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Siemens Sparks Tough Anti-Bribery Talk; Action Unclear

Jeremy Woolfe | May 1, 2007

Suddenly, it seems that bribery is not the business practice it used to be in Europe.

Credit the scandal of Siemens AG, the German manufacturing giant whose image has been tarred by possible bribery in its telecommunications department. The drumbeat of bad news around Siemens—which first erupted in November, with police raids and the arrest of high-level executives, and has only expanded since—has stiffened the resolve of institutions across the EU and to clamp down on bribery and corruption by various different measures. Investigation of Siemens has now gone well beyond Germany; prosecutors from Switzerland, Italy and other countries are also involved. These European governments are investigating what could be €400 million improper payments over several years. In addition, the conglomerate has come under investigation by the US Department of Justice and the Securities and Exchange Commission.

In addition to its alleged bribery case, Siemens also is one of 11 firms recently fined a total of €750 million for participating in a cartel for gas-insulated switch gear projects. That arrangement violates a European Commission treaty banning restrictive business practices. The Commission announced in January that from 1988 to 2004, the companies rigged bids for procurement contracts, fixed prices, allocated projects to each other, shared markets, and exchanged commercially important and confidential information.

Siemens’ share of that penalty is €396 million, the largest ever imposed by the Commission on a single company for a single cartel infringement. The €750 million total is the largest set of fines ever imposed on one group. Said Competition Commissioner Neelie Kroes: “The Commission has put an end to a cartel which has cheated public utility companies and consumers for more than 16 years.”

Rune Rasmussen, a Brussels-based spokesman for Transparency International, says blacklisting neatly sidesteps the long delays likely to happen if a company is taken to court over alleged bribery.

Against those sorry commercial misdeeds, a number of bodies now are working together to build up a de facto system to sanction errant companies. Those taking part in what could become a global development include the Organization for Economic Cooperation and Development, and Institutional Shareholder Services’ European branch. Transparency International, a notable anti-corruption organization, has long maintained its own such program, “Business Principles for Countering Bribery”—which Transparency International itself likens to blacklisting.

Rune Rasmussen, a Brussels-based spokesman for the group, says blacklisting neatly sidesteps the long delays likely to happen if a company is taken to court over alleged bribery. Few cases even reach a courtroom in the first place, Rasmussen says, and by the time a judgment is reached, the offending employee usually has long since left the company. The firm might get fined, but not in proportion to the offences that went on originally.

Rasmussen cites the relevance of an unrelated case concerning Lahmeyer International GmbH. The German engineering firm was blacklisted by the European Bank for Reconstruction and Development, after the World Bank’s sanctions committee had found that Lahmeyer had bribed the director of the Lesotho Highlands Development Authority for a multi-billion dollar hydro-electricity project.

The implication: that a firm caught bribing by one development bank risks losing finance from one or all the others. That can be a sharp disincentive against bribery, especially for public procurement contracts, which in Europe, represent 13 per cent of GDP.

According to Graeme Wheeler, chairman of the World Bank’s sanctions committee, the Lahmeyer sanction “reflects a serious response to corrupt practices.” The bank has sanctioned more than 330 firms and individuals since 1998.

Another example of the swelling blacklist procedure comes from the European Commission and the management of its EU €100 billion annual spending on farm support and local development projects. Previously, blacklists applied only nationally. Since the end of last year, however, a centralized, EU-wide database has come into play under the European Transparency Initiative, said Max Strotman, a Commission spokesperson. Now any company attempting to bribe its way into business, in any EU nation, can run afoul of regulators in all EU nations.

Bribery Legislation: The Weaker Hand

Turning to the legislative front, the EU has no equivalent to the Foreign Corrupt Practice Act of the United States—the world’s premier anti-bribery statute, adopted in 1977 and then amended in 1998 to bring it into line with the anti-bribery conventions of the OECD. In the last five years, American prosecutors have stepped up FCPA enforcement dramatically. Even European companies—or companies anywhere else in the world—are subject to FCPA enforcement if they are listed on U.S. stock exchanges.

