Reference no: EM131046201

Corruption at Siemens

One day in 2004, a senior executive at Siemens Company said he received a disturbing phone call from a Saudi Arabian businessman. The caller said he represented a Saudi consulting firm that had been a business partner of Siemens. He wanted $910 million in U.S. currency in payments and if Siemens didn't pay up, he would forward documents to government authorities detailing bribes paid on Siemens' behalf to win telecommunications contracts in Saudi Arabia. The incident was the beginning of a series of events-police raids, forensic investigations, and arrests of top executives-that became one of the biggest corruption cases in corporate history. Based in Germany, Siemens is one of the world's largest electronics and industrial engineering firms. It produces industrial controls, lighting products, power generation equipment, and transportation systems. Siemens operates in 190 countries and recently generated annual revenues exceeding $100 billion.

A Culture of Corruption ?

Since the 1970s, Siemens has been stung by a series of scandals, many of them including accusations of bribery brought by governments in numerous countries, the European Union, and the United Nations. One former executive was accused of handling $77 million in bribes. Another admitted to bribing a labor union. A court found that in 2007 Siemens had paid millions to bribe government officials in Libya, Nigeria, and Russia. Investigators alleged there was a culture at Siemens, endorsed by senior managers, to use bribes and slush funds to win contracts, especially in its communications and power-generation divisions. Millions of dollars were regularly dispensed, the money carted off to foreign destinations in suitcases by managers who often felt confident they were doing "business as usual."

Reckoning and Deliverance

In the end, bribery caught up with Siemens. In a ruling under the Foreign Corrupt Practices Act, U.S. authorities ordered the company to pay $800 million in fines. The United States found that, in order to win infrastructure contracts, Siemens allegedly spent more than $1 billion bribing government officials around the world, including the former President of Argentina. The U.S. Securities and Exchange Commission (SEC) claimed that Siemens made more than 4,000 bribe payments over seven years. Payments were intended to obtain contracts to supply medical devices in Russia, transmission lines in China, transit systems in Venezuela, medical equipment in Vietnam, power equipment in Iraq, and telecommunications equipment in Bangladesh. In 2006, a U.S. grand jury indicted Siemens and two of its employees in a fraud scheme to pay $500,000 to win a $49 million contract. In 2007, two former Siemens officials were convicted of bribery for their involvement in multimillion-dollar payments to officials of a power utility in Italy. In response to the scandals, some Siemens customers indicated they would delay ordering telecommunications equipment from the firm, and Nokia Corporation announced it would postpone a planned joint venture. In 2008, Siemens' profits declined, partly due to the creation of a fund for expenses related to bribery investigations. In 2009, the World Bank required Siemens to pay $100 million to help global anticorruption efforts and to forego bidding on World Bank development projects for two years. In the end, Siemens' two top executives, the chairman and the CEO, were forced to resign. In Germany, Siemens executives indicted in the scandal received only suspended prison sentences. A German court ordered Siemens to pay $284 million, a modest fine for a firm that usually generates billions in annual net profits. Germany is the world's leading exporter, and bribery cases often include efforts to generate foreign business, especially in developing economies. Until 1999, German firms were permitted to write off such bribes as business expenses. Many European countries did not outlaw paying bribes overseas until the late 1990s.

Remedial Actions

In the wake of the scandal, Siemens management took steps to prevent further bribery. The company appointed a law firm to conduct an independent review of its compliance system and uncover possible improprieties. Sixty-five countries were flagged for scrutiny. Siemens' own internal investigation identified more than $1.5 billion in suspicious transactions worldwide between 2000 and 2006. Management remarked on the difficulty of closely monitoring activities of the firm's 430,000 employees in 190 countries and bank accounts that once numbered 5,000 and handled up to 50 million transactions a day. International subsidiaries were free to act with substantial autonomy. Siemens hired an independent ombudsman, strengthened its business-conduct code, and established a task force to improve internal controls over international funds transfers, reduce the number of bank accounts, and supervise the opening and maintaining of bank accounts. Subsidiaries were required to provide comprehensive details of all transactions. The German government tightened standards for managers, seeking to ensure that those at all large firms report regularly to supervisory boards regarding compliance with ethics codes.

Conclusion

In the United States, the number of companies reporting foreign corruption investigations into their activities abroad is up sharply. Foreign companies that do business in the U.S. are attracting greater scrutiny as well. In most countries, however, antibribery laws are weak or poorly enforced. Bribery is difficult to detect when funds are channeled through consultants and other intermediaries, or when company operations are widely dispersed and decentralized. Why should firms care about bribery? For one thing, it is bad business. Bribery distorts legitimate efforts to sustain and enhance company performance. Where corruption becomes a pattern, eventually the firm is caught and its reputation tarnished. Corruption also inhibits development in poor countries and is at the root of persistent poverty in many. It sustains repressive governments and can lead to the failure of societies and national economies. The best firms create a culture in which ethical conduct is valued as highly as efforts to maximize sales and profits. It is insufficient to merely publicize the need for integrity; managers must lead through ongoing actions that demonstrate adherence to ethical standards. They should establish transparency and compliance processes that ensure senior executives know what is going on throughout the firm.

Case Questions

1. What does the case suggest is the value of ethical behavior? What did Siemens gain by introducing controls to minimize the likelihood of corruption?

2. Most countries lack adequate laws or enforcement to deal with bribery and other forms of corruption. Why is this? How do countries benefit from a strong rule of law that minimizes corruption?

3. Do you think Siemens was penalized enough for its corruption? Why or why not? What can governments or other organizations do to discourage firms and others from engaging in corrupt behavior?

4. Some argue that because ethical standards are lax in many countries, Siemens and other firms must pay bribes to obtain new business. Do you agree with this view? Stated differently, when doing business around the world, is it generally better to emphasize normativism or relativism? Justify your answer