Week 6 Discussion Question 1 & Discussion Question 2

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Case 8-1

SEC v. Siemens Aktiengesellschaft

On December 15, 2008, the SEC filed a lawsuit against Siemens Aktiengesellschaft (German

word for a corporation) charging the Munich, Germany-based manufacturer of industrial and

consumer products, with violations of the anti-bribery, books and records, and internal controls

provisions of the FCPA. The SEC has the authority to bring this action because Siemens stock is

listed on the New York Stock Exchange. Siemens agreed to pay a total of $1.6 billion in

disgorgement and fines, which is the largest amount a company has ever paid to resolve

corruption-related charges. The company also agreed to pay $350 million in disgorgement to the

SEC. In related actions, Siemens will pay a $450 million criminal fine to the U.S. Department of

Justice and a fine of $569 million to the Office of the Prosecutor General in Munich, Germany.

Siemens previously paid a fine of $285 million to the Munich Prosecutor in October 2007. The

SEC released a summary of its litigation in this matter that is summarized in the following

paragraphs.

Summary of Litigation

Between March 12, 2001 and September 30, 2007, Siemens violated the FCPA by

engaging in a widespread and systematic practice of paying bribes to foreign government

officials to obtain business. Siemens created elaborate payment schemes to conceal the nature of

its corrupt payments, and the company's inadequate internal controls allowed the conduct to

flourish. The misconduct involved employees at all levels, including former senior management,

and revealed a corporate culture long at odds with the FCPA.

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During this period, Siemens made thousands of payments to third parties in ways that

obscured the purpose for, and the ultimate recipients of, the money. At least 4,283 of those

obscured the purpose for, and the ultimate recipients of, the money. At least 4,283 of those

payments, totaling approximately $1.4 billion, were used to bribe government officials in return

for business to Siemens around the world. Among others, Siemens paid bribes on transactions to

design and build metro transit lines in Venezuela; metro trains and signaling devices in China;

power plants in Israel; high voltage transmission lines in China; mobile telephone networks in

Bangladesh; telecommunications projects in Nigeria; national identity cards in Argentina;

medical devices in Vietnam, China, and Russia; traffic control systems in Russia; refineries in

Mexico; and mobile communications networks in Vietnam. Siemens also paid kickbacks to Iraqi

ministries in connection with sales of power stations and equipment to Iraq under the United

Nations Oil for Food Program. Siemens earned over $1.1 billion in profits on these transactions.

An additional 1,185 separate payments to third parties totaling approximately $391 million.

These payments were not properly controlled and were used, at least in part, for illicit purposes,

including commercial bribery and embezzlement.

From 1999 to 2003, Siemens' Managing Board was ineffective in implementing controls

to address constraints imposed by Germany's 1999 adoption of the Organization for Economic

Cooperation and Development anti-bribery convention that outlawed foreign bribery. The

Managing Board was also ineffective in meeting the U.S. regulatory and anti-bribery

requirements that Siemens was subject to following its March 12, 2001, listing on the New York

Stock Exchange. Despite knowledge of bribery at two of its largest groups — Communications

and Power Generation — top management was tone-deaf to the internal environment it had

developed and created a corporate culture in which bribery was tolerated (and even rewarded) at

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the highest levels of the company. Employees obtained large amounts of cash from cash desks,

which were sometimes transported in suitcases across international borders for bribery. Written

authorizations for payments were removed later to eradicate any permanent record. Siemens used

numerous slush funds, off-books accounts maintained at unconsolidated entities, and a system of

business consultants and intermediaries to facilitate the corrupt payments.

Siemens failed to implement adequate internal controls to detect and prevent violations of

the FCPA. Elaborate payment mechanisms were used to conceal the fact that bribe payments

were made around the globe to obtain business. False invoices and payment documentation was

created to make payments to business consultants under false business consultant agreements

that identified services that were never intended to be rendered. Illicit payments were falsely

recorded as expenses for management fees, consulting fees, supply contracts, room preparation

fees, and commissions. Siemens inflated contracts with the United Nation (UN), signed side

agreements with Iraqi ministries that were not disclosed to the UN, and recorded the after-sale-

service-charges (ASSF) payments as legitimate commissions despite UN, US, and international

sanctions against such payments.

In November 2006, Siemens' current management began to implement reforms to the

company's internal controls. These reforms substantially reduced, but did not entirely eliminate,

corrupt payments. All but $27.5 million of the corrupt payments occurred before November 15,

2006. The company conducted a massive internal investigation and implemented an amnesty

program to its employees to gather information.

