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Siemens Sins Again

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Source: Deutsche Welle

Image: ProPublica

Not long ago, Siemens was at the center of one of the largest corruption scandals in the history of German business. In November 2006, a vast bribery scheme came to light, leading to the dismissal of practically the entire management team in the first quarter of 2007.

In response to the problem, the company adopted an anticorruption program and a new management, led by Peter Löscher, and guaranteed that it would prefer to miss out on lucrative deals than to involve itself in illicit practices.

A fresh case in Brazil, however, exposes how difficult it is for the Munich-based company to turn words into deeds. Last week, Siemens notified Brazilian authorities of the formation of a cartel, in which it participated, designed to fraudulently fix price for the purchase of railway equipment and construction and maintenance on train and subway lines in São Paulo and Brasília.

In a communiqué published after the announcement was made public by the Brazilian press, the group said that its management is aware of the investigation and recalled its efforts since 2007 to develop an effective system of controls, and said it was “the obligation of all employees to comply with the antitrust laws.” The company also reported that it is cooperating fully with Brazilian authorities.

According to the daily Süddeutsche Zeitung, however, the irregularities committed in Brazil were first reported to the company in 2008, that is, after its promises to change, and nothing changed.

In June 2008 strong indications emerged of illicit dealings, the Zeitung said. At that time, a Brazilian federal deputy and a former Siemens employee described in detail the manner in which Siemens closed deals with competitors. The accusations involved bribes paid to Brazilian officials. The case was very similar to the case in which Siemens announced its wrongdoing, the newspaper said. In 2010, new evidence appeared which, like previous evidence, led nowhere.

The SZ suggests that Siemens did not investigate the facts at the time in order not to suffer a disadvantage in the dispute for projects related to the World Cup 2014 and the Olympics of 2016.

The megascandal of 2006 came as a shock to Siemens at the time and gave rise to a profound process of change, for which it paid dearly. In the course of the scandal, a Munich court found the company guilty and levied a fine of 201 million euros.

The U.S. Securities and Exchange Commission, also opened an investigation against Siemens, which is listed in the stock exchyange. An out of court settlement cost Siemens another US$ 800 million.

In all, the damages suffered by the company in this episode are estimated to be nearly 3 billion euros, including fines, auditor fees, and supplementary tax collection.

Not long before the verdict, in January 2007, was condemned by the European Union, together with 11 other multinationals, to pay a 750 million euro penalty for formation of a cartel that manipulated high tension electricity installations. The major portion of the penalty — 400 million euros — was paid by the German group. It was the second largsest fine ever levied against a company in the Eurozone.

Pressured by the U.S. government, Siemens hired the former German finance minister Theo Waigel to ensure that the company was in fact modifying its business cultural and implementing the agreed-upon reforms. Waigel and his team interviewed more than 2,500 employees around the world between 2009 and 2012, and when it delivered its report, it was full of praise for the company. “Siemens implemented all our recommendations,” Wagel declared in late 2012.

Apart from Siemens, subsidiaries of other multinationals were allegedly participating in the cartel denounced by Siemens, including the Frence Alstom, Canada’s Bombardier, CAF of Spain and Mitsui of Japan. These allegedly negotiated illegally the price they were to pay in the public tenders, seeking to impose prices 10% to 20% higher than market value.

In early July, the Brazilian antitrust authority Cade, conducted an operation with the federal police that served warrants of 13 companies supposedly involved in the schemee, located in São Paulo, Diadema, Hortolândia and Brasília. Analysis of the fruits of those searches should take about three months.

The charges brought by Siemens inform that the cartel acted in at least six public tenders. The real extent of the misconduct, the duration of the scheme and the damages caused remain unknown, however. The deals involving Siemens are valued in the hundreds of millions of euros. In the early 1990s, the German firm won the contract for the construction of the first phase of what is now Line 5 of the São Paulo subway, estimated at R$ 600 million and in which an illicit deal involving Alstom is said to have been cut.

There may also have been irregularities in a 2000 contract for the provision of ten trains, built jointly by Siemens and Mitsui. And there may have been fraud in contracts signed by Siemens in 2007 and totaling R$ 96 million per year for maintenance of the Brasilia subway. In this case, the German firm made an illicit deal with Alstom, which supplied the trains to the government of the Federal District.

In denouncing the scheme, Siemens, according to the local press, signed a leniency agreement, guaraneeing the company and its executives immunity against prosecution in the even that formation of a cartel was proven. In return, Siemens will cooperate in the investigation.

Siemens’ accusation of cartel formation in the railway sector comes at a sensitive moment. Next month, an auction is scheduled for the TGV train that will link Rio and São Paulo, the first of its kind in Latin America.

The companies in the alleged cartel are among the most promising bidders in the dispute for this megaproject, estimated by the Brazilian government at R$ 35 billion.Along with the five multinationals accused of price-fixing, only five other companies in the world are cable of building the TGV. Only the Korean Rotem has expressed an interest in bidding on the project.