How a German engineering company is trying to change its fate in India through a compliance programme aimed at combatting corruption
By Lord Goldsmith QC
The international commercial community’s perception that Indian businesses are at best neutral in their view of corrupt practices places those companies at a competitive disadvantage in the global market. Recent events in India, like the manipulation of prices in the auction of 2G spectrum, the Commonwealth Games scandal and the Uttar Pradesh food and energy subsidy affairs, have reinforced this perception.
There is undoubtedly a strong grass roots desire in India to put an end to corruption. This is reflected in the India Against Corruption and Jan Lokpal movements, which seek to establish a Jan Lokpal: an independent body to investigate corruption at all levels of government.
But it is not just India’s lawmakers and authorities who must tackle corruption. Close scrutiny of corporate governance plays an increasingly important role in international business ventures, with the risk of billion dollar penalties and debarment from public contracts if standards are not met.
To compete financially with established rivals abroad, India’s companies must take a lead role in shaking off the commercially toxic perception that their business environment is tainted. Addressing internal compliance issues may be the single most important step an Indian company can take to compete successfully in the world market.
Compliance failures at Siemens
In 2007 and 2008, German engineering conglomerate Siemens paid a total of US$1.6 billion in penalties to German and US authorities to settle allegations of bribery. The US Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) accused the company of using its employees and intermediaries, such as “local consultants”, to help it secure contracts through improper payments.
The government agencies alleged that Siemens made at least 4,200 payments amounting to around US$1.4 billion to government officials in return for business. According to the DOJ and SEC, bribes were paid in connection with business ventures including mobile phone equipment sales in Bangladesh, telecommunications projects in Nigeria, national identity cards in Argentina, medical devices in Vietnam, China and Russia, traffic control systems in Russia, refineries in Mexico and mobile communications networks in Vietnam.
It was further alleged that Siemens management should have been aware of and addressing such practices since at least 1999, when payments to foreign officials became illegal under German law.
The corruption charges and resulting investigation led to a spate of resignations, including both Siemens’ CEO and its chairman. Since its financial and reputational thrashing, Siemens has worked hard to clean up its image.
Following serious compliance failures investigated first by Munich prosecutors and later by the US DOJ and SEC, Siemens initiated an independent internal investigation, which was completed to the authorities’ satisfaction in two years – a quick turnaround for an international conglomerate of its size.
Compliance culture at Siemens has changed dramatically since the November 2006 raid by Munich prosecutors of Siemens’ offices in Germany and the homes of numerous employees, which led to the arrest of several Siemens employees and the seizure of documents relating to suspicious payments through Swiss and Austrian accounts.
Within two years, Siemens replaced members of its top management, streamlined its organizational structures and clarified its chain of command. The company’s reforms included overhauling and strengthening its compliance, legal and audit functions, and addressing internal controls gaps.
“Instead of simply instituting new procedures, Siemens looked for ways to monitor their implementation and has remained willing to modify its anti-corruption processes to improve their effectiveness. It did this by bringing recognized professionals into key leadership positions (including CEO, general counsel, chief compliance officer and chief audit officer) to design a comprehensive compliance programme in consultation with various legal and accounting professionals, including Debevoise & Plimpton which had conducted the internal investigation.
A concrete strategy
Siemens divides its efforts into three basic “action” categories – Prevent, Detect, Respond – as set forth in the diagram below.
The company views “tone from the top” as critical to the success of its compliance programme. Within the first fiscal year of the new regime, senior executives engaged in a “compliance roadshow”, visiting 54 of the countries in which Siemens does business. The roadshow included management roundtable and employee town hall meetings, where participants were encouraged to discuss compliance activities and concerns openly.
Like the rest of the compliance programme, roadshows are an ongoing process. Since the end of 2010, the chief compliance officer, Josef Winter, and the chief counsel compliance, Klaus Moosmayer, have visited Siemens’ regional operations and facilities in the Middle East, Asia, Africa, North and South America, and Europe.
