A Swamp of Bribes Siemens Forced to Battle Internal Corruption

The most spectacular corruption scandal in the history of German multinational firm Siemens is taking on epic proportions. Divisions kept slush funds and are accused of paying hundreds of millions in bribes to obtain contracts around the world. Now, the company's incoming CEO wants to put an end to shady practices at Siemens.

A number of Siemens divisions have been snared in the corruption scandal, the worst in the company's 159-year history.
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A number of Siemens divisions have been snared in the corruption scandal, the worst in the company's 159-year history.

Heinrich von Pierer, Siemens former chief executive, was once asked if he ever felt powerless.

“When Siemens loses a major order, I do feel powerless to a certain extent,” the now 65-year-old manager told visitors at his office in Erlangen.

After all, he added, his company had to bring in orders worth several hundred million deutschmarks on a daily basis in order to keep its staff and factories operating at full capacity.

That was ten years ago. At that time, the multinational had just made headlines because a middleman in Singapore bribed a senior official at the country’s energy ministry. As a result, Siemens was banned from bidding for public contracts there for five years.

Von Pierer, who now heads the supervisory board of the Munich-based company, must feel as though he has gone back in time. For the past two weeks the company has been the subject of bribery allegations that, if true, would be the worst in the 159-year history of Siemens.

Allegedly, a group of managers conspired to channel off at least €200 million from the company’s Communications division to a series of shell companies. The funds landed in secret accounts, which investigators suspect were used to bribe officials into awarding contracts to Siemens. Regardless of location -- Greece, Nigeria, Russia or Indonesia -- Siemens is accused of using the funds to win orders. And, the same methods were likely used at the company’s other divisions.

In the end, is it possible that not 200, but perhaps 300 or even €500 million flowed through these secret channels? Is it possible that a team of creative employees skimmed off sums in the triple-digit millions of euros, without senior managers becoming aware of the situation, as they claim? And, why didn’t company management and the supervisory board use all of their powers to clear up the matter, which they must have been aware of since 2003?

Graphic: Global Player

Graphic: Global Player

At present all that is known is that since two weeks ago Wednesday several hundred investigators have combed through the company’s offices, private homes and even chief executive Klaus Kleinfeld’s office. This, along with the arrest of a half dozen high and mid-ranking managers is something completely new for Siemens employees.

Their company is now associated with police raids, illegal accounts, criminal bands and cash-smuggling. Indeed, the situation could hardly get worse for the conglomerate, especially after BenQ, the new owner of Siemens mobile handset operations, declared the business insolvent at the same time that Siemens senior executives came under criticism for receiving a hefty pay rise.

A history of corruption

Over the years, Siemens has racked up an impressive collection of corruption scandals. For a long time, these violations were considered to be mere petty offences. In fact, until the early 1990s, Siemens paid bail money as well as legal fees for employees who got caught. Even convicted managers didn’t have to worrying about losing their pensions -- at least not right away.

In order to understand why the Munich-based multinational is so susceptible to corruption cases, it is necessary to go back to the large-scale restructuring that took place in 1989. The 15 divisions which were newly created at that time were given a considerable degree of autonomy, and they were also allowed to carry out financial transactions without supervision by the company’s headquarters. The small central management enthroned above them was mainly responsible for company-wide issues, while also checking up on the newly created divisions.

The division heads learned to value this new-found freedom, and apparently dipped generously into funds that Siemens maintained in order to make general payments in foreign countries. At that time, these expenses were disguised as consultant fees or commissions, and they were even tax deductible.

This secret financial system first came under acute pressure in 1999, when bribery of foreign politicians and civil servants was made illegal, and the tax deduction for such payments was abandoned. Beginning in 2002, the bribery ban was extended to employees at private companies.

Incoming CEO Klaus Kleinfeld wants to restructure the company and scrub it of corruption.

Incoming CEO Klaus Kleinfeld wants to restructure the company and scrub it of corruption.

Parallel to this, Siemens also tightened its own anti-corruption guidelines -- at least on paper. But, instead of following the new rules, Siemens managers simply invented increasingly complicated maneuvers in order to win new tenders.

At the same time, they increased their efforts to hide the payment methods. Siemens then chief executive von Pierer, who took the helm in 1992, even unintentionally encouraged his employees by introducing rigorous profit margin targets for company divisions in 2000 that had to be achieved by 2003. The Communications (Com) division had missed a series of industry trends and suffered from a collapse in overall demand. As a result there was a particular need to win contracts, in spite of these overall problems.

The current case can be traced back to Siemens’s activities in Italy in the mid-1990s. The Germans were involved in a bitter fight with several rivals, all of whom were competing for a deal with the state-controlled telecommunications company Italtel. After several months of negotiations, the Germans won the tender in the spring of 1994.

Investigations across Europe

Nine years later the Bolzano public prosecutor’s office renewed its efforts to look into the circumstances surrounding the deal. It quickly became clear to investigators that Siemens must have used dirty tricks to gain an advantage over rival firms. Close to 10 million deutschmarks (approximately $6.738 million) were sent to a Puerto Rico-based shell company called Tetre Inc., which was alledgedly owned by Giuseppe Parella, the former inspector general for Italian mail and telecommunications.

German authorities first learned about the matter in 2003, when Italian prosecutors sent a formal legal request to their counterparts in Munich, requesting assistance in the investigation. The Italians also provided information which described in great detail how Parella was allegedly able to send funds abroad. After receiving this information, German investigators searched Siemens offices, but failed to uncover any evidence pertaining to the case.

