Discussion #5: Bribery

Go to pg. 304-306 of the text and read the "Daimler's" case on bribery. Answer question #2 - "What internal controls could have been usefully introduced to prevent bribery at Daimler?"

304 CHAPTER 5 lane Macartncy. "Rio Tinto Sacks Four Executives Jaled Michael Sainsbury, "Jailing of Two Chinese Steel Execu- in China for Bribery." The Timmes, March 30, 2010 tives Ends Rio Tinto's Brbery Saga The Australan eremy Peloiskay, US Jadge OKs Setlement in Daimler August 9, 2010 Bribery Case Thomson Ruters, April 1, 2010 Daimler's Settles U.S. Bribery Case for $185 Million ETHICS CASE David Bazzetta learned in July 2001 at a Deferred prosecution and independent corporate audit executive committee meet monitoring for two years by former Fed- ing in Stuttgart Germany that Daimler era Bureau of Investigation Director Chrysler "business units continued to Louis Freeh. maintain secret bank accounts to bribe for- The scope of Daimler's bribery opera eign government officials' though the com- pany knlew the practice violated US tion was staggering. From 1998 to 2008, payments for bribes, kickbacks, gifts of den box, 10,000 copies of an official's personal manifesto translated into German, and lavish travel had been given to officials in at least twenty-two countries, including Russia, a whistleblower complaint under the U.S. Foreign Corrupt Practices Act (FCPA) that ultimately led to a multiyear investigation of surprising scope and U.S charges against a company headquartered in Germany for bribes made China, Vietnam, Nigeria, Hungary, Latvia, to foreign officials around the world On April , 2010, the German and Croatia, Bosnia, Egypt, Greece, Hungary North Korea, and Indonesia. Focusing on much Russian business units of Daimler AG pleaded guilty to charges laid under the just fifty-one transactions out of a FCPA for bribing foreign officials and for failing to maintain books and records and of a investigation found the following internal controls as required under the Tens of millions of dollars "were made FCPA. As a result, Judge Richard J. Leon through the use of U.S. mails or the of the U.S. District Court for the District of means or instrumentality of U.S. inter- Columbia approved an arrange settlement that included the following state commerce. "Daimler also violated the FCPA's books Payment of $91.4 million to the Securi and records and internal controls provi- sions in connection with the 51 transac- an additional 154 ties Exchange Commission (SEC) for dis gorgement of profits earned as a result of bribery. Daimler law since it was a registrant with the SEC in order to raise capital (issue shares and debt) in the United States Payment of $93.6 Department of Justice for related crimi- nal charges. tions and at least r was subject to the US. transactions, in which it made im payments totaling at least $56 million to secure business in 22 countries.... Through these transactions that commercial vehi- Daimler cles and 500 passenger cars, for related crimi Teremy Pelofsky. US. Judge OKs Settlement in Daimler Bribery Case,accessed November 11, 2010, at http//www.reuters.com/article/idUSTRE6303WY20100401. Daimler AG is the successor company to DiamlerChrysler following the sale of Chrysler in 2007 Tbid bid United States Securities and Exchange Commission v. Daimler AG. United States District Court for the District of Columbia, Case 1:10-cv-00473, accessed November 26, 2010, at http://www.sec.gov/litigation/complaints /2010/comp-pr2010-51.pdf Ibid, 2. 110-qr-00473, accessed Nowmber 26, zo1a at http/www.sec-gow/litigtion/complaints CORPORATE ETHICAL GOVERNANCE& ACCOUNTABILITY 305 earned $1.9 billion in revenue and at least $91.4 million in illegal profits. "Nineteen of these transactions... involved direct and indirect sales of motor vehicles and spare parts under the United Nations Oil for Food Program. numerous such accounts to make or facilitate improper payments to for eign government officials. Bribes were also made through the use of "corporate cash desks" where sales executives would obtain cash in amounts as high as 400,000 Deutsche Marks for making improper pay- In addition, the investigators found that many of the personnel and systems that should have provided safeguards against mission arrangements, phony sales such illegal activities were actively support-intermediaries, rogue business part ing them. The SEC Complaint indicated the ners and misuse of inter-company ments), deceptive pricing and com- following and debtor accounts. The SEC Complaint indicates that, . A number of Daimler's former senior executives, who operated ina decentralized corporate structure, per-although Germany outlawed bribery in mitted or were directly involved in the 1999 when it ratified the OECD Anti- Company's bribery practices, includ- Bribery Convention, Daimler had become ing the head of its overseas sales an SEC registrant in 1993 and became sub- department, who reported directly to ject to the FCPA at that time.10 Also in the Company's most senior officers. 1999, Daimler created an Integrity Code The Company's internal audit, legal,ncluded antibribery provisions but and finance and accounting depart- these were essentially ignored. ments, which should have provided checks on the activities of the sales ery of foreign officials was legal and tax force, instead played important roles deductible in Germany, but bribery of in the subversion of internal controls German officials was not-and it seems and obfuscation of corporate records Prior to 1999, under German law, brib Daimler continued to hold and act 6. The improper payments were on this outdated perspective. In summary made possible in part as a result of form, Daimler continued to bribe foreign the falsification of corporate recordsofficias with the knowledge and approval and a lax system of internal controls. of very senior company officials using 7. In this environment, Daimler developed several organized proce- dures and mechanisms through which improper payments could be made. Daimler's books and records contained over 200 ledger accounts, known internally as "interne Fremd- konten," or, "internal third party accounts," which reflected credit bal- ances controlled by Daimler subsidiaries or outside third parties. Certain Daimler employees used SEC Complaint, as is the company's hundreds of ledger accounts on Daim ler's own books, corporate "cash desks" (where sales personnel would obtain cash), deceptive pricing and commission arrangements, offshore bank accounts and nominees for government off cials improperly described as "sales intermediaries" and "consultants."2 These arrangements are detailed in the i Ibid., 4 I1 tbid., 5 12 rbid