The success of Siemens’ bribery system was maintained by lax internal controls over

corruption-related activities and an acceptance of such activities by members of senior

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management and the compliance, internal audit, legal and finance departments. Siemens violated

Section 30A of the Securities Exchange Act of 1934 by making illicit payments to foreign

government officials in order to obtain or retain business. Siemens violated Section 13(b)(2)(B)

of the Exchange Act by failing to have adequate internal controls to detect and prevent the

payments. Siemens violated Section 13(b)(2)(A) of the Exchange Act by improperly recording

the payments in its books.

Without admitting or denying the Commission's allegations, Siemens consented to the

entry of a court order permanently enjoining it from future violations of the Exchange Act;

ordering it to pay $350 million in disgorgement of wrongful profits, which does not include

profits factored into Munich's fine; and ordering it to comply with certain undertakings regarding

its FCPA compliance program, including an independent monitor for a period of four years. On

December 15, 2008, the court entered the final judgment. Since being approached by SEC staff,

Siemens has cooperated fully with the ongoing investigation, and the SEC considered the

remedial acts promptly undertaken by Siemens. Siemens' massive internal investigation and

lower level employee amnesty program was essential in gathering facts regarding the full extent

of Siemens' FCPA violations.

Charges Against the Managing Board

The following charges were made against Siemens’ Managing Board:

1. The Board was ineffective in meeting the U.S. regulatory and anti-bribery requirements

that Siemens was subject to following its listing on the NYSE on March 12, 2001.

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2. The Board failed to adopt meaningful compliance measures, failed to adequately staff

Siemens’ compliance function and, at times, failed to adopt reasonable recommendations

designed to ensure compliance procedures at the company.

3. The company failed to respond to red flags including: ignoring substantial cash payments

in Nigeria by senior level employees within one of its business groups; ignored Siemens’

outside auditor KPMG’s identification of approximately $5.81 million in cash that was

brought to Nigeria by a group employee; the FCPA compliance report prepared on the

foregoing matters in November 2003 by Siemens’ then-CFO did not lead to any

disciplinary actions against those employees involved in the bribery and the report was

not provided to or discussed with the Managing Board or the company’s audit committee.

Illicit Payment Mechanisms Used to Pay Bribes

Siemens made thousands of payments to third parties in ways that obscured the purpose for, and

ultimate recipient of, the money. The principal mechanisms used to facilitate illicit payments

were business consultants, payment intermediaries, slush funds, cash, and intercompany

accounts.

Through its use of business consultants and payment intermediaries, Siemens funneled

more than $982.7 million to third parties, including government officials. Business consultants

were typically hired pursuant to business consultant agreements, contracts that on their face

obligated Siemens to pay for legitimate consulting services. In reality, many business consultant

agreements were shams in that the business consultants performed no services beyond funneling

bribes. One business group had specific instructions on how to use a "confidential payment

system” to conceal payments to business consultants. Payment intermediaries were additional

entities and individuals through which Siemens funneled bribes. In many cases, Siemens would

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pay the intermediary an amount and simultaneously direct that the money be transferred to a

third-party bank account, less a small portion as the intermediary's fee.

Siemens also funneled more than $211 million through slush funds for use as bribes.

Slush funds were bank accounts held in the name of current or former senior Siemens

employees, third parties, or affiliated entities. These payments were made before September 30,

2004. The most notable slush funds were maintained by a former group (i.e., consolidated entity)

manager convicted in Germany for his role in the payment of bribes to foreign officials, which

included several slush funds held in the name of U.S. shell companies.

Siemens also used cash and cash equivalents to funnel more than $160.4 million to third

parties. Its employees used “cash desks” maintained by the Siemens Real Estate Group to obtain

large amounts of cash to pay bribes. Often, employees would obtain hundreds of thousands of

dollars and, at times, even $1 million in various currencies from the cash desks in Germany. At

times, the cash was then stored in safes maintained by Siemens employees to ensure ready access

to cash to pay bribes.

As early as 2004, a Siemens corporate financial audit employee raised concerns about the

use of intercompany accounts. He was phased out of his job and assigned to work on “special

projects” from his home until leaving the company in 2005. Siemens thereafter began closing

some of the accounts and eventually closed all of them.

