PART II OF A TWO-PART SERIES
German engineering giant Siemens, one of the world’s biggest multinational companies, ignored its own red flags for foreign bribery in the aftermath of a major corruption scandal in 2008, according to newly released monitoring reports and other confidential documents.
The warnings involved the company’s use of third-party resellers, who have often served as conduits for bribing foreign officials, according to former company insiders and internal assessments. Evidence from public records in China suggests this practice has continued into recent months, and resulted in the sale of medical equipment to Chinese state-owned hospitals at vastly inflated prices amidst the pandemic.
The four monitoring reports, which Siemens was obliged to commission from 2009 to 2012, stem from a $1.6 billion landmark settlement of bribery charges by the US Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) in 2008.
The investigation by US and German authorities uncovered over $1 billion of bribes paid to foreign government officials in return for business, in what the SEC called a “systematic practice” spanning decades and virtually every region in which Siemens operated, in violation of the Foreign Corrupt Practices Act (FCPA). A main plank of the SEC’s case against Siemens alleged bribery of third-party resellers to advance Siemens’s business interests.
The case marked a turning point at Siemens. In the wake of the scandal, the company increased its number of compliance officers to over 500 worldwide and introduced stringent new internal policies. The moves, together with Siemens’s apparent adherence to the monitoring reports, turned the company’s reputation around. Many then saw the company as a key player in the fight against global corruption.
By 2014, the Secretary-General of the Organization for Economic Cooperation and Development (OECD), Angel Gurría, was lauding Siemens for playing a “leading role in anti-bribery compliance measures” at an event attended by the company’s Chief Compliance Officer Klaus Moosmayer.
But whistleblower allegations, evidence that Siemens appeared to still be involved in bribery schemes in the Chinese healthcare market, as well as reports of major FBI investigations against Siemens and other companies in Brazil, suggest that these policies may not have been as effective as Siemens portrayed, and as many assumed they were.
The Justice Department historically has withheld monitoring reports from the public, and the DOJ, Siemens, and its monitor, former German Finance Minister Theo Waigel, all fought to keep the contents of the monitoring reports secret. 100Reporters, represented by Davis Wright Tremaine, sued the Justice Department for release of the reports under the Freedom of Information Act, and won their release, in what transparency advocates have called an important precedent.
Both Waigel and Siemens also declined to address specific questions related to this article. In a statement, the company said that it has “an extensive global compliance program designed to prevent, identify, and eliminate corruption,” and that it was “making extensive efforts to identify and eliminate business practices that promote corruption” in China.
“This includes ending the use of sales partners and consultants in the event of misconduct,” the statement said. “Whenever we find misconduct by distributors, we take action, including ending our collaboration with them.”
The Siemens Scheme
The 2008 scandal was of breathtaking scope. “Over time,” the SEC wrote in its complaint, “Siemens developed a network of payment mechanisms designed to funnel money through third parties in a way that obscured the purpose and ultimate recipient of the funds.” The ensuing settlement, in which Siemens pleaded guilty to criminal violations of internal controls and record-keeping regulations, stipulated that Siemens appoint an independent monitor. The company’s choice of Waigel to monitor compliance reflected the importance of Siemens’s reputation and worldwide business to Germany’s political establishment.
Of hundreds of pages of Waigel’s reports that were released, most were heavily redacted.
The handful of pages left visible reveal the areas that prompted the former finance minister’s Waigel’s concern at the time: There are chapters dedicated to “anti-corruption training,” “punishing wrongdoing,” and the “tone from the top.” Most significant, given that Siemens has been investigated for corruption in Brazil and China in recent years, are chapters on “third-party risks.” Third-party resellers are widely considered a red flag for potential bribery. In fact, according to a 2014 briefing by the law firm Clifford Chance, over 90 percent of all FCPA prosecutions in China involve third-party agents.
Similarly, the Justice Department’s Resource Guide to the FCPA lists among its common red flags “the third party [becoming] part of the transaction at the express request or insistence of the foreign official.” Since Chinese hospitals are state-owned and run, for FCPA purposes, hospital officials are considered government officials.
Red Flags: Attention Optional
Waigel’s initial report alerted Siemens to the bribery risks presented by third parties such as resellers commonly used in China, particularly those designated by the end customer. “[B]usiness counterparties should be screened for red flags, including (but not limited to) . . . relationships with government officials,” the report noted in a section on General Principles and Best Practices.
Waigel’s initial report made 114 recommendations for changes in Siemens’s compliance practices to prevent bribery. All of those recommendations were redacted in the current release, but a former compliance officer at Siemens Healthcare in China, Meng-Lin Liu, disclosed a crucial one: that Siemens review its internal controls for scrutinizing its business partners, particularly the use of resellers or distributors in contracts that would otherwise be handled directly between Siemens and the purchaser.
