Bribery Scandal @ Siemens

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Case Analysis by Steve Akana steve.akana@laverne.edu BUS 685 Global Business Management Case 1 ─ The Bribery Scandal at Siemens AG Overview The report will analyze the case study and discuss the bribery scandal at Siemens AG. The author of the case study paints a picture of a successful and arguably dominant multi-national firm, with a reputation for a war chest of competencies and innovative products. The obvious question, then, is why would a firm with this resume and list of global achievements become involved with corruption and criminal behavior? Therefore, the case study raised questions such as the accountability of senior managers to the rampant corruption occurring in global divisions. Summary On November 15, 2006, 30 offices and private homes were raided by 200 police officers, tax inspectors, and prosecutors in Munch and other cities in Germany to investigate suspected bribery, embezzlement of company funds, and tax evasion. Five Siemens employees were taken into custody in connection with the case. Swiss prosecutors were also involved in the raids because they had an independent investigation on three people connected to Siemens, which launched in 2005. As a result, there was €420M of questionable payments made over a sevenyear period from 1999 to 2006. Official Siemens records showed the payments as having gone to external consultants. It was determined, however, that the funds were actually paid to foreign purchasing officials and that the expenditures coincided with the procurement of “fixed-line line telecommunications business in various international markets," including Italy, Puerto Rico, Greece, and the United States. Siemens acknowledged that certain company employees were engaged in fraud, and the damage to the company could be around €10-30M. Because of the fraud Siemen’s was burdened with an additional €168M in income tax charges since 1999. Their net profit was restated from €3.106B to €3.033B. By the spring of 2007, two former Siemens managers were convicted of embezzlement of company funds (€6M) for the purpose of bribing foreign officials to win a natural-gas turbine contract. The employees argued that their actions did not violate any laws, resulted in no personal gain, and were taken solely for the purpose of improving Siemens’ positioning. They argued that they worked only to secure a lucrative deal in which the payments were required by Enel management as part of the standard bid process. In fact, Siemens AG argued that the court order requiring forfeiture of earnings from the contract, prior to 2002 when the German government instituted a law prohibiting bribes to private officials abroad, specifically, had no basis in law. Analysis It took approximately 200 government officials, made up of police officers, tax inspectors, and prosecutors to indite five Siemens employees. The result was that the company was fined €30M, which was approximately 7% of the total €420M in bribes Siemens paid out. Combined, Siemens lost a total of €450M in 2006. Therefore, the company had to restate their net profits for 2006 from €3.106B to €3.033B. The adjustment was a mere 1.4% of their total net profits in 2006.

Two Siemens employees gave out bribes worth €6M in order to win contracts. The punishment for these briberies was a fine of €44M; however, the contract awarded to Siemens was worth €450M. Therefore, the company’s gain was a profit of €406M. The penalties Siemens paid were roughly 10% of the overall profit made from the contract. So was it worth it for Siemens to engage in criminal behavior? The punishment they received of paying fines varying up to 10 percent were only a drop in the bucket compared to the profits they gained. So from the viewpoint of a Siemens employee who is willing to break the law in order to gain large profits, it was definitely worth it. As a matter of fact, if a company anticipates the percentage of penalties that will be applied for breaking the law, they could actually...
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