Another type of internal account that employees abused was Siemens internal

commission accounts. These balance-sheet accounts were intended to be used to record

commissions at a business group earned on transactions with other Siemens entities. These

accounts were used to make third party payments. Many of the intercompany account payments

and the internal commission account payments were done manually to bypass Siemens'

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automated payment system. The manual payments, executed through the system, did not require

the submission of documentation in support of a payment. Siemens used a host of other schemes

to make more than $25.3 million in payments to third parties. In particular, Siemens used sham

supplier agreements, receivables and other write-offs to generate payments.

In total, Siemens made bribery payments directly or indirectly to foreign government officials

in connection with at least 290 projects or individual sales involving business in a variety of

countries.

Siemens Failed to Maintain Its Books, Records and Internal Controls

Siemens failed to implement adequate internal controls to comply with the company's NYSE

listing, including the detection and prevention of violations of the FCPA. Siemens made

thousands of payments to third parties in ways that obscured the purpose for, and the ultimate

recipients of, the payments. Despite a policy that required two signatures on company documents

to authorize transactions, a significant number of business consultant agreements were entered

into and a significant number of payments were authorized in violation of the policy.

Siemens paid approximately $1.4 billion in bribes to foreign government officials. Doing

so involved the falsification of Siemens' books and records by employees throughout the

company. Specifically, Siemens failed to keep accurate books and records by: (1)establishing

and funding secret, off-books accounts; (2) establishing and using a system of payment

intermediaries to obscure the source and destination of funds; (3) making payments pursuant to

business consultant agreements that inaccurately described the services provided; (4) generating

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false invoices and other false documents to justify payments; (5) disbursing millions in cash from

cash desks with inaccurate documentation authorizing or supporting the withdrawals; (6)

concealing the identity of persons authorizing illicit payments; (7) recording illicit ASSF

payments as legitimate commissions in Oil for Food transactions; (8) falsifying UN documents

in connection with the Oil for Food Program; and (9) recording bribes as payments for legitimate

services.

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Siemens failed to establish controls over cash disbursements, allowed manual payments without

documentation, and failed to ensure the proper use of intercompany accounts. In addition, the

company failed to establish an effective central compliance function. The compliance office

lacked independence and was severely understaffed. Siemens tone at the top was inadequate for

a law abiding entity, and employees engaged in bribery and other misconduct on behalf of the

company were not adequately disciplined. Siemens also failed to conduct appropriate anti-

bribery and corruption training.

Ethical Issues:

This case looks at a company engaging in a widespread and systematic practice of paying bribes

to foreign government officials to obtain business; elaborate payment schemes to conceal the

nature of the corrupt payments, and the company’s inadequate internal controls which allowed

the conduct to flourish. This case deals with legal and ethical issues related to compliance with

the FCPA.

Kohlberg’s stages of moral development provide a useful framework to consider the issues in

this case. A company’s ability to comply with the provisions of the FCPA is more than a matter

of simply adhering to the technical aspects of the Act. Ethical behavior requires that the intent of

the Act – what it is trying to accomplish -- should also be honored. The Act exists to prevent a

company from gaining an unfair advantage in negotiations for foreign contracts by making

inappropriate payments to foreign officials. If all companies devised methods to circumvent the

FCPA to gain business overseas that might not be rightfully theirs, then a culture would develop

that a company has to provide monetary or other incentives to influence the decisions of foreign

officials. In such an environment, ethics would take a back seat to expediency and egoistic

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behavior results. Each company would likely be motivated solely by self-interest reflecting a

Stage 2 level of reasoning. The result would be that a company has to conform to this practice or

risk not being awarded international contracts. A Stage 3 mentality would then develop in

international business negotiations, that is, continuing to make improper payments to keep up

with one’s peer groups – competitor companies.

Questions

1. Evaluate the ethics of the actions taken by Siemens with respect to Josephson’s Six

Pillars of Character and virtue decision making, as discussed in Chapter 1.

Fraud on such a massive, systematic scale could only have occurred with the top management

approving the bribery. The management of the company set a tone that payments must be made

to gain business regardless of the ethics of such payments. It indicates a company without any

standards of behavior. It indicates a company that acts in its perceived short-term interests

without regard to long-term consequences. Virtually all of Josephson’s pillars are violated

especially honesty, integrity, trustworthiness, and responsibility.

