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'Useful Payments' US Investigators Crack Down on Daimler's Culture of Corruption

After corruption scandals involving engineering giant Siemens and truck manufacturer MAN, Daimler is now in the spotlight. The US is pressing charges against the carmaker over alleged bribery payments to foreign governments. The case will likely be settled out of court.

Sometimes two letters are enough to tell an entire story. In this case, the two letters, which were printed on the labels of three files in a safe at the Mercedes-Benz office in Istanbul, were "N.A."

The German automaker produces busses in Turkey, which it sells in countries around the world, including North Korea, Latvia, Bulgaria, Romania and Russia. The company apparently paid €3.3 million ($4.4 million) in bribes to secure business in these countries.

This, at least, is the way the United States Securities and Exchange Commission (SEC) interprets the content of the files with the letters "N.A." -- an abbreviation for the words "Nützliche Aufwendungen" ("useful payments") -- printed on the label. It's another -- and very German -- way of saying "bribes."

The story behind the files is particularly dramatic, because it also involved the suicide of an executive. Rudi K., who worked for Mercedes-Benz's parent company Daimler in Nigeria, was apparently involved in the payments. He was faced with a difficult choice: report poor sales figures or risk a jail term.

American attorneys questioned K. for several days. He later told his wife that he was treated like a hardened criminal and was under "enormous pressure." Then K. committed suicide.

Good at Corruption?

The affair has proved to be extremely expensive for automaker Daimler, which is set to pay $185 million to settle a lawsuit  in the United States. The case raises many questions. How could a respected global corporation like Daimler apparently have violated German and international law for years by paying bribes in at least 22 countries around the world? Could it be that the Daimler case is in fact typical for Germany, which until recently was the world's largest exporter? Are German companies as good at corruption as they are at exporting?

It hasn't been long since two other major German companies, electronics giant Siemens and the industrial group MAN, were found to have engaged in bribery on a large scale. Last Wednesday, prosecutors searched the headquarters of industrial services provider Ferrostaal. The company is suspected of having used secret payments to promote the sale of submarines and oceangoing tugs, and of having managed bribes for other companies.

The so-called "useful payments" known as "N.A." are payments to people who are expected to be of use to the company in the contract-awarding process, including government officials, cabinet ministers and heads of state, as well as their wives and children. Such payments were legal in Germany until 1998 and were even tax deductible.

But then Germany was forced to bow to US pressure. In 1977, the Foreign Corrupt Practices Act made it illegal for American companies to bribe foreign business contacts. Washington complained that US companies stood to lose billions in contracts because they, unlike companies in Germany and other countries, were barred from paying bribes. Germany, at the time the world's second-largest exporter after the US, responded by imposing its own ban on the bribing of foreign decision-makers.

Business as Usual

That was in 1999. Since then, foreign bribes have been banned by law in German companies. The Mercedes-Benz files in Istanbul were however discovered in 2006. The legal framework had changed, but the company's business practices apparently had not.

According to the complaint filed by the "United States of America" against "Daimler AG," Daimler had "an inadequate compliance structure" as well as "a corporate culture that tolerated and/or encouraged bribery."

Many of these payments were apparently based on a clearing system through which the bribes were processed, completely legally, during the period when the practice was still allowed under German law. For most of its foreign subsidiaries, the German parent company maintained so-called internal "third-party accounts" (TPAs).

These accounts were used, for example, to transfer discounts and commissions to which the subsidiaries were entitled when they sold the parent company's vehicles abroad. The foreign subsidiaries had access to these accounts, which, as an internal audit report states, were to be handled with "absolute confidentiality."

Concerns about Loss of Sales

The company should have abolished or modified this system, which made the unchecked disbursement of funds possible, by no later than 1999. At a management meeting, the then-head of internal audit explained the new legal framework to his fellow executives. In response, they argued that Daimler would lose sales in some countries if the "useful payments" could no longer be used.

To its credit, management did approve an anti-corruption "integrity code." Nevertheless, no effective measures were put in place to prohibit the payment of bribes in the future.

On the contrary, the company allegedly even frustrated efforts to impose better controls. According to the US complaint, the head of internal audit warned executives in May 2000 that he feared that Daimler employees would continue to use internal third-party accounts to pay bribes abroad, despite changes in the German legal framework. He also informed them that these accounts were only subject to minimal oversight and permitted cash transactions.

Problematic Favors

Daimler's head of internal audit proposed that his department conduct an audit of all internal third-party accounts, to "identify favors granted that might be problematic from a legal point of view and canceling them as soon as possible." But he encountered resistance: The group's sales management, he noted, lacked a willingness to allow more transparency into the transactions through the third-party accounts.

A year later, the head of internal audit became more insistent and called for the closing of all internal third-party accounts. But he encountered opposition from the head of the sales organization DaimlerChrysler Overseas.

But where was Jürgen Schrempp, who had been running the company since 1995? The then-CEO was busy building his global conglomerate, pushing forward the merger with Chrysler and Daimler's investment in Mitsubishi. But Schrempp apparently paid no attention to the subject of corruption.

