The massive Siemens bribery scandal has made US-style internal investigations the new model for Europe. But there is significant German and Europe-wide resistance to this model, as Michael D Goldhaber reports

On 15 November, 2006, more than 200 policemen descended on the Munich headquarters of German technology giant Siemens and the homes and offices of 30 Siemens executives around Germany to comb the premises for incriminating documents. It was one of Europe's dreaded 'dawn raids', a term that bears little relation to the time of day but usually denotes the start of a tiresome ballet between the government and a company suspected of wrongdoing. In the traditional European model of prosecution, corporations stonewall and fight to the bitter end.

But Siemens did not follow the script. Within weeks the company hired a US law firm to conduct an internal investigation, which led to a vast airing of its dirty laundry at staggering expense. Debevoise & Plimpton has uncovered E1.3bn (£1.02bn) in "suspicious payments", most likely bribes paid by Siemens to secure contracts around the world between 2000 and 2006. These disclosures will almost surely lead to a record-shattering US fine even if the company wins leniency for its cooperation. But when the shock fades, Siemens may be best remembered for spreading to Europe the US method of outsourcing corruption prosecution to the private sector.

In the US, the use of internal investigations evolved in corporate fraud cases during the 1990s. In a typical case, a company's audit committee hires a law firm to ferret out the facts of wrongdoing, while the company itself retains a separate law firm to negotiate a settlement. Internal investigations became the standard in both fraud and corruption cases after the Sarbanes-Oxley Act of 2002 boosted government caseloads.

"It was natural to transfer that model from fraud to corruption when corruption exploded at about the same time," recalls Paul Berger of Debevoise, who directed corruption enforcement at the Securities and Exchange Commission from 2000 until 2006.

The result has been a small bonanza for US law firms that boast Foreign Corrupt Practices Act (FCPA) experience and global reach. Twelve of the 24 criminal FCPA proceedings brought by the US Department of Justice against corporations since 2001 have targeted foreign companies, according to figures compiled by Shearman & Sterling. European law firms are rarely an option to handle investigations, because Europe's white-collar lawyers mostly practice in small firms that lack either a US or global presence. (The exception is Clifford Chance, which acquired a US white-collar practice when it merged with Rogers & Wells, and built a global platform around the group.)

The magnitude of Debevoise's work for Siemens puts it in a category all by itself. Siemens is one of the first European multinationals to employ the full-blown US investigation model (with separate counsel for the compliance committee), and certainly the highest-profile. The company spent E474m (£374m) on compliance fees for the 15 months ending December 2007, according to Securities and Exchange Commission (SEC) filings. Informed sources estimate that about half of the total went to Siemens' auditors at Deloitte Touche Tohmatsu and about 5% to its strategists at Davis Polk; marginal amounts went to employment counsel Gleiss Lutz, and witness counsel Baker & McKenzie. As investigating counsel, Debevoise earned at least E95m (£75m), sources familiar with the investigation estimate.

To date, Siemens has paid E239m (£188m) in German court fines stemming from the bribery scandal and E520m (£410m) in tax charges. Cases against individual Siemens employees are still pending in Munich and Germany. Half-a-dozen development banks and at least 16 countries – including notorious anti-corruption laggards China, Indonesia, Japan, Nigeria and Russia – have opened investigations into Siemens' activities.

Of greater significance, Siemens has not settled yet with the US agencies. US fines could reach $3bn-$6bn (£1.5bn-£3bn), according to the high guesses in the German media. The Debevoise investigation could chug along another year or two, running its tab past $250m. Davis Polk will keep busy defending ancillary litigation. And the Justice Department will almost surely require Siemens to hire some other law firm to monitor its compliance, a job that could last three years and run up another $250m (£125m) bill. US anti-corruption lawyers might want to start picking up some German.

Siemens' web of deceit began to unravel five years ago, as two sets of investigators began to tug at two separate strands. In today's interconnected world, it is harder for corruption on a grand scale to evade detection. An in-house investigation by Italy's state-controlled Enelpower SpA in 2003-04 uncovered bribes paid to Enel SpA by Siemens to win a subcontract for gas turbines at Enel plants in Abu Dhabi, Oman and Qatar. A Milan court debarred Siemens from selling turbines to the Italian state for a year and – even more significantly – found that Siemens's corruption problem was systemic. In May 2007, a German court in Darmstadt, picking up the thread, convicted the ex-finance chief of Siemens' power unit and ordered Siemens to disgorge E38m (£30m) in profits.