2. Under the German Criminal Code, much like the U.K. Bribery Act, all bribes are

prohibited including facilitating payments. The Foreign Corrupt Practices Act

(FCPA) in the U.S. makes a distinction between the two and permits facilitating

payments made to induce a government official to carry out her designated

responsibilities. From an ethical perspective, which of these two approaches are

more consistent with virtue theory?

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The German approach is more consistent with virtue theory. Both bribes and facilitating

payments are payments made to influence the outcome of a decision or to gain an advantage that

one would not have otherwise. While in the U.S. we rationalize allowing facilitating payments

because they” simply” induce an official to do what she should be doing anyway, it is still a

bribe albeit on a smaller scale. Imagine that I went to a police department and asked for the

report of a traffic accident I had. The officer says for $50 he will run off a copy (these are not

copy costs). Can I ethically claim I did nothing wrong because the officer should have made me

a copy without the $50 and my action is therefore acceptable? Perhaps I should go home and call

the station and explain to an administrator what the officer asked me to do.

Many countries not only outlaw the paying of bribes and facilitating payments but the

accepting of such payments also. Bribery and facilitating payments violate honesty and fairness.

It impedes the level playing field that should exist in international business.

The U.S. does not allow its citizens to make or take bribes or facilitating payments in the

U.S. so why does it allow it internationally? Ethical values should be the same whether one is in

the U.S., Nigeria, Chili, or Japan. When the FCPA was passed, the U.S. was the lone wolf and

enforcer of bribes internationally. To its credit, the U.S. was trying to set an ideal for

international business and has been working for many years to bring about more global

anticorruption efforts. With more countries passing global anticorruption laws, it may be time for

the U.S. to outlaw facilitating payments also.

3. Comment on the following statement from an ethics perspective: Companies that

make the mistake of trying to follow the bottom limits of legal behavior without

championing ethics should learn from the Siemens case that once a culture of taking

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short cuts and ignoring values is in place, it is only a matter of time before

employees cross the line into illegal conduct.

Companies that try to follow the bottom limits of legal behavior are doing the bare minimum and

sending a message to employees that compliance is a formality only. This is true even if the

company has a code of ethics. The company would be seen as having low organizational ethics.

Employees take a company code of ethics with a very minimum level of compliance as a wink

and a nod to do whatever it takes. Once that perception is widely held by the employees, it will

not be long before the employees (those with low individual ethics) are doing illegal conduct.

Optional Question

4. Review the 13 cases on bribing foreign government officials described in the SEC

complaint referenced below. Summarize the accounting issues involved in each case

and explain how the payments described violated the FCPA.

The bribery in the detailed situations below used business consultants, who do no work other

than deliver the bribes to officials. In many cases, top officials with Siemens knew and approved

of the payments. The payments violated FCPA in that they were payments to secure business and

paid, directly or indirectly, to government officials. The payments employed the U.S. mail,

banks, and other means and instrumentalities of U.S. interstate commerce. Siemens made

thousands of payments to third parties in ways that obscured the purpose for, and the ultimate

recipients of, the payments. Siemens failed to keep accurate books and records by: 1)

establishing and funding secret, off-books accounts; 2) establishing and using a system of

payment intermediaries to obscure the source and destination of funds; 3) making payments

pursuant to business consultant agreements that inaccurately described the services provided; 4)

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generating false invoices and other false documents to justify payments; 5) disbursing millions in

cash from cash desks with inaccurate documentation authorizing or supporting the withdrawals;

6) using post-it notes for the purpose of concealing the identify of persons authorizing illicit

payments; and 7) recording bribes as payment for legitimate services.

1. Metro Transit Lines in Venezuela – Siemens TS and Siemens S.A., a regional company

in Venezuela, paid an estimated $16.7 million in bribes to Venezuelan government

officials in connection with the construction of metro transit systems in the cities of

Valencia and Maracaibo, Venezuela. The corrupt payments were made using a numbered

off-books bank account in Panama; a longtime Siemens business consultant, known as a

political “fixer” in Venezuela; a Cyrus-based business consultant as an intermediary; and

a sham agreement with a Dubai–based business consultant.

2. Metro Trains and Signaling Devices in China – Siemens TS paid approximately $22

million to business consultants who used some portion of those funds to bribe foreign

officials in connection with seven projects for the construction of metro trains and

signaling devices on behalf of government customers in China. Siemens hired the

business consultant based on an oral agreement to pay a success fee equal to a percentage

of the project value and would enter into a written business consulting agreement after

the government contract was awarded to Siemens. Backdated agreements and phony

work product were used to support at least some of the payments.

