Siemens: engineering change in anticorruption
This case examines the Siemens bribery scandal and its repercussions for the firm’s
approach to the management of ethics and compliance. The case examines the
circumstances that led to the firm paying the highest ever fine for a bribery
settlement, and the actions Siemens subsequently took to institute an industryleading management system to help eradicate the root causes of bribery at the firm
and to guard against future violations.
Founded in Germany in 1847, Siemens is not only Europe’s largest engineering company,
but it also regularly counts among the top 50 companies in terms of revenue among the
global Fortune 500. The engineering giant produces a wide range of goods and services,
from light bulbs to power stations, and has a leading position in many of its markets, which
include white goods, rail transportation systems, health-care technology, IT, and financial
services, to name just a few. It is a large, decentralized conglomerate operating in more
than 190 countries, and employing more than 370,000 people across the globe.
Despite its impressive commercial track record, and a regular place high on various lists of
most respected companies, Siemens also has one record that it is no doubt rather less
1
proud of. In December 2008, after a long-running bribery scandal, the company settled out
of court with the US authorities and was landed with a record-breaking fine of $800 million
—at the time a figure far in excess of any previous penalty imposed under the US Foreign
Corrupt Practices Act. While in recent years firms such as Rolls Royce, French transport
company Alstom, and Brazilian engineering company Odebrecht have paid a whopping
$880 million, $1 billion, and $2.6 billion in fines for bribery-related crimes, respectively,
Siemens’ settlement, along with fines levied in Germany and other countries, as well as a
World Bank settlement in 2009, brought the total paid by the company to more than $1.7
billion. This was roughly 35 times larger than any previous anti-corruption settlement.
However, including lawyers’ and accountants’ fees charged to the company during the
cases, the full cost was ultimately even higher, at well above $2.5 billion in total.
The company had been investigated on multiple counts of bribery, adding up to more than
$2.3 billion in alleged payments during the 1990s and early 2000s. This included allegations
of $5 million paid to the son of the Bangladeshi prime minister for a mobile phone contract,
$22 million to Chinese officials for a metro trains deal, and $40 million worth of payments in
Argentina for a $1 billion contract to produce identity cards—just to name a few examples.
The scandal unfolds
The Siemens case started coming to light in the early 2000s, when prosecutors in Germany
and the US first began investigating allegations of bribery at the company. The firm and its
leadership initially denied any knowledge of the payments. But with more incidents coming
to light, the magnitude of the payments becoming ever higher, and trials of former company
managers suggesting that bribery was common practice in the firm, this position became
increasingly tenuous.
As the scandal unfolded, it became clear that bribery at Siemens was not simply a case of a
few rogue managers acting alone and breaking the company rules to secure lucrative
overseas contracts. Corruption looked to be endemic in the company, or, as one prosecutor
put it, ‘bribery was Siemens’ business model’. The various investigations and subsequent
trials brought to the surface a murky picture of payments made to public officials in a bid to
win large overseas contracts for the company. Given that much of Siemens’ business relies
on large government contracts, often in developing countries with poor governance and a
high prevalence of corruption, Siemens’ managers had often found themselves in a
competitive market where they and their rivals were frequently expected to bribe to secure
business. According to various witness statements, Siemens’ employees often simply
thought that bribery was how the game was played and that they had to engage in
corruption in order to win business, and keep jobs secure and their company strong.
Corruption appeared to be seen in rather amoral terms and as a victimless crime—if a
crime at all. Furthermore, it did not exactly help that the German corporate tax code only
made bribery technically illegal in the late 1990s. Until then, bribes paid in foreign countries
were even tax deductible and were declared under the notorious label ‘useful expenses’ (in
German: nützliche Aufwendungen).
2
Siemens, like most German multinationals, also tended to grant a lot of autonomy to local
executives—the argument being that they dealt with complex technical products with a
need for a high level of customer-specific local adaptation. The downside from an ethical
perspective, however, appeared to be twofold. First, decisions about payments could be
taken locally, without any real oversight or understanding from the headquarters. Second, if
the leadership back home did become aware, the decentralized structure could make it
difficult to implement effective ethics management across the firm’s span of operations.
When the first signs of the bribery allegations surfaced in 2005, the then newly appointed
CEO announced that fighting corruption would be his top priority. However, by 2007, he
and the supervisory board chairman had both been forced to resign because of the ongoing
stream of bribery allegations that engulfed the company. The firm then made its first
appointment of an outsider as CEO, Peter Löscher, who was tasked with getting the firm
back on its feet again.
Beginning the ethical turnaround
Löscher, the new CEO, needed to act fast to head off the bribery scandal, but he also faced
a company with corruption apparently deeply engrained in its culture, making it particularly
hard to initiate a major change in attitudes. Many Siemens employees had been with the
company for their entire career, leading to densely woven webs of contacts, informal
relationships, and networks, in which problems like corruption (and its cover-up) could
thrive. As the trial hearings revealed, the maintenance of corruption on the scale alleged at
Siemens had actually required a deep degree of loyalty from employees. One executive
testified to the court that he was chosen to become the co-ordinator of the ‘useful
expenses’ payments because his superiors trusted him and because he was a loyal worker
who could be relied on not to simply direct some of the bribe money into his own pockets.