A January 2010 “Special Review” of the company’s vaunted system for scrutiny of potential partners, called the Business Partner Tool (BPT), showed that in November 2009, Siemens indeed assembled a team to examine how the company vetted these third parties, referred to as import/export companies in the documents.
When the team interviewed Liu that December, Liu said that he expressed his concerns that Siemens was allowing some business partners to sidestep vetting through the BPT, thus allowing what were, according to Siemens’s own definition, “high-risk” entities to conduct the company’s business in China without proper due diligence. Liu had already sent an email to Bernd Ohnesorge, at the time CEO of Siemens Healthcare in China, in October 2009 raising concerns about the company bypassing anti-corruption assessment in certain deals. It appears that the review team listened to Liu. The Special Review stated that a 2008 decision to “exclude [import/export companies] related to sales and tendering business from the BPT approval” was being reconsidered.
The team even noted other “red flags” that should, in its view, intensify scrutiny of import/export companies. One red flag was that Chinese hospitals chose a “partner of trust” to buy equipment from and assigned that partner of trust to a respective Siemens unit. Another red flag was that import/export companies used by bigger hospitals were actually former purchasing departments of those hospitals. In both cases, the reselling companies seemingly presented a high risk of corruption.
In an emailed statement, Siemens did not directly address this review, but insisted that its compliance system was “adequately conceived,” and pointed to Waigel’s positive appraisal of the company at the end of his monitorship.
But the Special Review suggested that important red flags were being missed, according to Otto Geiss, a former compliance officer at various German companies and board member at the European Business Ethics Network Germany (DNWE).
“Of course, if the hospital has an influence on who imports the product I would say right away that kickback payments are being paid,” Geiss said. “What interest could a hospital possibly have in whether Mr. X or Mr. Y. is doing the importing? That means they have an influence on who gets the business.”
Nevertheless, five months later, a memorandum issued by Siemens’s compliance officers reinforced the 2008 decision to ignore such warning signs. The June 2010 memo, sent to Liu among others, declared that the BPT “does not apply to Models A, B, and D where the companies were engaged either by the end-customer or the dealer.” In other words, three of the four different ways that Siemens works with import/export companies in China could be exempt from this heightened scrutiny.
Even after an independent monitor had called out practices at Siemens following one of the biggest corporate fines in history, the company was allegedly telling its compliance officers not to activate enhanced due diligence processes in the face of red flags.
Liu had already noticed big price differences between what the import/export companies were charging hospitals for expensive medical equipment, such as MRI scanners, and what Siemens was receiving, and concluded that that the difference was being siphoned off to bribe corrupt hospital officials. He flagged these concerns in a PowerPoint presentation and a spreadsheet he compiled pointing out the deviations, which he showed to senior compliance officers and senior management at Siemens China.
In the ensuing months, Liu was stripped of his responsibilities before being fired, according to a subsequent lawsuit Liu brought against Siemens alleging whistleblower retaliation.
A Siemens spokesman denied that Liu was fired, claiming that he signed a “mutual termination agreement” after a long period of discussion. The agreement in question, included in Liu’s lawsuit, is titled “Notice of Non-Renewal of Employment Contract,” and appears to be a straightforward notification of non-renewal of an employment agreement.
To Geiss, the June 2010 memorandum presented yet another cause for concern.
“Why would I figure out a methodology for red flags and then not apply it? Why would I make a rule, then define all the exceptions, then say, only the exceptions apply?” Geiss said. “Then I don’t need the rule in the first place. If I have four business models, then decide that in three of them the issue of red flags aren’t applied, then that’s not right.”
Geiss found the exceptions are ironic. Siemens was one of the first companies to develop an IT-based Business Partner Tool to help weed out corruption, and built some of the most comprehensive compliance policies and internal infrastructures of the corporate world in the wake of 2008.
The June 2010 memo, signed by two senior compliance officers, also included a rather alarming footnote to one of the business models. Under what was called “Model B,” in which the import/export company is considered an agent of the hospital rather than an agent of Siemens, the officers acknowledge that “it’s not clear to Siemens whether the [import/export company] signs a further contract with the end-customer.” The footnote then admits, “We cannot exclude the possibility that the [import/export company] and the end-customer abuse the structure and make other dealings under the table.”
In other words, the memo expressly acknowledged the risk of bribery, but neither addressed how to prevent it nor how to remedy it if it occurred.
In November 2010, after he had already been told that he was being let go, Liu sent an emailed statement to Waigel and the company’s compliance department explaining what he described as “the whole picture.” In it, Liu said he had seen many compliance failures, including “one-time dealers [being employed] without applicable process control/authorization,” “ineffective intermediary management,” and “unqualified distributors . . . approved over the objection of [the] responsible compliance officer.”