3. Power Plants in Israel – Siemens PG paid approximately $20 million in bribes to a former

Director of the state-owned Israel Electric Company in connection with four contracts to

build and service power plants. Siemens routed the corrupt payments through a business

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consultant firm owned and managed by the brother-in-law of the CEO of Siemens Israel

Limited, a regional subsidiary. In reality, the business consultant was a Hong Kong-based

clothing company with no expertise in the power generation industry.

4. High Voltage Transmission Lines in China – Siemens PTD paid approximately $25

million in bribes to government customers in connection with two projects for the

installation of high voltage transmission lines in South China. The payments were

funneled through multiple intermediaries and supported by phony distribution contracts.

5. Mobile Telephone Services in Bangladesh – Siemens COM paid approximately $5.3

million in bribes to government officials in Bangladesh in connection with a contract to

install mobile telephone services. The payments were made to three business consultants

pursuant to sham agreements.

6. Four Telecommunications Projects in Nigeria – Siemens COM made approximately

$12.7 million in suspicious payments in connection with four telecommunication projects

with government customers in Nigeria. Bribe payments were typically documented using

fictitious business consultant agreements under which no actual services were performed.

7. Identify Card Project in Argentina – Siemens paid over $40 million in bribes to senior

officials of the government of Argentina in an effort to secure a $1 billion project to

produce national identity cards. The Siemens officials involved in authorizing the

payments included a member of the Vorstand, Managing Board, who personally flew to

the U.S. to meet with Siemens’ principal intermediary to negotiate the payment terms, as

well as the CEO and CFO of Siemens’ regional company in Argentina; part of the

payments were routed through the books of an unrelated transmission project in China to

conceal the payments from the internal auditors.

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8. Medical Devices in Vietnam – Siemens MED paid $183,000 in connection with the sale

of medical devices on two projects involving the Vietnamese Ministry of Health. The

payments were routed through a U.S. correspondent bank to Singapore bank accounts of

the Hong Kong business consultant; amounts were withdrawn in cash and transported to

Vietnam. Project calculation sheets connected to the sales describe the payments to the

consultant as relating to “room preparation.”

9. Medical Devices in China – Siemens MED paid approximately $14.4 million in bribes in

sales of medical equipment to five Chinese-owned hospitals, as well as to fund lavish

trips for Chinese doctors. The payments were routed through a U.S. correspondent bank

to Singapore bank accounts of the intermediary; project calculation sheets connected to

the sales describe the payments to the consultant as relating to “expenses (commission).”

However, no services were provided by the intermediary. The Hong Kong intermediary

was used to pay $9 million in travel cost for “study trips” taken by doctors from the five

hospitals to Las Vegas, Miami, and other vacation spots in the U.S.

10. Traffic Control System in Russia – Siemens I&S and OOO Siemens, a regional company

in Russia, paid approximately$741,419 in bribes to government officials in connection

with a World Bank-funded project for the design and installation of a traffic control

system in Moscow. Payments were made to a business consultant for the bribes, as well

as for a sham traffic study.

11. Refinery Modernization Project in Mexico – Siemens PG and Siemens S.A. de CY, a

regional entity, made three separate illicit payments totaling approximately $2.6 million

to a politically-connected business consultant to assist in settling cost overrun claims in

connection with three refinery modernization projects in Mexico. Payments were made

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with the knowledge and approval of the then-CEO of the regional company; payments

were supported by invoices reflecting consulting services that were not provided or only

vaguely described.

12. Medical Devices in Russia – Siemens MED made improper payments of over $55 million

to a Dubai-based business consultant in connection with the sales of medical equipment

in Russia. The former CFO of Siemens MED knew of and approved the payments.

13. GSM Mobile Network Services in Vietnam – Siemens COM paid approximately

$140,000 in bribes in connection with the supply of equipment and services related to

mobile network for a government owned telecommunications provider in Vietnam. A

Siemens business consultant received payments through a U.S. correspondent account.

1 Securities and Exchange Commission v. Siemens Aktiengesellschaft. Case 1.08-cv-02167.

Case 1.08-cv-02167. Litigation Release No. 20829.Accounting and Enforcement Release No.

2911. December 15, 2008. http://www.sec.gov/litigation/complaints/2008/comp20829.pdf