Headquartered in Munich, Germany, Siemens focuses on developing products for electronic and electronic engineering based industries. As with many large global manufacturing conglomerates, Siemens’s customers are other companies and governments around the world. Within these industries, it is common to have long-term contracts with the clients that can be worth millions or billions of dollars. It is critical that Siemens and their competitors convince a relatively small group of people that their products provide the best overall value to the client. Therefore, Siemens and its competitors may always have the temptation to use “whatever means possible” to persuade decision makers to sign contracts with their firms. With this persuasion comes the temptation to give illegal financial incentives to close the contracts.

The Allegations Start

Siemens’s illegal method of obtaining orders from clients was exposed when it was announced that six Siemens executives had been arrested for their actions related to giving bribes to German and other clients in the telecommunications industry. In addition, the executives were also accused of embezzling funds from Siemens to pay for the bribes. One of the executives arrested was Thomas Ganswindt, who was head of the telecommunications equipment unit. At this point, the estimated amount of the bribes was 200 million euros and allegedly included using bribes to obtain the security systems contract at the 2004 Olympic Games in Greece.

The concerns started for Siemens when a senior executive, Michael Kutschenreuter, claimed he got a very worrisome phone call from Beit Al Etisalat in early 2004. Al Etisalat worked at a Saudi consulting firm that was a business partner with Siemens. Al Etisalat demanded that he be paid $910 million in “commission payments” by Siemens for his role in winning telecommunication contracts with Saudi Arabia. Al Etisalat continued by stating that he threatened to go to the SEC with evidence of bribes offered by Siemens related to the contracts if the company did not pay the commission payments. Kutschenreuter notified his superiors, including future Siemens CEO Klaus Kleinfeld and the then current CEO Heinrich von Pierer, that the company was being blackmailed by Al Etisalat. Kutschenreuter claimed he got approval from the Siemens management board to pay Al Etisalat $50 million in January 2005. Of that $50 million, $17 million was for past obligations and $33 million was for “hush” money to make sure that the information was not sent to the SEC. Kutschenreuter was one of six executives arrested in November 2006. It was alleged that Siemens used fake consulting contracts to transfer money as a bribe to clients. If Siemens were found guilty of fraud, the company would no longer be allowed to bid on public sector contracts by governments globally. Prosecutors alleged that the bribes were not isolated to one group of employees or to one business unit, but were widespread throughout Siemens and were very well organized. The allegations came at a time when Siemens was ready to merge its telecommunications equipment business with Nokia. Siemens announced that the proposed merger was put on hold until the results of the investigation were known.

A Culture Built on “Don’t Ask, Don’t Tell”

The use of bribes in Germany has been very common in the past. In fact, only after stricter corruption laws were passed in 1999 were companies forbidden to offer bribes. Before 1999, German companies were allowed to write off as business expenses any bribes with foreign clients. Both Kleinfeld and von Pierer denied any knowledge of the bribes and claimed they did not offer any payments as hush money to stop Al Etisalat’s disclosures. Kutschenreuter claimed that bribes were so wide spread that they even had a coding system for them using the phrase “Make Profit.” Each letter in “Make Profit” corresponded to a number based on the sequence 1–2–3–4–5–6–7–8–9–0: M equals 1, A equals 2, K equals 3, and so on. Siemens executives used this code to tell their subordinates what the amount should be. For example, if they said “file this in the APP file,”

it would mean they were authorized to give a bribe equal to 2.55% of sales. Kutschenreuter stated he witnessed bribes being paid for power project contracts in Russia and Slovakia in the mid-1990s. In addition, he knew that bribes were being paid to the Argentine government for a contract to develop electronically scannable passports in 1999. He stated that the bribes stopped in 2001 only because there was a change in the Argentine government. Kutschenreuter also stated that the bribes were widespread partly because they were seen as a small sin (a peccadillo) in exchange for the large benefit to the company by obtaining these contracts.

Another Siemens executive who had worked for the company for 40 years, Reinhardt Siekaczek, stated that he was ordered to set up bank accounts to establish slush funds to be used for bribes in either 1999 or 2000. One bank account in Salzburg, Austria, was used to transfer more than 75 million euros for bribes each year. The bribes were used to secure contracts in countries such as Cameroon, Egypt, Greece, Indonesia, Kazakhstan, Kuwait, Nigeria, Saudi Arabia, and Vietnam. The transferring of money for bribes became much more difficult after money laundering laws were tightened after the September 11, 2001, terrorist attacks. At the annual shareholders’ meeting in January 2007, Siemens CEO Kleinfeld said he was “shocked” by the allegations and that Siemens was doing whatever was possible to clear up the allegations. At the same meeting, former CEO von Pierer stated that during his tenure as CEO he had taken major steps to control bribery and corruption. He also stated that he was “deeply distressed that these efforts were not successful enough.”

