In a Swiss criminal investigation into bribery offences committed abroad, Alstom accepted heavy sanctions ordered by the federal prosecutor's office. Following the conviction of a Swiss financial institution for money-laundering, this is the second case in which Swiss corporate criminal law – until recently considered fairly harmless – has bared its teeth. These cases should spur companies into reviewing their compliance systems.
The initial charges raised against Alstom by the federal prosecutor's office were dramatic: it was alleged that the company ran a system of slush funds financing bribes to foreign public officials in order to win public procurement contracts. The company was cleared of this initial allegation after an extensive investigation. However, the federal prosecutor's office concluded that foreign public officials had been bribed on three accounts. On 22 November 2011, a summary punishment order was issued against Alstom's Swiss subsidiary that was in charge of certain compliance procedures for the French group. The subsidiary was held liable for not having taken all necessary and reasonable organizational measures to prevent the payment of bribes to foreign public officials.
Following a recent conviction of a Swiss financial institution for money-laundering, the order rendered against Alstom by the federal prosecutor's office is the second case within a year in which the provision of the Swiss Criminal Code (SCC) which allows for criminal sanctions against corporate entities (Article 102 SCC) has bared its teeth. In April 2011, the District Court of Solothurn-Lebern had handed down a sentence for money-laundering (currently under appeal), finding that the company in question had failed to take the necessary precautionary measures in connection with a cash payment of CHF 4.6 million. The Court held that the company's organization was deficient, as there were no appropriate internal regulations in place. Since its introduction in 2003, corporate criminal law has been considered somewhat of a harmless figure in the background. Based on recent developments, however, that figure may turn out to be a fully-grown wolf.
2. THE "ALSTOM CASE "
Alstom is a group based in France with a global presence. Its core business lies in the construction and maintenance of large-scale infrastructural developments involving power plants, rail transport, and energy transfer. Accordingly, a majority of its customers are states or companies providing public services.
The group appointed consultants to secure such projects and, to some extent, provide support during the projects' implementation and completion. The usual arrangement with these consultants was for a contingency fee to be paid in installments when certain predefined milestones were reached. The criminal investigation revealed that on three occasions, consultancy fees were indirectly paid to executives of the customers or to persons belonging to the political establishment. In return, they ensured that the contracts were awarded to Alstom or that the customers refrained from claiming damages against the group.
2.1 Inadequate Organization
Pursuant to Article 102 SCC, companies are criminally liable for a felony or misdemeanor committed within the company if, due to inadequate organizational structures of the company, that offence cannot be attributed to any specific individual. For certain offences, such as bribery, the company may even be punished regardless of whether or not a specific individual within the company can be held accountable. However, a prerequisite for such a verdict would be that the company failed to take all necessary and reasonable organizational measures to prevent the offence.
The law does not define the organizational measures that are deemed necessary and reasonable. Rather, the appropriate measures depend, inter alia, on the size of the company, the business sector, and the market area. The OECD and various trade associations such as the International Chamber of Commerce (ICC) and economiesuisse have published principles on compliance management that may provide companies with some guidance. In addition, the Swiss State Secretariat for Economic Affairs (SECO) has issued a brochure on the prevention of corruption.
In a globalized economy, it is certainly insufficient to limit compliance to the organizational requirements of the state in which the company is incorporated. Rather, all relevant jurisdictions must be taken into account. As regards anticorruption legislation, this may mean that, for instance, the US Foreign Corrupt Practices Act (FCPA) or the UK Bribery Act (2010) need to be considered.
Alstom issued internal regulations with an aim to reduce the risk of illegal payments. In particular, the regulations prohibited payments to consultants for bribes and defined the requirements for a consultant to be appointed. As a rule, consultancy agreements had to be concluded with legal entities having an existing, operative business and a physical presence in the country in which the project was to be carried out. Moreover, the consultants were supposed to have bank accounts in this country. Accordingly, consultancy agreements with shell or offshore companies were prohibited. Furthermore, the consultancy fees were limited to a certain percentage of the contract volume and the consultants were obliged to detail and substantiate the contractual services they had performed before any payment was made.
To strengthen its compliance, the French group had centralized major compliance functions within two subsidiaries established for that specific purpose. One of those subsidiaries, Alstom Network Schweiz AG, was the subject of the summary punishment order mentioned above. The company's responsibilities included, inter alia, checking the conformity of suggested consultants with internal compliance regulations and, subsequently, checking the payment process for conformity with the relevant contracts.
According to the federal prosecutor's office, Alstom Network Schweiz AG's showed deficiencies in the organizational integration of the compliance unit, its personal resources as well as the enforcement of the internal regulations on the prevention of corruption. The compliance unit was functionally affiliated with a unit of the group headquarters whose task was also to support the sales unit. The federal prosecutor's office doubted that this structure conformed to the general principle requiring compliance structures to be independent from any sales interests of the business units. According to the federal prosecutor's office, this organizational structure meant that the head of compliance was not given sufficient authority to effectively enforce compliance regulations.