The problem, Liu wrote, unfolded in stages. “Briefly, at an organizational level, compliance independence was surrendered first, followed by compliance gravity shifted from ethics to revenue, and inevitably, compliance metamorphosed into complicity.”
Whether Waigel received Liu’s email, and how he dealt with the email in his monitoring reports, is unknown, thanks to the secrecy he and Siemens insisted upon in fighting against their public release. Shortly afterward, he reported that “Siemens . . . is working to implement all 114 recommendations [from his first year report] in a timely manner.” In October 2011, after three years of assessing Siemens’s compliance policy and procedures, Waigel concluded in his final work plan that the German company had “fully implemented all of his Year One recommendations.”
To the letter, Waigel was correct. The monitor had recommended a “review” of the company’s practices involving resellers, which Siemens had, indeed conducted. However, the spirit and intent behind the recommendation–rooting out practices conducive to bribery–appear to have been largely sidestepped in favor of a more passive approach, of reacting only after corrupt actors had been identified by external parties – such as the Chinese courts.
Waigel, who now practices European competition law at a Munich law firm, refused to provide comments for this article, saying that it was no longer possible for him to remember the details of his monitorship. Nevertheless, partly as a result of his role, Waigel has since gained a reputation in Germany as a compliance troubleshooter for major international corporations. In 2017, he was hired by European aviation giant Airbus to check compliance standards, and in February 2021, he was named chairman of an expert commission for auditor Ernst & Young in the aftermath of the recent Wirecard scandal, one of Germany’s biggest-ever cases of corporate fraud.
Despite assurances that the problems at Siemens have been fixed with a comprehensive compliance policy and new controls, how exactly Siemens has responded to these problems remains unclear. That is because the monitoring reports in settlements like this are kept secret by the companies found to have broken the law and the government agencies charged with enforcing it, said Matt Kelly, publisher of the Radical Compliance newsletter.
Kelly emphasized how rare it was that even part of a monitor’s report be made public. “In the 17 years I’ve been doing this, I’ve only found one (other) monitoring report that ever became public,” he said. “They’re highly confidential material.”
For some compliance experts, the way the judicial system dealt with Siemens’s FCPA violations is suspect, particularly in light of Siemens’s subsequent reputation, burnished by the DOJ itself in its 2008 sentencing memorandum, which praised Siemens’s “reorganization and remediation efforts” and maintained that it had “set a high standard for other multinational companies to follow.”
“The DOJ frequently talks about transparency in FCPA enforcement, but when given a chance to demonstrate transparency, it does the exact opposite,” said Mike Koehler, who runs the FCPA Professor website and teaches at several law schools.
Koehler and other experts argue that the public and shareholders have a right to know whether a company’s business is honest.
In fact, transparency has been a mantra of the Justice Department itself. In a 2015 speech on corporate compliance at the NYU School of Law, the head of the Criminal Division, Assistant Attorney General Leslie R. Caldwell, said, “Greater transparency benefits everyone. The Criminal Division stands to benefit from being more transparent in part because if companies know the benefits they are likely to receive from self-reporting or cooperating in the government’s investigation, we believe they will be more likely to come in and disclose wrongdoing and cooperate.”
Nevertheless, the Justice Department argued the exact opposite in the Siemens case, alleging that releasing the monitoring reports would “decrease the amount and accuracy of information that DOJ received from future monitorships, which will ultimately inhibit DOJ’s ability to reduce corporate crime.” In opposing the release of its compliance reports, Siemens maintained, in part, that its measures to counter bribery amounted to “trade secrets,” whose release could give Siemens’s competitors an advantage.
In the face of Siemens’s apparent inaction, the problem persisted. According to a recently-released Chinese court verdict, in the same year that Waigel concluded his monitorship, a Siemens business manager offered to pay a hospital president in the Anhui district ¥2 million ($300,000) in exchange for help ensuring that Siemens products won bids. The hospital president who made this confession was convicted of taking bribes from 2004 to 2017.
Two years after Waigel’s monitorship ended, the most senior sales manager at Siemens China blew the whistle on corruption among third-party resellers. In a 2013 email to dozens of senior staff at Siemens China, the manager, Cao Yong Sheng, spelled out his concerns. He asserted that there was a “huge gap between biddings and contracts,” and asked, “Where’s the gap going?”
Sheng, who had been sacked over his own alleged corrupt actions, maintained that Siemens knew full well that intermediaries were overcharging for equipment, building in the cost of bribes to hospital officials.
“It made us very uncomfortable and so worried,” he wrote.
This series was produced in partnership with the McGraw Center for Business Journalism at the Craig Newmark Graduate School of Journalism at the City University of New York, and co-published with the Associated Press.