In fact, Siemens’s decentralized organizational structure allowed bribes to take place without any real checks and balances. The vastness of Siemens’s operations required that unit business managers be given a lot of autonomy to make their own decisions. Although this is an effective tool for decision making, it also weakens the potential accountability of the actions of the managers if there is not a control or monitoring system in place to ensure the decisions comply with German and foreign laws. Siemens had business unit managers and regional managers for their operations in 190 countries. Both unit and regional managers had the authority to create and implement contracts with consultants who aided Siemens in getting new client contracts. There was no standardized template that Siemens’s managers were required to use to draw up these contracts. As a result, the responsibilities and compensation to be given to the consultants to obtain more business for Siemens were left to the discretion of each manager. After the bribery allegations started, Siemens established a requirement that any type of consulting agreement must now have approval of senior managers and the chief compliance officer.

The Consequences Begin

In March 2007, former top Siemens executives stood trial for paying approximately 6 million euros in bribes so Siemens could secure a power generation equipment contract with the Italian utility Enel. Both Siemens’s managers, Horst Vigener and Andreas Kley, a former finance chief at the power generation unit, admitted the bribes but argued they were not guilty. Their reasoning was that Siemens had benefited greatly by the bribes, and they were charged with bribing public officials whereas Enel is a hybrid public/private owned company. The Italian government controlled 68% of Enel’s stock during the time of the alleged bribes, but the defense argued that Enel is partially privatized and is traded on Italian stock exchanges. In 2002, Germany passed an additional law stating bribery was illegal regardless of whether the official was with a public or private entity.

The Siemens managers also stated that the Enel managers who were going to make the final decision on the contract asked for bribes during the bidding process. The charges against the Siemens managers were a breach of trust because they were accused of inappropriate stewardship of Siemens’s money.6 In May 2007, both former managers were convicted of giving bribes. Siemens was ordered to pay a fine of $51.4 million, and the former managers received suspended prison sentences. Kley received a 2-year suspended sentence, and Vigener received a 9-month suspended sentence. The $51.4 million is equivalent to the profit Siemens made on the power generator deal with Enel. Siemens’s response was that the ruling was illegal because the court’s decision was not based on law or fact.

A New Beginning

In April 2007, von Pierer announced he would resign as chairman of the supervisory board of Siemens. Von Pierer stated he was leaving because of his duty to Siemens and not because of the ongoing bribery investigation. Six days later, Kleinfeld announced that he would step down as CEO when his contract expired in September 2007. Siemens supervisory board voted not to renew Kleinfeld’s contract. Kleinfeld had been CEO for only 2 years and was handpicked by von Pierer to take over the top position at Siemens.

In July 2007, Siemens chief compliance officer, Daniel Noa stepped down from the job after 6 months. It was speculated that Noa’s departure resulted from his lack of support from Siemens to be able to do his job. An anonymous source commented that Noa was not given enough power and responsibility to do his job properly in investigating illegal activities at Siemens.

In July 2007, Peter Löscher, formerly of Merck, was named the new CEO of Siemens, and he promised to streamline operations to ensure bribery would not continue at Siemens. Löscher was the first CEO that was hired for the top position from outside of Siemens. Löscher’s vision is based on Siemens having clear lines of responsibility, a high level of transparency, and the ability to make changes at maximum speed. He also stated that Siemens’s strategic focus would be based on “performance with ethics—this is not a contradiction, it is a must . . . compliance becomes part of management culture internationally, from top to bottom and back again.”

The Fines Continue

In October 2007, Siemens was ordered to pay $284 million for its role in the telecommunication equipment bribes. Siemens was convicted of funneling money through consulting contracts that were actually bribes to ensure Siemens got the client contracts. Siemens paid millions of euros in bribes to government officials in Nigeria, Russia, and Libya to win those countries’ telecommunication contracts. It was estimated that a total of 77 bribes equaling approximately 12 million euros was paid by Siemens from 2001 to 2004. The bribes ranged from 2,000 euros to 2.25 million euros.

An Amnesty Plan

Corruption had infiltrated to such a level within Siemens that it was difficult to determine the full impact of the effects of the bribes. As a result, in November 2007, Siemens declared an amnesty for all of its employees except the top 300 executives to disclose what type of illegal actions were taking place at various Siemens businesses around the world. The result of the amnesty was that 110 employees came forward and offered information about illegal activities occurring at Siemens. Through the information from the lower-level employees, Siemens officials could finally piece together which top-level managers were involved and knew about the bribes occurring globally. The newly appointed general counsel, Peter Solmssen, commented that in the past, Siemens’s level of corruption was systemic and that there was “a cultural acceptance that this was the way to do business around the world, and we have to change that . . . [and that] . . . allowing crimes to persist is a form of aiding and abetting.”....

Questions

1. Should bribery be considered an unethical act or just another cost of doing business? Explain your position.

2. How do you change a culture that is built on bribery to make sales?

3. Due to the employee amnesty, 110 employees came forward with reports of wrongdoing. Does an amnesty program really work? Explain your position.

4. In 2009, two former CEOs reached settlements concerning their roles in the Siemens corruption scandal.

However, one of the CEOs says that he did nothing wrong. Do you agree or disagree with this position?

Does perception play any part in this settlement?