Within the first few months of his tenure, Löscher had made wholesale changes, including
replacing 80% of the firm’s top-tier executives, 70% of its second tier, and 40% of its third
tier. To ensure that auditing personnel throughout the company were competent, every
member of the firm’s 450 audit function was required to reapply for their jobs. Siemens also
brought in a new General Counsel, appointed the co-founder of Transparency International
(an international anti-corruption NGO) to serve as its compliance adviser, and agreed to cooperate with the US authorities in its investigations. The firm also initiated an amnesty for
any whistle-blowers with knowledge of bribery in the company (which was taken up by
more than 100 staff) and spent millions on an internal investigation conducted by a US law
firm. The new leadership team began spreading the message across the company that
‘only clean business is Siemens business’.
Siemens institutes a new compliance infrastructure
Central to the new approach instituted by Löscher and his new management team was a
much enhanced and far-reaching compliance system. The firm set up a compliance
management system to oversee the prevention, detection, and response to legal and
ethical violations at the firm. From 86 compliance officers in 2006, the firm soon expanded
3
to more than 500. Siemens also developed a series of anti-corruption compliance policies,
tools, and communication channels, including a compliance audit department, web-based
risk assessment tools for employees, and 24/7 secure reporting channels for employees
and external stakeholders. The new compliance system also involved systematic training
for Siemens employees.
Many of these changes were already implemented when Siemens was finally sentenced by
the Department of Justice in 2008. For example, extensive compliance training had been
provided to over half of the workforce by the time the fine was handed down. By
September 2008, Siemens’ senior leadership had also visited 54 of the firm’s highest-risk
countries as part of a ‘compliance roadshow’ to explain to country managers and
employees the importance of compliance. Indeed, Siemens’ impressive efforts to institute
the new compliance system, along with its willingness to conduct its own independent
investigation and co-operate with the Department of Justice investigators, meant that the
huge $800 million fine it received was actually far less than it would otherwise have been.
As the Department of Justice stated, ‘the reorganization and remediation efforts of Siemens
have been extraordinary and have set a high standard for multi-national companies to
follow.’
Although the nature of the final settlement in the US did not actually require Siemens to
admit to bribery (it was only required to admit to having inadequate controls and keeping
improper accounts), the firm acknowledges that it experienced ‘systematic violations of
anti-corruption laws and accounting regulations … over many years’. The new Siemens
leadership made it clear that the firm needed to continue to change its ways. As the CEO,
Peter Löscher, said: ‘We regret what happened in the past but we have learned from it and
taken appropriate measures. Siemens is now a stronger company.’ After the US ruling,
Siemens also moved to integrate compliance measures into personnel processes, such as
hiring, promotions, and management bonuses. In 2012, a new comprehensive compliance
risk assessment system was subsequently instituted, whereby compliance risks are
systematically identified, assessed, and mitigated by senior management on an annual
basis.
One of the biggest challenges facing Siemens is ensuring that its ethics management does
not conflict with its business success. According to Löscher, ‘performance with ethics—this
is not a contradiction, it is a must’, but if their clients still seek bribes and their competitors
are willing to pay them, then Siemens may well be faced with a handicap. One way that the
firm has sought to tackle this is through its anti-corruption outreach activities, which go
under the banner ‘Collective Action’. That is, in addition to internal company changes,
Siemens also started to engage its external stakeholders in anti-corruption efforts to create
fairer market conditions. This began as part of a ground-breaking settlement agreed with
the World Bank in 2009, following the firm’s acknowledged misconduct and the bank’s
investigations into corruption in the awarding of contracts to Siemens subsidiaries. The
settlement committed Siemens to pay $100 million over 15 years to support anti-corruption
work, to co-operate to change industry practices, and to work with the World Bank to fight
corruption.
4
To comply with the settlement, Siemens launched the ‘Integrity Initiative’, with a budget of
$100 million, to support anti-corruption projects. It also took a lead in initiating projectspecific and industry-wide compliance pacts to ensure fair bidding on public contracts. For
example, Siemens Argentina recently concluded a compliance pact with several
competitors in the field of energy transmission. In Brazil, Siemens started to support a
project aimed at creating transparency when awarding infrastructure projects connected
with the soccer World Cup in 2014 and the Olympic Games in 2016. The company also
seeks to increase the compliance awareness of current and future business leaders by
conducting business round-table discussions and presentations and developing learning
materials for students. It also attempts to inspire its customers and engage in external
advocacy around integrity and compliance. In 2018 Siemens launched a ‘Compliance
Included’ online game that encouraged players to become ‘compliance champions’ across
topics including anti-trust, human rights, and anti-corruption.
As a result of these developments, Siemens has been widely recognized as having
developed an outstanding ethics and compliance management system. Even so, it remains
a work in progress to achieve a corruption-free company, especially when bribery might still
be seen by some as necessary to drive business opportunities. As CEO Peter Löscher said
at the time of his appointment, instilling an ethical corporate culture ‘is a marathon for us,
not a sprint’. Indeed, while Löscher is widely credited with turning around the Siemens
corruption scandal and pulling the company out of its crisis, concerns over the firm’s
performance and its failure to meet the CEO’s own aggressive growth targets led to his
ousting in 2013. ‘The clean-up man,’ one newspaper ruefully observed, ‘was swept aside.’
5