick says:

    Fascinating.It is definitely an interesting – and unexpected – development. Thanks especially for the explanation of the qui bono. I cannot be the only person doubting a Russian anti-corruption campaign without ulterior motives, but good luck to the Kremlin if they really are trying to tame the beast.Your site is a super source for what is going on inside what may be the hardest to read of the BRICs. Thank you!

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