Siemens slush fund scandal deepens

Siemens is squirming on the hook of the investigations into bribery, embezzlement and tax evasion.

It has lowered its expected net profit for 2006 by €80 million; another former executive has been arrested; and the total cash used in suspect payments has more than doubled from €200 million to €420 million.

Thomas Ganswindt, a main board executive of Siemens until September last year, has been arrested after several days of interrogation with the police reportedly fearing he might flee Germany. He joins several others in custody.

The suspect payments were used to hire people as external "consultants" and pay them to help get contracts in the fixed line telecommunications area awarded to Siemens. Bribes were also said to be paid to purchasing officials in Italy and elsewhere via shell companies in Puerto Rico and other locations. Other money was simply embezzled, according to what is known of the current investigations. Ganswindt allegedly knew of some of these suspect transactions.

Siemens CFO Joe Kaeser said that €420 million of illegal payments dated back to 1999. Additional income tax charges total €168 million since 1999. The company has restated its 2006 net profit figure as a result, down from €3.11 billion to €3.03 billion. But this may not be the final cost of the affair. If the recipient of external consultancy fees or a bribe cannot be identified then the money cannot be deducted from Siemen's tax liability.

Siemens stated it has "identified a multitude of payments made in connection with these contracts over the course of approximately a seven-year period for which we have either not been able to establish a valid business purpose or clearly identify the recipient. These payments raise concerns under the legislation of the US, Germany and other countries."

Origins of the affair

The history of the affair has become clearer through Siemens' own actions.The current investigation grew out of an anonymous complaint and requests for judicial assistance from Switzerland and Italy.

Bank accounts in Geneva, Switzerland, held by a former officer of Siemens Greece were seized in August 2005. The Company became aware of the seizure at the end of 2005 having been notified by both the officer and the financial institution in which the accounts were held. As part of its internal investigation, the Company filed a civil action in Greece against the officer on Nov. 14, 2006.

Then, in June 2006, the Company also became aware of the existence of an escrow account in Lugano, Switzerland. In July 2006, the trustee was requested to provide documentation of the account and to transfer the funds to the Company: The account was seized prior to receiving the funds.

Bank accounts in Liechtenstein were also seized in late 2004. Funds from these Liechtenstein accounts were transferred to Siemens in 2005 after being released by governmental authorities.

On March 30, 2006, the premises of Intercom Telecommunication Systems in Switzerland (Intercom), a subsidiary of Siemens, were searched by Swiss prosecutors. The company subsequently learned that, via Intercom, so-called Business Consultant Agreements were processed directly or indirectly through intermediary companies. Intercom currently finds itself in liquidation. It has been established that Intercom made payments to the above mentioned bank accounts. Investigations are ongoing to determine the rightful owner of the accounts in Geneva and Lugano.

Possible repercussions

It's not just the financial cost. The Siemens board has said: "Siemens currently can not exclude the possibility that criminal or civil sanctions may be brought against the Company itself or against certain of its employees in connection with possible violations of law. The Company’s operating activities may also be negatively affected due to imposed penalties, compensatory damages or due to the exclusion from public procurement contracts."

For example, there have been fears that the Siemens folding of its telecommunications division into a joint venture with Nokia might unravel as a result. Siemens CEO Klaus Kleinfeld moved to ease such fears, and said: "We, and I believe also Nokia, are very committed to this deal."

Kleinfeld also said: "Siemens tolerates absolutely no illegal or irregular conduct by employees -- and I really mean zero tolerance. We are employing the knowledge and experience of external and independent experts to track down specific cases of misconduct and gaps in Siemens' regulations, structures and processes and to make our compliance system absolutely watertight."

He is strengthening Siemens ethics and compliance controls in a blizzard of initiatives, which parallel those of HP following its spying scandal where private investigators spied on Board members and pretended to be journalists in order to access their private communications.

Siemens is retaining an international law firm, Debevoise & Plimpton, to monitor the company's activities. This law firm has experience in the area of internal corporate investigations and supports companies in managing investigations by authorities. KPMG, Siemens' independent auditor, which did not detect the illegal payments, will support Debevoise in its efforts.

An internationally recognized anti-corruption expert and co-founder of Transparency International (TI), Michael J. Hershman, has been appointed as Siemen's compliance advisor. His credentials include serving as a senior staff member of the U.S. Senate Watergate Committee.

The Audit Committee and the Siemens Managing Board are appointing an external legal expert as the head of the Siemens Compliance Office. And Siemens has set up an internal Compliance Task Force, led by Corporate Executive Committee member Jürgen Radomski.

BenQ affair

Siemens discomfort with the corruption affair is increased because of public disquiet in Germany over the BenQ affair.

The company issued a statement saying: "We're deeply concerned about developments at our former mobile phone business, now part of the Taiwanese company BenQ. In September 2006, the company filed for bankruptcy for its mobile phone business in Germany and other countries, causing a public outcry in Germany in particular. The filing took us by surprise, above all, because we were convinced we had chosen a good partner for our mobile phone business and because we had purposely strengthened BenQ's position by providing financing and by transferring patent and brand rights. We've now launched a variety of measures to facilitate job placement for our former employees."

Siemens wants to be able to better detect and prevent bribery, embezzlement and tax evasion. Unfortunately it will probably have to face the prospect of losing telecommunications bids in countries where such activities are seen as a relatively normal way of obtaining contracts.