In parallel, a group of Liechtenstein bank auditors tracing laundered assets on suspicion of terrorist financing discovered a money trail leading to Siemens' telecom division. In October 2007 a Munich court fined Siemens E201m (£158m), based on the charge that Siemens telecom executives had paid multiple bribes to officials in Russia, Nigeria, and Libya between 2001 and 2004. This sum, which included E200m (£157m) in disgorged profits, represented a 100-fold leap over Germany's largest prior corruption fine. "Siemens will definitely be remembered as the case that woke up corruption enforcement in Europe," says Nicola Bonucci, director of legal affairs at the Organisation for Economic Cooperation and Development (OECD) in Paris.

Even so, US enforcement remained the dominant focus of Siemens leadership. The E201m fine ordered by the Munich court was based on just 1% of the suspicious payments. How much might the traditionally tougher US agencies demand to settle the other 99% of the problem? And as bad as a 10-figure US fine would be, it would pale in comparison to the impact of Siemens being debarred from contracts in the US, where Siemens earns $27bn (£13bn) in annual revenues.

"We are a major player in the US market," says Siemens' current compliance chief Andreas Pohlmann. "We must respect the US legal system." That meant hiring a law firm to conduct an investigation.

Why Debevoise? "[The firm] had to be global with expertise in large corruption investigations," says Pohlmann, explaining the company's considerations in making its pick. "And it had to have no conflicts with Siemens." Ironically, Debevoise's token presence in Germany – it has five partners in Frankfurt -probably played in its favour, decreasing the likelihood of conflicts. At the same time, Debevoise had built a reputation in Europe from afar. Of the 20 FCPA investigations Debevoise has conducted over the past five years, a dozen had a connection to Europe. In its most prominent European role, Debevoise advised Royal Dutch/Shell Group in a fraud settlement with the SEC over its massive oil reserves overstatement in 2004. Davis Polk, which had conducted the Shell investigation, swapped roles with Debevoise and has been Siemens' strategist in the current scandal.

Debevoise has dedicated a team of 50 lawyers across the globe to Siemens, says Pohlmann, a number that has spiked up to 100 lawyers on occasion. The team is headed by Bruce Yannett, a member of Debevoise's management committee and co-chair of its white-collar group, who cut his teeth as an attorney on the independent counsel team that investigated the Iran-Contra scandal. Since December 2006, the firm has conducted approximately 1,000 interviews and searched tens of millions of document pages, according to Pohlmann. The investigation has touched directly on 65 countries and indirectly on 190, but nothing has been farmed out. Debevoise lawyers fly wherever they are needed when they are needed. "I have never seen such a thing before," says Pohlmann. "They needed to get quickly up to speed and understand our business and culture. What I have seen is astonishing."

All the same, Debevoise met with limited cooperation inside Siemens at the start, encountering both puzzlement and hostility. "The concept [of internal investigation] is totally weird for Europeans," says one lawyer close to the case. "It takes a lot of explaining over and over." Burkard Goepfert (pictured) of Gleiss Lutz in Munich, describes the mindset of many Siemens staff members: "This was the best company you could work for in Germany… I gave everything for 30 years, and now I'm fired because I was once asked to drop off two envelopes."

That the investigators were American added insult to injury. Popular resentment of America over the Iraq war and corporate downsizing mixes with business resentment of America over class actions, hostile takeovers, even antidiscrimination laws. "There is a general uneasiness accepting big ideas from across the Atlantic," says Goepfert, who is personally an advocate of anti-corruption compliance. "Now US law firms are coming in and laying the proudest companies in Germany open to attack."

A changing of the guard helped clear the way for Debevoise to progress. Chief executive officer (CEO) Klaus Kleinfeld and chair Heinrich von Pierer resigned in April 2007 – the very month when the company announced that it was officially under investigation by the Justice Department and SEC. The new management team at Siemens has a distinctly American tinge. Although CEO Peter Loescher is an Austrian, he has served as CEO of GE Healthcare. The new general counsel is American-born, American-educated Peter Solmssen, a former Morgan Lewis & Bockius partner who spent a decade as general counsel of various GE divisions. And the new compliance chief Pohlmann, who joined the company in September 2007, is a German lawyer who spent the last few years in Dallas overseeing both the legal and compliance groups at Celanese Corporation.