Darryl Lew, with the law firm White & Case, notes that enforcement is increasing globally, with joint efforts among American and European investigators. Indeed, last year U.S. prosecutors wrangled more than $20 million from the Norwegian oil business Statoil, after close cooperation with Norwegian authorities.


Below is a statement from Transparency International encouraging the EU to adopt a blacklisting policy for companies found to offer bribes.

A stronger, more transparent and harmonised European Commission debarment system (also known as blacklisting) will ensure that corrupt companies and greedy public officials do not sap EU resources, says Transparency International (TI).

TI has presented detailed recommendations to Siim Kallas, the European Commission’s Vice President for Administrative Affairs, Audit and Anti-Fraud, urging that the current debarment system be more rigorously enforced, more transparent, and standardised across the departments of the EU. It is also vital that member states bring their national debarment mechanisms into line with a common standard.

“A strong debarment system is critical to prevent corrupt companies from enjoying the benefits of publicly funded contracts anywhere in the European Union, at any level,” said Huguette Labelle, Chair of Transparency International. “Our ultimate goal here is to change behaviour, and above all, to increase the power of the debarment system to prevent further abuse.”

Although there are provisions in the EU for excluding companies from public tenders if they are found to have bribed, these vary across the institution, are inadequately enforced and their mechanisms remain shrouded in obscurity. The current framework, for example, does not apply to the approximately 80 percent of the EU budget spent under member states’ management (shared management schemes).

Cases like the United Nations Oil–for-Food scandal underscore the importance of adequate corruption prevention in international organisations. The EU must do more to protect its financial interests and to safeguard taxpayer funds.

In particular, TI recommends, to Vice President Kallas, the following:

  • Lists and details of debarment mechanisms must be made public to maximise their preventive potential;
  • Due process must be observed when companies are placed on or removed from debarment lists;
  • Debarment must be automatic following a court conviction; in cases where there is no conviction, but where corrupt behaviour can be verified, clear criteria must guide the debarment process;
  • Options for centralising the debarment function in the European Commission must be explored to bring consistency and accountability to the system.


Transparency International

James Killick, a lawyer in White & Case’s Brussels office, says bribery matters historically had been left to the EU member nations’ own legislation because the EU as a whole did not have the power to adopt statutes with criminal penalties. So, at EU level, there is very little criminal legislation of any kind. As for the national criminal codes, legislation may have been stiffened during recent years. But even in a nation as economically and legally strong as Germany, companies could deduct payments of bribes paid abroad from taxable income up to 1999.

The European Commission has also taken a strong line in favor of allowing companies that lose business due to competitors’ bribes to have their vengeance in court. Kroes, the competition Commissioner, has formally stated: “Businesses and individuals who suffer losses because of illegal activities such as cartels have a right to compensation. Currently, this right is all too often theoretical because of obstacles to exercising this right in practice.”

However, she referred to a 2001 judgment by the European Court of Justice in a notable test case, Courage v. Crehan, which concerned the sale of beer in a chain of British public houses. The judgment explicitly recognized a right to damages by injured parties following breaches of EC competition law.

Calls to Siemens for comment on this article produced no response. But speaking in an interview by the New York Times, Klaus Kleinfeld, chief executive of the engineering giant, denied that the scandal reflected a basic flaw in the firm’s corporate culture.

Rather, he said, that the company was undergoing a painful process of coming into line with more stringent German and European laws on corporate conduct, which came into effect in the late 1990s. “You need a certain amount of time for adjustment,” he said. “Don't get me wrong; this is not meant as an excuse.”

At least in lobbies in Brussels that represent commercial interests, temperatures appear to be high over Siemens and related issues. For instance, the European Federation of Accountants (FEE) ducked comment, saying it could not comment on individual cases under litigation.

Business Europe, (formerly UNICE), which represents European employers, likewise pulled down the shutters when asked to comment about Siemens and the significance of its bribery allegations.

How effectively international organizations will be able to work together to develop global blacklisting procedures remains to be seen. However, active projects have gone well past the initiation stages, and the potential would seem to be large. Siemens could stimulate further advances.