From Systemically Corrupt to Above Reproach: Examining Siemens’ Remarkable Turnaround
Peter Solmssen was brought into Siemens to accomplish the impossible – upend the morally bankrupt, corrupt culture of Siemens that was systematically paying bribes in every corner of the world and transform it into a model of compliance reform and ethical culture. Peter and former SEC FCPA Unit Chief Kara Brockmeyer joined me to discuss the Siemens corruption case and their remarkable compliance turnaround.
Peter related a story that a friend of his told him. His friend went through Siemens management training in the 1950s. At one point, the instructor said, “there will come a time when there will be payments you may need to make which will make you uncomfortable. Don’t worry, we’ve got an office that handles that.” This was in 1959. This anecdote helped drive home the point of how big an undertaking it would be to drive ethical culture across the Siemens enterprise.
When the settlement of the Siemen case was announced in 2008, law enforcement didn’t pull any punches. Matthew W. Friedrich, the acting chief of the Justice Department’s criminal division, called corruption at Siemens “systematic and widespread.” Linda C. Thomsen, the S.E.C.’s enforcement director, said it was “egregious and brazen.” Joseph Persichini Jr., the Assistant Director in Charge of the F.B.I.’s Washington field office, which led the investigation, called it “massive, willful and carefully orchestrated.” And so it seemed. Yet what is equally remarkable is that a company that used corruption strategically and methodically to achieve its business objectives for decades remade itself in the wake of the corruption scandal to emerge as a model of corporate reform and business ethics. The admonishments from the DOJ, SEC, and FBI were followed by statements that Siemens AG disclosed these violations after initiating an internal FCPA investigation of unprecedented scope; shared the results; cooperated extensively; took appropriate disciplinary actions against individuals including senior management and remedial action, including the complete restructuring of Siemens AG and the implementation of a sophisticated compliance program and organization.
Perhaps the biggest failure on Siemens’ part was the failure to act. Siemens’ leadership, internal audit, outside auditors, compliance and outside counsel received numerous reports of government investigations in multiple jurisdictions. The reports of slush funds, off-books accounts, misleading information from officers and employees (including regional compliance officers) and numerous instances in which the company did not take appropriate actions to investigate and discipline responsible parties. The world had never seen a corruption case like this before. So much so that when Siemens finally did act, it was decisive. They fired the entire C-suite and turned over its management and executive boards. It was unheard of at the time and set the tone for the compliance and cultural overhaul that followed. Kara explained the importance of holding executives and board members accountable when a major scandal like this first comes to light. Kara stated that Siemens “showed the way forward” on what to do when your company is faced with a situation like they were in which the conduct radiated from the top of the organization and was so widespread. “It is what the government expects to see. They want to see the company address the wrongdoings, however, high up in the organization they are. That’s one of the things that allowed Siemens to get credibility with the government that allowed them to get the investigation done so quickly so that they could move on from there and turn over a new leaf.”
When Peter stepped in as General Counsel, Germany was less than 10 years removed from a time when bribery was not only legal, it was tax-deductible. I asked him to describe some of the most important steps taken at Siemens to halt bribery and begin to build a sustainable ethical culture. Two things that were critically important and effective. The first was to establish an unambiguous tone from the top and clarity from leadership that compliance reform was a top priority and there would be no exceptions and no grace periods. He attributed the secret to their success was Siemens’ employees. To accomplish an unprecedented level of compliance and ethical culture reform, each employee needed to know and see frequent examples of the unwavering support of their leadership. Peter said that the “secret sauce” is that people don’t want to pay bribes and if you empower them to say no, it works.
Peter reminded Siemens’ workforce that Werner von Siemens, the founder of the company, faced bribery in the 1860s which he wrote about in his memoirs that he wouldn’t pay bribes. This was an important part of the company’s history that they could build on. They had a good culture that they could and should revert to. Equally important is that they found that in the countries where bribery was a problem, the employees in those countries knew it was a problem and wanted to be a part of the solution.
Peter said that it wasn’t hard to motivate employees in corruption-riddled countries if you gave them good leadership. By establishing those two things, tone and clarity of leadership and then enabling people to do what they want to do anyway, was key to orchestrating Siemen’s turnaround.
Siemens executives particularly Peter traveled the world in the years leading up to their FCPA settlement. During a visit to an unnamed South American country, Peter was told that the former regional CFO was insisting on meeting with him. When he eventually agreed to meet, the former CFO told him that he had $38 million of the company’s money in a bank account in his name and that he wanted to return it. It never came up during the investigation and no one knew that he had it. This was an example of the way that Siemens was driving cultural change.
The Siemens case caused a knee-jerk reaction on the part of some German companies, where there was this wrongheaded view that if you don’t list in the U.S., you may not be subject to U.S. enforcement. It seemed to convey a lack of understanding of the FCPA and that it is not just issuers who are subject to the jurisdiction of the FCPA. Kara explained that there are a lot of reasons why companies choose to leave the U.S. capital markets but FCPA enforcement should not be one of them. In addition to U.S. issuers, any company that has a subsidiary or does business in the U.S. is subject to the FCPA as what’s called a “domestic concern”, meaning it’s subject to the FCPA regardless of where the unlawful conduct occurs. U.S. enforcement authorities can assert jurisdiction over foreign nationals if the individual or the entity takes action in the U.S. as is often the case with intermediaries.
The Siemens case was groundbreaking both in terms of the scale of the systemic bribery and extraordinary compliance turnaround. It is an important case study and many of its lessons are still very relevant today.
To hear both of the full Fraud Eats Strategy podcast episodes with Kara Brockmeyer and Peter Solmssen, click here, and episode 2 here.
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