It was further found that the personal resources of the compliance unit were insufficient, both from a qualitative and from a quantitative point of view. The group did not provide its compliance unit with sufficient staff and the employees lacked relevant experience, were insufficiently trained, and were not vested with adequate powers. In addition, the compliance unit failed to act against transgressions by consultants as well as by Alstom's own employees, and failed to pursue violations and circumventions of internal regulations.
Since the Swiss subsidiary had not taken all necessary and reasonable precautions to prevent bribery, it was fined an amount of CHF 2.5 million. The relevant provision of the SCC allows for fines of up to CHF 5 million against corporate entities. The fine imposed on Alstom's Swiss subsidiary was therefore in the middle of that range.
Outweighing the fine by far, the federal prosecutor also ordered the confiscation of the assets stemming from the criminal offence. The determination of the amounts subject to confiscation is controversial in a case in which a company wins a contract thanks to bribery. The punishment order limits the confiscation to the profits earned on such tainted contracts. Based on the operating profit margin, these profits were estimated at CHF 36.4 million. Hence, the federal prosecutor's office did not confiscate the entire turnover, as might have been possible in certain other jurisdictions. Remarkably, the profits were confiscated from Alstom Network Schweiz AG, although they had been earned by other, operative subsidiaries of the group. These subsidiaries had transferred their share of the profits to the accounts of the Swiss subsidiary in advance, apparently with a view to resolving the matter amicably. Thus, the operative subsidiaries were only indirectly involved in the criminal proceedings. A conviction for bribery offences can in certain cases lead to a ban from participating in public procurement proceedings, for example pursuant to a directive of the European Union. Particularly for suppliers like Alstom, which mainly service global public procurement needs, such a ban may have fatal consequences.
Thus, it is highly beneficial to the Alstom group that the criminal sanction was formally imposed on the Swiss subsidiary, which does not act on the procurement markets. The operative companies in each country as well as the holding company remained formally untainted, even though they may have suffered damage to their reputation since Alstom is publicly perceived as a conglomerate.
2.3 Dismissal of the Proceedings against the Holding Company
Criminal prosecution is not limited to companies domiciled in Switzerland. Swiss authorities may also exercise jurisdiction over foreign companies if the criminal offence in question was committed in Switzerland, if the organizational failure occurred in a division of that company located in Switzerland, or if the failure had ramifications in Switzerland. Therefore, the prosecution not only targeted Alstom's Swiss subsidiary but also the French holding company. The Swiss Criminal Code provides that, under certain conditions, prosecution and punishment may be waived if the offender has made reparations and if the general public and the persons harmed have little interest in the prosecution of the offender. Based on such considerations, the federal prosecutor's office dismissed the criminal proceedings against the French holding company, which is equivalent to an acquittal.
On the one hand, the federal prosecutor's office found that the French holding company was ultimately responsible and liable for developing the organizational side, implementation, controlling, and the HR component of the compliance department. To this extent, the holding company was to blame for organizational shortcomings too. On the other hand, however, the federal prosecutor's office recognized the considerable efforts of the holding company to act in conformity with the law, to improve the organization of the compliance department as well as the reparations paid by the Alstom group to the International Red Cross amounting to CHF 1 million. Thus, the federal prosecutor's office deemed a further punishment of the holding company unnecessary.
2.4 "Deal or No Deal"
Although Swiss criminal law does not generally provide for plea bargaining between criminal justice authorities and offenders, it seems as if the parties did come to an agreement in the case at hand:
Firstly, Alstom waived its right to appeal immediately after the summary punishment order and the order to dismiss proceedings had been issued. Secondly, the profits to be confiscated had previously been transferred by the operative affiliates to an account of the Swiss subsidiary. Thirdly, the conclusion of the proceedings had advantages for both the federal prosecutor's office and the French group. The federal prosecutor's office was able, in its view successfully, to bring the criminal proceedings to an end. Alstom had to pay a considerable sum of money but was eventually able to avoid a criminal conviction of the operative companies. Finally, the group was explicitly cleared from the allegation of running slush funds to finance bribery.
3. LESSONS LEARNED
Three major lessons can be learned from the Alstom case. Firstly, companies are required to set up an effective compliance mechanism tailored to their needs; otherwise they face considerable exposure to serious criminal sanctions. It does not suffice to simply introduce certain internal compliance regulations. Rather, it is crucial that such regulations be consistently enforced. Furthermore, the compliance department needs to be provided with the appropriate resources, be independent of any sales interests, and be vested with the necessary powers and authority. Since the federal prosecutor's office does not seem to have an issue with treating a group of companies as an entity for the purpose of criminal liability, holding companies bear the burden of ensuring and supervising compliance functions visà- vis their subsidiaries.
Secondly, the era in which corruption was seen as a necessary evil of international commerce is definitely over. The summary punishment order against Alstom serves as a clear signal that Swiss authorities intend to diligently pursue cases of bribery, even those involving foreign public officials.
Thirdly, the case at hand shows that a skilled defense strategy may prevent the worst from happening, should a company be targeted by law enforcement authorities despite having a compliance system in place. In such a situation, it is advisable to retain external counsel. This is particularly important given that in-house counsel cannot rely on the attorney-client privilege in order to protect confidential communications, a circumstance which may be crucial in criminal proceedings directed against the company.
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