Since that time, investigators have made considerable progress in the case. The funds, they found, originated in a Raiffeisen account in Innsbruck, Austria. Later, the account was apparently used to send payments to Nigerian military officers and politicians. In total, well over €70 million ($91.98 million) was sent from this account between 1995 and 1999.

The account was maintained by a relatively anonymous Siemens employee, who handled the cash for the network. He was arrested a few days ago along with five other company managers.

A request for legal assistance from abroad, this time from prosecutors in Bern, triggered the most recent raids on Siemens’s properties. The most important tip came from staff at a Zurich-based unit of Dresdner Bank that is responsible for money-laundering investigations. They noticed that Siemens representatives were attempting to use one of their bank accounts to send more than €10 million to a dubious recipient. Apparently, Siemens managers were concerned that their Austrian account would be discovered in the course of a separate investigation of bribes paid to the former Nigerian dictator Sani Abacha. For this reason, they were trying to distribute some funds via a new network of shell companies.

Graphic: Fiercely contested market

Graphic: Fiercely contested market

The Bern prosecutors' research ended at Siemens headquarters in Munich. Investigators arrived there in the early morning hours of November 15 with a search warrant. The warrant stated that managers responsible for the bribes had created shell companies and fictitious consulting contracts in order to take funds from Siemens. This was apparently done with the blessing of Siemens’s division heads, who granted power of attorney authority to two employees.

Initially, the money was sent to three United States-based companies and a trading company in Vienna named Krhoma. From there it was sent onwards to three shell companies in the British Virgin Islands controlled by a high-ranking Siemens manager. He maintained close ties to a trustee on Lake Lugano, who built up and looked after the financial network. The man now says he is cooperating closely with Swiss authorities.

Olympic favors

Prosecutors in Athens are also investigating a high-ranking executive at the Greek subsidiary of Siemens’s Com unit. He allegedly used illegal accounts to bribe government officials who awarded Siemens contracts prior to the 2004 Olympic games. These included major orders for a security system as well as other major projects, possibly including an order for the Athens subway system. Investigators found about €30 million in Swiss-based accounts that belonged to his Caribbean shell companies.

In a similar manner, bribe money was likely used to win orders in Egypt, Indonesia, Nigeria, Kuwait and Saudi Arabia. In addition, a double-digit million euro amount was taken from the secret accounts to win contracts in Russia.

However, the funds did not always come from accounts based in the Caribbean. Close to €100 million were transferred to the desert metropolis of Dubai, some of which went to a company called Fiberlite. From there the money was transferred to the Swiss bank accounts of Caribbean companies controlled by a Greek former Siemens executive.

The Munich public prosecutor quickly raised the amount of money it suspected was involved in the matter from €20 million to €200 million. This included €60 million seized in Austria, €40 million frozen in Switzerland as well as the €100 million which moved through Dubai.

Corruption in multiple divisions?

However, it appears that investigators will have to correct their estimates upwards once again. It now looks as though Greek-based employees within Siemens Transportation division may also have been involved in the network of illegal bank accounts.

But who gave the order to promote these sorts of business methods? One Siemens employee who is currently in custody, alleges that former executive board member Thomas Ganswindt knew about the bribes. But, Ganswindt, who also served as the head of the Communications unit, is not being investigated.

It is also worth noting that another former head of the Communications unit, Volker Jung, has close ties to Greece. The former management board member, who left the company in September 2003, also served as the head of the supervisory board at Siemens’s Greek subsidiary. In addition, Jung supervised a Greek company with close ties to Siemens, and he still apparently owns a house there.

However, the Munich public prosecutor is not pursuing Jung, either as a witness or a possible suspect in the case. There is also no evidence that Jung participated in the affair.

Separately, a regional court in Darmstadt near Frankfurt is scheduled to hear a case next year about whether two former executives at Siemens Power Generation unit paid bribes to win orders. The Frankfurt public prosecutor accuses the two high-ranking managers of paying €6 million in bribes to two managers at Italy’s Enel between 1999 and 2002 in order to win an order for gas turbines.

Furthermore, the public prosecutor in the western German city of Wuppertal has been conducting an investigation against five former Siemens managers for more than two years. They allegedly won a EU order for a Serbian power plant by making cash payments as well as giving luxury cars as gifts. A spokesman for the prosecutor said that case is so complicated that an end to the investigation is nowhere in sight.

But Siemens apparently viewed these cases as simple twists of fate.

“Bringing charges against their own managers is simply not part of their house style,” a high ranking Siemens manager said.

However, the situation could change under Siemens new chief executive Kleinfeld. Using the same radical approach that he is applying to the company’s restructuring, Kleinfeld apparently wants to drain the swamp of corruption that existed in the era of his predecessor, von Pierer. In the future, any employee who hears about unethical activities within the company can contact an independent attorney. This attorney will also have a say in whether the employee suspected of corrupt activities should be suspended from his duties.

In addition, Siemens divisional heads must now submit joint bids for major orders such as football stadiums, hospitals or airports. This could reduce corruption because the managers of different units will be required to exchange information with each other before submitting their bids.

Amazingly, the current case might not become a public relations disaster for Kleinfeld. During the time that the Communications and Power Generation divisions were allegedly establishing their illegal accounts, he was working in the United States. And, up to 1998, he served as the head of Siemens internal consulting business, which meant he was far removed from the matter.

In contrast, Kleinfeld’s predecessor von Pierer served as chief executive during the period in question. Since resigning in January 2005 he has served as the head of the audit committee within the company’s supervisory board. He received regular reports on the cases, but investigators must still determine whether top executives were directly involved in the corrupt activities.

In fact, it is possible that if Kleinfeld is able to portray himself as a reformer within the company he could profit from the entire corruption scandal: this coming spring his contract is up for renewal.



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