"To find people with the right [compliance] skills, Siemens had to look in American corporations," says Bruno Cova of Paul Hastings in Milan, who played key roles in cleaning house as an in-house counsel at ENI during the 1990s and as an adviser to Parmalat Finanziaria earlier this decade. "Most European corporations are not yet equipped to deal with compliance."

The new team brought an entirely new attitude. When Pohlmann encounters scepticism about the internal investigation, he says, "We tell them it is not the US system that's the problem… It was Siemens that was the problem."

Solmssen and Pohlmann made an aggressive effort to jump-start the investigation. Solmssen's first innovation – inspired by antitrust practice – was to offer cooperating junior employees amnesty from being fired or sued by Siemens. From December 2007 through to February 2008, 130 people applied. "Amnesty was a brilliant idea," says Sabine Stetter, a criminal attorney at Peters Schoenberger & Partner in Munich who represents seven amnesty applicants. One Siemens employee had little to tell Debevoise in an initial interview but suddenly, post-amnesty, volunteered the existence of an undocumented Swiss slush fund. "Clearly the amnesty was crucial," Stetter says.

The other key step was to win the cooperation of Albrecht Schaefer, a venerable attorney who served as Pohlmann's predecessor in compliance and for many years as general counsel. Siemens fired Schaefer in August 2007, and Schaefer sued to clear his name. In a December 2007 settlement, Siemens took Schaefer back into the fold, and he began to cooperate on a voluntary basis. (Schaefer says he was willing to cooperate all along, but Siemens had initially rejected his offer.)

In the estimation of one insider: "One hundred and thirty amnesties is not that many [in a company of 475,000 employees]. Turning Schaefer was at least as crucial. Schaefer was at the heart of the information flow. . . . He is smart and he is a lawyer. He is the perfect source."

Thanks to one tactic or other, Debevoise did achieve a breakthrough, although the details are still not public. In January the firm issued a statement: "Since 28 November, 2007, we have obtained significant new information and developed very substantial leads from participants in Siemens' amnesty programme, as well as other sources… In particular, certain of this new information pertains to the conduct and knowledge of a number of individuals who have served on the managing board." Shareholders at the January general meeting took the hint and did not ratify the actions of the previous board and chair – in effect reserving the option of suing them. The investigation continues.

As Debevoise discovered, transplanting the US-style of investigation outside the US is not easy. In several key ways, the US business and legal culture remains unique, so tactics developed in that environment do not always work abroad. US investigators are less likely to have to deal with any unions, let alone strong ones. American employees can be fired far more easily than European workers and investigators can disregard their feelings with near impunity. At the other extreme, German unions have seats on the board; so as one US investigator notes: "You don't want to piss them off."

Another big difference: the US lacks a data protection law. Around the world, data privacy rules vary from company to company, country to country, and province to province, especially for encrypted data. Among the tougher jurisdictions are China, France, Hungary, Greece, Russia, and Southern Bavaria, where Munich is located.

"An enormous amount of time and effort goes into how and where and by whom data can be reviewed," says Angela Bellizzi Burgess, who is among Siemens' counsel at Davis Polk.

Outside the US, employees often have a right to privacy at their desktop. Lucinda Low of Steptoe & Johnson recalls an experience she had while investigating an Italian manufacturer. One of her targets managed to elude investigation by calling in sick and keeping his computer at home. "We didn't think he was sick," she says drily. "It can be fairly frustrating."

While employer relations and data privacy present diplomatic or bureaucratic obstacles, these can be overcome by careful lawyers. The main barrier to the development of internal investigations in Europe is the enforcement culture. In some civil law countries, such as France, prosecutors generally have no discretion to settle-which removes the incentives to cooperation. But the man behind Siemens' record E201m (£159m) fine -senior prosecutor Guenther Puhm of the Munich prosecutor general's office – does not think Germany lags in anti-corruption. Puhm makes a proud affirmative case for his nation's old-fashioned method of public prosecution. Repeating a reporter's question, he asks: " 'Are we the leader in Europe?' Why not in the world? Your question implies that enforcement in America is better, and in that I cannot agree. When you ask how mature is anti-corruption in Germany, it sounds a little bit conceited."

