A Little Issue of Bribery

Historically, European countries have had relatively lax bribery laws. Until about 10 years ago, companies were allowed to pay "commissions" to foreign officials. They could also deduct such payments from their taxes. That practice was outlawed in Germany in 1999 and in France in 2000. European countries are starting to take a much tougher line on practices that have often been employed in the past by companies as they attempted to win contracts.

In the past year or so, there have been two high-profile cases where European companies have been charged with bribing potential customers in order to obtain business. One case involves Siemens AG, Europe's largest engineering company. It does business in nearly 200 countries around the world and manufactures a wide range of products, including light bulbs, medical scanners, steam turbines, and high-speed trains. The other company is Alstom SA, a French engineering firm that makes power turbines, high-speed trains and subway cars. Here are their stories.

Siemens AG

In 2006, German police raided the company's headquarters looking for evidence that Siemens managers had bribed potential customers in order to win projects in various foreign countries. After an internal investigation in the fall of 2007, the company said it found $US 1.3 billion in suspicious transactions during the period 2000-2006. The investigation triggered the resignation of the company’s CEO and its supervisory board chairman. The U.S. Justice Department had been investigating Siemens under the Foreign Corrupt Practices Act. In 2007, a German court fined Siemens $US 284 million after the company admitted that it bribed government officials in Nigeria, Russia, and Libya in order to win telecommunications equipment contracts in those countries.

In July 2008, Reinhard Siekaczek, a sales executive at the company, was found guilty of breach of trust. He had funneled $US 77 million into a slush fund that was used to pay bribes to help win infrastructure contracts. He was fined $US 170,000 and given a two-year suspended sentence. He also testified that his superiors were aware of what was going on. In fact, he said they told him to organize a new way of raising money to pay bribes. So he created fake contracts that he used to extract $US 83 million from Siemens' regular accounts. He received a lenient sentence for cooperating.

In October 2008 a Munich court ruled that Siemens had paid $US 17.5 million in bribes to government officials in Nigeria, Libya, and Russia. These bribes were facilitated by Siekaczek. In November 2008, Siemens said it would set aside $U.S. 1.3 billion to pay for fines levied by the German and U.S. governments.

As a result of the scandal, there has been a massive personnel shakeup at Siemens. All but one management board member has been replaced. But all of this scandal didn’t affect the company's stock. In November 2007, the stock price was 32 percent higher than it had been a year earlier. Profits are up because of a successful restructuring.

Alstom SA

Alstom is alleged to have given hundreds of millions of dollars of bribes to go-betweens to win contracts in South America and Asia. Suspicious contracts include a subway expansion in Sao Paulo, Brazil, a hydroelectric plant in Ita, Brazil, and electric power stations in Singapore and Venezuela. In Brazil, for example, it is alleged that a mysterious middleman arranged payments to Brazilian politicians so that they would award lucrative public works contracts to Alstom. The middleman was paid $US 5 million, but so far there is no evidence that any Brazilian politicians actually received any money. If it loses its case, Alstom could be banned from bidding on contracts in fast-growing economies like Brazil. The company denies any wrongdoing and says it is a victim, not a perpetrator.

Documents seized by prosecutors allegedly show that the scheme was run by senior Alstom officials in Paris, and that cash was channeled through shell companies and Swiss bank accounts to make it look like Alstom was not involved. Investigators claim that the alleged bribery started in 1997, when a Paris-based Alstom executive wrote a memo proposing that a middleman be paid a big commission to help win political support in Brazil for Altom's bids. In another memo, the executive noted that the middleman was close to the governor of Sao Paulo and could "get things done" if he (the middleman) was paid 7.5 percent of the value of any contract that was signed. Shortly after that, a team of executives was formed to work with the middleman. Records of the "commission" payments were sent to a Swiss banker for safekeeping. The banker kept the records at the home of a secretary. The documents were discovered during the course of an unrelated probe after the banker was arrested and charged with laundering money for a South American drug ring. The identity of the middleman is still unknown.

Questions for Discussion

1. On p. 77 of the text, four ethical norms are noted. Briefly summarize the essence of each of these ethical norms. Which of the four approaches do you think was operative at Siemens? At Alstom? Explain your answer.
2. Use Figure 3.1 to analyze the Siemens and Alstom cases. What do you conclude? Explain your reasoning.
3. What steps can companies take to increase the likelihood of good ethical business practices? To what extent do you think these things would have been useful at Siemens and Alstom?
4. What is whistle-blowing? Was Reinhard Siekaczek a whistle-blower? Explain your reasoning.
5. Each year Transparency International publishes a Corruption Perceptions Index that ranks various countries based on the amount of corruption that is perceived to exist in each one. Which countries are least corrupt? Most corrupt? Do you notice any patterns? Explain.

Sources: David Crawford and Mike Esterl, "Siemens Prepares for Fines of $1.3 Billion," The Globe and Mail, November 6, 2008, p. B9; Mike Esterl and David Crawford, "At Siemens, A Conviction could Trigger More Cases," The Wall Street Journal, July 29, 2008, p. B1; David Crawford and Mike Esterl, "Siemens Fine Ends a Bribery Probe," The Wall Street Journal, October 5, 2007, p. A2; "Ex-Manager Details Siemens Slush Fund," The Globe and Mail, May 27, 2008, p. B9; Mike Esterl and David Crawford, "Siemens Probe May Point to Board Members," The Wall Street Journal, January 17, 2008, p. B13; David Crawford and Mike Esterl, "Siemens Ruling Suggests Bribery Spanned Globe," The Wall Street Journal, November 16, 2007, pp. A1, A17; David Crawford, "French Firm Scrutinized in Global Bribe Probe," The Wall Street Journal, May 6, 2008, pp. A1, A18; David Crawford, Antonio Regalado, and David Gauthier-Villars, "Bribe Probe Exposes Alstom Network in Brazil," The Wall Street Journal, June 19, 2008, pp. B1-B2.