For the Daimler board members, looking the other way was made easier by the fact that the bribes in question were for significantly smaller amounts than in the Siemens case.

Expensive Gifts

At Daimler, the kickbacks were not intended to promote the sale of power plants, which cost billions, but of busses, cars and trucks. For example, about €3 million ($ 4 million) in bribes, distributed across several years, was enough to encourage Russian government representatives to purchase Daimler vehicles. In another case, €4 million was enough to convince Chinese officials to purchase utility vehicles and Unimogs. In Turkistan, all it took to win over a member of the government was an expensive birthday gift: an armored S Class luxury sedan, worth more than €300,000.

The individual amounts were so low that the board didn't have to be informed about the payments. Nevertheless, Schrempp does bear the responsibility for the fact that, after the laws were changed in Germany, Daimler simply continued to behave as if nothing had happened.

The CEO of a global conglomerate must ensure that it abides by the law. Schrempp had to have been aware of the risks to which his company was being exposed. It was Schrempp, after all, who had seen to it that Daimler's shares were listed on the New York Stock Exchange, thereby subjecting the company to US laws on corruption.

As a result of the merger with Chrysler, Schrempp had also brought people into the group who took umbrage at their German colleagues' lax attitudes regarding corruption. David Bazzetta, for example, an auditor at Chrysler, was astonished about what he learned at a July 2001 auditors' meeting in Stuttgart, where German managers told him that it was customary at Daimler-Benz to process bribery funds through secret bank accounts.

Massive Investigation

After being laid off in 2004, Bazzetta told US authorities what he knew. They, in turn, launched an investigation into Daimler on a scale that the German company had never experienced.

In accordance with US law, the Daimler investigation was assigned to a law firm, the New York-based firm Skadden. The attorneys acted like prosecutors, except that they were not subject to the same restrictions. They questioned managers in Germany, Eastern Europe, Africa and Asia, without having to submit requests for legal assistance first. They searched offices and confiscated computers without having to present search warrants.

Daimler management gave the attorneys free rein in their investigations, so as not to expose itself to the suspicion that it had anything to hide. This meant that at times it seemed as if the attorneys were running the company. A total of 45 Daimler executives were dismissed. And whenever a new position was to be filled, the Daimler board members would ask the Skadden lawyers whether they had any objections to the candidates.

The attorneys also investigated Bazzetta's claim that the deputy head of the auditing department had told Schrempp about the secret accounts. They inspected Schrempp's laptop and combed through his emails, but they found no proof that the CEO had been aware of the bribery practices. And the deputy head of the auditing department also refuted Bazzetta's statements on the subject.

Daimler Has Little to Fear in Germany

For this reason, the lawsuit is now directed against Daimler and not against Schrempp or any other Daimler board member. The first hearing in the case is scheduled for April 1, before the US District Court for the District of Columbia. At that point, the out-of-court settlement will likely be announced, under which Daimler is to settle the suit with a payment of $185 million.

The automaker has little to fear from prosecutors in Germany. The public prosecutor's office in Stuttgart is still investigating two cases, but other investigations have already been closed. According to a spokeswoman, the prosecutor's office has no evidence to suggest that a corruption system existed that was given the blessing of upper management.

Daimler is getting away relatively cheaply compared with Siemens, whose bribery scandal has cost the company more than €2 billion in total. This is partly because the bribes at Daimler were significantly smaller than at Siemens. Nevertheless, corruption did not pay off for the Stuttgart-based automaker.

In addition to the settlement payment in the United States, the company must pay for the years of investigations by Skadden, as required under US law -- a sum in the triple-digit millions. When all is said and done, the affair will have cost the company more than half a billion euros.

'World Champion in Bribery'

The news of corruption scandals at Daimler, Siemens, MAN and, most recently, Ferrostaal, creates the impression that German companies owe some of their success abroad to their bribery practices. But this is a fallacy, argues Peter von Blomberg, who is deputy head of the German chapter of the anti-corruption non-governmental organization Transparency International.

French and British corporations, like Alstom and BAE Systems, are also plagued by corruption scandals. Although Germany held the title of "export world champion" for many years, before recently being overtaken by China, it didn't do so by being a "world champion in bribery," says Blomberg.

The most interesting question, however, is whether abandoning bribery will mean that sales decrease at Siemens, MAN and Daimler. There are countries in which it is virtually impossible to conduct business, or at least win major contracts, without paying kickbacks to key decision-makers. In those cases, it remains to be seen whether the US Securities and Exchange Commission will be just as quick to look into suspicions of corruption among US companies.

No Alternative

But the companies involved have no alternative. The management of Daimler, MAN and Siemens should have already installed many of the controls that have now been introduced more than a decade ago, when Germany prohibited bribery abroad.

Instead, a system that had been previously set up was simply allowed to continue. Companies didn't even change their euphemism for bribes. As the Daimler files discovered in 2006 demonstrate, they were still being called "useful payments."

Translated from the German by Christopher Sultan
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