As a further example of American chauvinism, Puhm pulls out a 2002 Newsweek cover story on corruption, which classified the US as "clean" and Germany as "not-so-clean", on the basis of a Transparency International survey in which the two nations virtually tied.

Puhm's office certainly has bragging rights. Munich has conducted 22,000 corruption proceedings since 1994; most of them were domestic, but thousands were international. Puhm believes that Americans conceive of the problem too narrowly, through the lens of the Foreign Corrupt Practices Act, which is concerned only with foreign official corruption – bribes paid to overseas officials by US companies or foreign companies with a US connection. In Puhm's view, corruption is equally domestic and foreign, public and private. And in enforcement of domestic and private corruption, many US states lag Bavaria. Certainly the German foreign bribery statute outstrips the FCPA in banning private-to-private bribery abroad. And until US authorities top him in the Siemens case, Puhm's E201m fine blows away the current FCPA record of $44m (£22.1m) – levied in 2007 against the Houston-based oil services firm Baker Hughes Incorporated.

Puhm is philosophically opposed to US-style investigations. "Outsourcing prosecution goes too far," he says. "Public duties are best left to public authorities." Puhm is sceptical that lawyers at firms can subordinate their loyalty to paying clients. And he is doubtful that defendants can constitutionally be forced to pay (extravagantly) for their own conviction.

Intriguingly, there is no such objection from the company that is doing the paying. Siemens' Pohlmann dismisses the German prosecutor's attitude as "thinking in a box". A private-sector investigation, he insists, is the only tool that can achieve global compliance.

"Debevoise has much more advanced forensic and interview techniques," Pohlmann says, citing, for instance, the firm's technology for searching electronic documents.

"They have more people and their scope is international. As an international company, we need to construct an overall picture of what happened around the world. If you have a Munich prosecutor and a London prosecutor and an Athens prosecutor, you only see fragments of the picture."

In terms of team size, Munich dedicates to Siemens half of the dozen corruption prosecutors that Puhm supervises, with the support of more than 20 police officers and tax auditors. An impressive commitment, but no match for the 200-plus lawyers and auditors that Debevoise and Deloitte can muster.

Michael Wiehen, president emeritus of Transparency International in Germany, agrees that a fragmented national system is inadequate. While the Munich office has a proud record, Germany has more than 25 regional prosecution offices and many are limited in experience, resources and language skills. The Siemens fine is an outlier – more than 100 times the previous German record for corruption. Unlike US authorities, German prosecutors cannot debar Siemens from contracts, dictate internal controls or impose a monitor.

Siemens' reaction to its crisis "is probably a model for the world", says Wiehen. "But if there were no SEC, Siemens would probably not have hired Solmssen and Pohlmann, and the company would have a different attitude. I wish they were a little more scared of German prosecutors."

The ultimate triumph of US-style investigations would be their embrace by European prosecutors in purely European cases. Heiner Hugger of Clifford Chance in Frankfurt sees the beginning of such a trend in the most complex white-collar criminal cases, including corruption cases. "Over the last two years or so," he says, "German prosecutors have increasingly approached corporate counsel and hinted that they could carry out a dawn raid, but that this would be a lot of work for them and not really improving the clients' image with the general public. They say, 'Look, you can avoid this by carrying out an internal investigation and cooperating.' It is a current development."

Perhaps this is a glimpse of the future. But other European attorneys interviewed for this article have not seen such a phenomenon, and do not expect to see it, because – as Puhm demonstrates – the culture is unreceptive. "It is a dream," says Burkard Goepfert of Gleiss Lutz. "Internal investigation will never be an alternative to domestic German prosecution."

As long as US regulators set the agenda in multinational boardrooms, that may not matter much. Everyone interviewed expects to see more international investigations of multinational companies driven by US prosecution. And European companies are sure to be targets. A recent PricewaterhouseCoopers International study shows that only 61% of German companies have ethical guidelines, compared with 91% of North American companies. "European corporations are slow in adapting to a changed legal landscape," says Bruno Cova of Paul Hastings Janofsky & Walker. "Siemens will not be the only case of non-compliance."

A version of this article appeared in the May edition of The American Lawyer, Legal Week's US sister title.

GermanyJuly2008