Another critical aspect is the global compliance organization, which has been completely overhauled in the past five years. It previously consisted of a handful of legal experts at the company’s headquarters in Munich and Erlangen and about 60 mostly part-time compliance officers in the business units and in some of the 192 countries in which Siemens operated. Now, approximately 600 full-time employees work in compliance, with about 80 at headquarters and the rest at the businesses and regional companies.
Compliance officers generally have an internal audit and/or legal background, as well as experience in operational units so that they understand how Siemens functions. The compliance officers are the front line when it comes to identifying and raising red flags. Their role is to inform management before issues become problems, allowing remedial action to be taken before it is too late.
Winter is in charge of operational matters, while Moosmayer deals with governance issues such as providing legal advice in compliance matters, investigations, discipline, remediation and risk prevention. The compliance organization is designed to be an integral part of the business where employees spend three to five years before moving back into operational divisions. Working in the compliance department is regarded as a key element in an employee’s career path.
Preventing future mishaps
Siemens’ business conduct guidelines, rewritten in the months after the 2006 raid, were simplified and integrated in business processes in 2008 and 2009. “It had become apparent that a deluge of rules and regulations is more likely to undermine employee confidence than to provide genuine help,” says Winter.
For example, Siemens simplified its business partner policy in mid-2008 to introduce a uniform company-wide software-assisted risk assessment of entities such as sales or consortium partners performing intermediary functions between Siemens and customers. Now, each business partner is allocated a risk class based on factors such as the corruption rankings of the country where work is undertaken and specific compliance risks associated with the project in which the partner is involved.
Training has also been a key element of the Siemens compliance initiative. Worldwide, more than 300,000 Siemens employees have received compliance training since 2007; one-third received up to eight hours of in-person training and the rest had electronic training. New compliance officers take part in an intensive four-day programme, and compliance is among the topics covered in basic employee training.
Another innovation has been the formation of a compliance helpdesk, to assist in the prevention and detection of non-compliant conduct. The “ask us” function of the helpdesk has answered about 11,250 questions emailed by employees in the past four-plus years and acts as an indicator of compliance topics of interest. The “tell us” function – part of the “detect” action level – is a 24-hour whistleblower hotline. It is operated by a third-party provider and available in 150 languages.
Other “protected” reporting paths available to Siemens employees, managers and external parties are the company’s independent ombudsman and the company’s accounting complaints function, established under the US Sarbanes-Oxley Act of 2002, also known as the Corporate and Auditing Accountability and Responsibility Act.
The compliance investigation department, established in 2008, and the forensic audit group are another aspect of the “detect” action level. As Moosmayer explains: “A key finding of Siemens’ assessment of past malpractices and of the deficits of the earlier Siemens compliance system was that existing evidence of misconduct was not investigated soon enough or with the necessary resolve.”
Siemens has also changed the manner in which it addresses misconduct. “Prior to 2007”, says Moosmayer, “Siemens rarely responded to corruption or to unlawful competitive practices with disciplinary sanctions.”
A new corporate disciplinary committee, chaired by general counsel and head of compliance Peter Solmssen, was established in August 2007 to assess misconduct at the management level following internal or official investigation. The committee has taken more than 200 decisions since its inception, ranging from informal warnings to immediate dismissal. Siemens has also made compliance a central factor when assessing the compensation of its managers.
In addition, the German company has devised a global case tracking tool to improve its information flow regarding potential misconduct. As a result, it is less likely that a problem will fall between administrative cracks, or that a regional issue will not be brought to the attention of headquarters.
Siemens has embraced the “integrity pact” concept, which Transparency International developed to prevent corruption in the public procurement context. Integrity pacts include agreements with tendering authorities that their officials will not demand or accept bribes or gifts (or else will be subject to criminal and disciplinary sanctions), and ensure that bidders disclose all payments made in connection with a contract to anybody involved in the tendering process (including agents, middlemen and family members of officials).
