Siemens Goes Wrong

A German Icon of Industry Falls from Grace

News | Paul Krauskopf | December 2006 / January 2007

The German appliance manufacturer Siemens has joined Austria’s BAWAG and the Deutsche Bank as yet another European global player with major dirt on its hands. Unfortunately for Siemens, it has the potential to lead the field in this rather unsavory competition.

The damage to the company swells with the amount of money diverted to dubious sources.  As of the beginning of November, the missing sum was estimated at about €20 million; only a few days later, the German weekly magazine Focus uncovered that it was, in fact, more like €100 million.

Back then, it seemed that a group of five Siemens managers, at least two of whom hold high positions within the company, embezzled company profits and diverted them to dummy accounts on the Virgin Islands for later use as corporate bribes.

As of this writing, a full €200 million have been unearthed in off-shore accounts, according to head prosecutor Christian Schmidt-Sommerfeld. The "five managers" are now a network of illegitimate firms, which are again part of a worldwide money laundering machine stretching its global jaws around Siemens, the driving force behind this mechanism since the 1990s.

While many people see Siemens as a global household utilities manufacturer, the reality seems to be that ever since the 1990’s, Siemens has been repositioning itself as a major manufacturer and supplier for the arms industry. Steel supplies to the Middle East or security systems for the Olympic Games in Greece are in Siemens repertoire just as much as washing machines and refrigerators. So emerging economies like those in Asia, the Middle East or Africa are attractive markets for the company’s new activities. According to the Süddeutsche Zeitung, contract assignments in these areas have seen huge increases, an increase of 26% in Asia, over 35% plus in the Middle East and Russia. A single contract can carry huge sums of money. Just recently a Saudi-Arabian company signed Siemens to build a blasting plant – negotiated sum: €100 million.

Now, Russia and Africa are well known for their custom of bribes as an element of any contract negotiation, which leaves room for the conclusion that Siemens planned to use the bribery money to penetrate foreign markets. Back home, household electronics revenues where dropping to an all time low due to recessions and currency changes.

According to the Financial Times, approximately 7% of any revenue a company makes in Russia flows into the mills of corruption. A German investor who requested anonymity allows a glimpse into the technique:

"We book the bribery money as consultant services, donations or other miscellaneous services and no one ever asks questions," he said.

Many, it seems, use these methods in areas where it’s interwoven with the local economy, in order to compete with present competition. Some go so far as to say using bribes can save a company from job cuts back home if a project can be signed overseas.

"The argument, that corrupted contracts prevent job losses at home is invalid," counters corruption expert Peter Bloomberg of Transparency International. "Corruption endangers jobs in upright companies and always brings along victims. The money has to come from somewhere.

"The financial calculations of large international projects often include a few extra million in bribery money from the very beginning. It becomes part of the project right away. Delivery of poor quality products at a higher price is also a tool used to "fix" the balance."

Siemens, however, has taken these "tools" a step further. According to the findings of the Munich-based prosecutors, the telecommunications section of the company constructed a complicated mesh of dummy companies on several layers to hide the repositories of bribery money.

The top layer was Siemens itself, which transfers money to the Austrian Khroma Handels GmbH and three other companies based in the US, PromExport, Weavind and BFA Global Advisor. These firms – including Khroma – make up the second layer which links directly to dummy firms – Eagle Invest, Tamarind Group and Electronic Technology – in Tortola, the Virgin Islands. This third and final layer is then again entirely controlled by Siemens.

The companies in the second layer signed consultancy contracts with Siemens. Regardless of the lack of service in return, Siemens paid off the second layer companies, which then closed fake contracts with the off-shore companies on the third layer, and paid them. The accumulated millions in those accounts were deposited in banks in Switzerland and Lichtenstein and, according to the prosecutors of Staatsanwaltschaft München 1, were used to bribe foreign firms and governments to win in the race for project distributions.

Siemens even deducted its numerous "consultant expenses" from its taxable income, which triggered various government authorities, like the U.S. Securities and Exchange Commission, to initiate a thorough investigation of the companies’ entire expenditures. These investigations could result in judgments for massive back taxes.

Although government officials are very secretive about names, it’s apparent that the scandal does not include in the highest level of Siemens, the board of directors. CEO Klaus Kleinfeld has had his hands full trying to down play the scandal, which has been the biggest shake up in Siemens history. Amongst other measures, he has installed an ombudsman to serve as mediator between concerned employees and potential detrimental outside forces, including investigatory bodies or the press.

However, the machinations of a handful of influential managers have torn great fissures in the company. Integrity and reliability no longer go hand in hand with the name Siemens, and as the scandal widens, the company’s reputation continues to suffer. Withdrawing Siemens as a sponsor or supplier for the Olympic Games in Greece seems to be just one of consequences awaiting the company down the road.

Meanwhile new findings rattle through news agencies like gunfire, and the damage may be too great to repair.  "Wertarbeit: Made in Germany," once the proud slogan of German manufacturing in the post-war era, may begin to sound like a bad joke. It may be too early to sign a death certificate for the country’s entire reputation as an assiduous and hard working nation. But if something as representative and traditional as the 150-year old Siemens company shatters, it’s bound to leave scars.

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    the vienna review December 2006 / January 2007