Trapped in the US Web: Daimler Upset with Over-Eager American Oversight

By Dietmar Hawranek

In April 2010, US authorities forced Daimler to pay $185 million due to corruption allegations. Butthe SEC is still monitoring theGerman carmaker, with former FBI head Louis Freeh leading the American team. Daimler executives complain that hisaggressive style is bad for business.

Photo Gallery: Daimler's Beef with US Regulators Photos
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For years, Ernst Lieb was seen as the prototype of a Daimler manager. Lieb, referred to simply as Ernst at the Stuttgart headquarters, worked for the carmaker for 36 years, most recently as the head of its important US operations. In addition to knowing his way around expensive cars, Lieb is a connoisseur of good food and wine. He cultivated the persona of a "Mister Mercedes" and lived in a company-owned mansion in New Jersey. Many of New York's wealthy and important people were invited to his parties.

Now Lieb is gone, after having been dismissed in October. He is still considered the prototypical manager, but of the type Daimler no longer wants to see in its ranks.

The former Mercedes executive was simply charging too many items to his employer's tab, including a home theater for $89,000 (€68,000), a home gym for about $22,000, a washing machine, a dryer and a bed, a built-in barbecue system, his membership in a country club, and much more.

There was a time when Daimler would have taken care of the matter on the quiet. It would have issued a brief press release, stating that the head of its US operations was leaving the company "on amicable terms," and that would have been that. But now Daimler is in litigation with its former executive in a Stuttgart labor court, and the details are being discussed openly, including the charge that Lieb had his employer reimburse him for several thousand dollars to cover the electricity costs for an elaborate Christmas lighting display at the New Jersey mansion.

Under Strict US Supervision

The company must now face questions as to why it paid for such perks for years, only now to sue its former executive in a labor court. As it turns out, lawyers for Mercedes-Benz have become a permanent fixture in the court. According to an internal list, the company has dismissed 39 managers, 30 of them without notice, since August 2010.

But the company is not to blame for such crass treatment of its top managers. Daimler is operating under the strict supervision of the US Securities and Exchange Commission (SEC) and the US Department of Justice.

The board of directors, under CEO Dieter Zetsche, now has only limited powers. And it serves as an example of how German companies can come under the control of American regulatory agencies.

For years, the SEC and the Justice Department investigated corruption allegations against Daimler involving dubious payments in 22 countries. Under a settlement the carmaker reached with the Americans in April 2010, Daimler was to pay a fine of $185 million and the investigation was to be suspended -- under the condition that Daimler prevent its employees from engaging in corrupt business practices in the future.

Under the arrangement, a monitor was appointed to ensure that Daimler remained in compliance with the agreement. This monitor has almost as much power as a district attorney. All of the managers must cooperate with him and, upon request, turn over telephone lists, email communications and files. Although the monitor cannot arrest anyone, he can block promotions and demand dismissals.

On Parole

Former FBI Director Louis Freeh took on the job at Daimler. He and a permanent staff of 20 employees have been investigating the company for more than a year now, and he has up to 60 additional experts flown in from the United States for individual audits.

Freeh's appointment lasts until March 31, 2013. If he is unable to certify by then that the company has made effective arrangements to combat corruption and abuse, Daimler could face further legal action and billions in fines. In other words, Daimler is merely on parole.

Siemens is in a similar boat. The German electronics giant has already paid $800 million for the SEC to end its corruption investigation. Siemens is also under SEC supervision, but it managed to convince US officials to accept Theo Waigel, a former German finance minister, as its monitor. Since then, things have been quieter at Siemens headquarters in Munich than at Daimler headquarters in Stuttgart.

The two giants are victims of their own corporate policies. Many years ago, they joined a number of other German companies to become listed on the New York Stock Exchange (NYSE), hoping that share value would increase more quickly if they were listed in New York. But companies that are listed on US exchanges are also subject to supervision by the SEC -- and the SEC can investigate them, even when, for example, a German company is suspected of having bribed politicians in Africa.

It isn't easy for companies to escape the stranglehold of the SEC. Even when they withdraw from the NYSE, as E.on, Deutsche Telekom and Allianz have done, they remain subject to US laws for another five years. Daimler, which also withdrew from the NYSE, still remains under US observation. Senior executives at Daimler are beginning to see this as a new form of economic warfare, and they accuse the US authorities of using their extensive investigations to make it more difficult for German companies to do business.

Suspected Corruption

When former FBI Director Freeh arrived on the scene, a climate of fear took hold at Daimler. The executive rumor mill was full of stories about colleagues who had been fired for having invited good customers to a Formula One race or made fun of whistleblowers. "It's as if we had the Stasi" -- the notoriously effective former East German secret police -- "in the building," says a Mercedes-Benz manager.

Marketing experts complain that their business is suffering because hardly anyone knows what practices are permitted anymore. A bus salesman, for instance, was investigated for having given a customer a discount in addition to a credit for future parts purchases worth several thousand euros. Without these concessions, the lucrative deal would have been impossible. Employees in the compliance department, whose job is to ensure observance of the law, suspected corruption.

If Mercedes-Benz wants to sell trucks to a municipality, for example, the sales department must first submit its bid to the compliance department, which then conducts an extensive review. But by the time the compliance department gives the sales department the green light to proceed, the contract has sometimes already been awarded to another bidder -- the competition.

In a secret document, Daimler CEO Zetsche has added up all the contracts the truck division alone has lost because it can no longer sell products to certain highly corrupt countries. The total: €52.8 million in lost sales in the last 12 months. The company has also had to pay damages when it could no longer honor existing delivery contracts.

Christine Hohmann-Dennhardt deals with such complaints. She once served as the justice and science minister in the western German state of Hesse, and as a judge on the Federal Constitutional Court, before becoming a member of the Daimler board in February of this year.

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1. Withdraw
Eleos 12/14/2011
Siemens, Mercedes and others need to withdraw from the reaches of the envious US authorities. One method would be to sell all subsidiaries currently operating in the US, and then to set up companies in Mexico, or eventually Cuba, whose purpose would be to furnish the former subsidiaries with the products they need. Assembly plants and sales outlets would still have the same products but be at arm's length from the mother company. Any retaliation at government level should be answered by the Bundesbank selling T bonds. After the fiasco with Chrysler it seems that Mercedes is a slow learner. SAP also took a beating from Oracle recently in a US court. It's protectionism dressed in judicial robes.
2. The Lieb is lost...
coolblueice 12/14/2011
Well... That's what happens when the Lieb is gone out of any relationship.
3.
thezenroom 12/14/2011
are not these business practices illegal under German law? or are DB or Siemens untouchable there? British Aerospace had similar problem with the americans, and they aren't listed on the NY exchange. certainly greed and corruption has increasingly run riot at the top levels around the world. doing business in certain countries has always involved oiling the wheels and greasing palms. and executives have always had lucrative expense accounts. DB seems to be being treated unduly unfairly from what i can see: since they only sell cars and trucks; they haven't brought the financial system to its knees; with a lucrative trade in junk subprime lending for instance.
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