Siemens Limited, a regional company for India that employs over 18,000 people, has been working with other companies in the electrical and electronics engineering sectors to draw up codes of ethics, and with the government and authorities to promote an anti-corruption culture.
Siemens also provided grants of US$4.35 million over four years to the United Nations Global Compact Project to promote collective action on anti-corruption in key markets (including India, through its Anti-Corruption Collective Action Project launched in January this year) and to better integrate anti-corruption issues in business school curricula.
The rewards of fair play
GAIL (India), which concluded an understanding with Transparency International for the use of integrity pacts with contractors in 2007, invited Siemens’ compliance group to discuss the company’s post-2008 anti-corruption initiatives during its recent tendering process. Siemens was subsequently allowed to participate in the bidding and won a €50 million (US$68 million) order from the state-run company.
The value of US public contracts awarded to Siemens rose 20% between 2007/08 and 2009/10 according to USAspending.gov. In June, a consortium led by Siemens won a £3 billion (US$4.7 billion) government contract to build carriages for the UK’s £6 billion Thameslink Upgrade programme. In September, the Swiss Federal Railway selected Siemens Rail Automation for a €125 million contract to update the Swiss rail network’s safety technology over the next six years, and maintain its existing signalling systems for the next 25 years.
Siemens is not alone in aggressively rooting out corruption and designing systems for good corporate governance.
In 2007, the US pharmaceutical company Johnson & Johnson disclosed making improper payments to officials in Greece, Poland and Romania in relation to the sale of medical devices. The US DOJ cited the company’s compliance improvements as a key factor in favour of a lower criminal penalty in the recent resolution of its anti-corruption investigation of the company.
Johnson & Johnson’s accounting control improvements included self-assessments and internal and external audit reviews of operating companies to ensure that improper payments would be detected immediately if they occurred again.
In 2010, the South Korean conglomerate Samsung began an extensive programme to implement a company-wide compliance system, including inspecting and reviewing operational standards throughout the company’s business units, and training programmes and educational materials on the latest legal developments and regulations.
An anti-corruption drive by Russian oil company TNK-BP uncovered 365 cases of alleged corruption or other violations of company rules. TNK-BP announced that 92 of the employees concerned had been disciplined and 37 criminal legal cases had been started as a result of internal “zero tolerance” efforts to combat fraud and corruption. The company has implemented a system to screen all potential contractors, blacklisting those who violate laws, regulations, human rights and ethical business standards.
Adopting a universal culture of ethical business is easier said than done, particularly in developing economies such as Brazil, Russia, India and China. Compliance with global anti-corruption legislation such as the US Foreign Corrupt Practices Act and the UK Bribery Act, and adherence to laws like the Indian Companies Act and the Securities and Exchange Board of India Act may help Indian companies compete globally and consign cases such as Satyam to the past.
GAIL and some other leading Indian companies have already recognized the commercial importance of eradicating corrupt practices. Infosys Technologies is a lead partner in the United Nations Global Compact Project and has won awards for corporate governance, as has Mahindra. Tata Tea, through its 2009 Jaago Re campaign, has taken action to mobilize the wider population against bribery by establishing an “Anti-Corruption Day”.
However, until a robust legal framework is implemented and effectively enforced in India, some Indian companies may feel no immediate need to take steps to root out corrupt practices and corporate wrongdoing. They may view compliance with India’s prevention of corruption legislation – and consequently “international compliance” – as mere inconveniences to be circumvented through bad corporate practice, such as the exploitation of accounting gaps and ineffective internal payment controls.
India’s companies must demonstrate their desire to do good business by insulating themselves against the potentially devastating effects of corruption and bribery scandals at home and abroad. While these changes will require time and expenditure, they will ultimately yield dividends – in all senses of the term – as confidence grows and customers and investors look increasingly to do business with Indian companies.
Lord Goldsmith QC is a former UK attorney general and currently a partner and the chair of European and Asian Litigation in the London office of Debevoise & Plimpton LLP. The author wishes to acknowledge Gaurav Sharma, an associate at the firm’s London office, for his contribution to the article.