In fallout from $106 million corruption scheme, Siemens managers face ‘copycat’ charges in Argentina

In a case that vividly demonstrates the widening risks companies face from anti-corruption enforcement, a judge in Argentina ordered the indictment of 17 current and former managers of Siemens AG on charges they helped funnel more than $106 million in bribes to win contracts from the Argentine government.

The indictment late last month follows a long-running investigation in Argentina that exposed a vast bribery scheme extending to the senior management of the German engineering conglomerate and its Argentine subsidiary.

In 1998, Siemens and its Argentine subsidiaries won a government contract to produce national ID cards and build a border control system in Argentina, a deal signed by then-president Carlos Menem. In order to secure the contract, Siemens funneled tens of millions of bribes over several years to middlemen representing Menem.

In 2001, Menem’s successor, Fernando de la Rua, canceled the contract and ordered an investigation. Siemens admitted paying bribes to Argentine government officials in connection with obtaining the contract.

The bribery scheme has already had a costly fallout for Siemens. In 2008, the company was hit with a record $800 million penalty from the US Justice Department for violating the Foreign Corrupt Practices Act in connection to the Argentine corrupt payments. Five Siemens managers were also charged in the US for facilitating bribery.

Those same five managers now face charges in Argentina, along with twelve others who helped create shell corporations and falsify payment documents to help conceal the bribes.

Their indictment highlights a growing trend in anti-corruption enforcement globally – the rise of so-called “copycat prosecutions.” Corruption schemes, especially those involving large multinational companies, are often highly international in scope, with participants and violations in multiple countries. When wrongdoing comes to light, companies and their employees are left facing the threat of prosecution from multiple enforcement agencies in multiple countries for the same violations.

Siemens used global network of shell companies to funnel bribes

The investigation in Argentina shares many elements in common with the 2008 case against Siemens in the US. The company was also fined more than $280 million by the German authorities in 2007 in connection to the Argentine bribe scheme.

The 337-page resolution by Federal Judge Ariel Lijo offers insights into how Siemens engineered such a large-scale bribery operation. Participants created a complex system of transactions and fronts to justify the expenditure of large sums of money from Siemens and its subsidiaries. Among other methods, Siemens employees used a group of shell companies to create fictitious contracts for services that were never provided in order to justify and channel corrupt payments.

According to the Argentine investigation, corrupt practices to secure government contracts were an established part of the corporate culture of Siemens’ subsidiaries. Argentine officials stated, for example, that one of the subsidiaries had set aside approximately $40 million to use for bribe payments in the country.

Case a setback as Siemens tries to distance itself from corruption

In the US case Siemens acknowledged that between 1998 and 2007 about $106 million related to “Project ID” in Argentina were paid directly or through affiliates, subsidiaries and business units.

The case in the US did not focus only on corrupt acts in Argentina. It referred to the payment of more than $ 1.4 billion in bribes between 2001 and 2004 in countries scattered across the globe, including payments to secure contracts for supply transit systems in Venezuela, medical equipment in China, Vietnam and Russia, power equipment in Iraq and Israel, refineries in Mexico, and telecommunications equipment in Nigeria and Bangladesh.

For Siemens, which is trying to bury once and for all allegations of corruption and bribery, the Argentine decision falls like a bucket of cold water.

After entering into a Deferred Prosecution Agreement in the US, Siemens revamped its compliance program in 2008. The company has taken steps to improve its anti-corruption program, naming a new chief compliance officer to head Siemens’ entire compliance operations beginning this month.

Eleven countries cooperated to unravel bribe scheme

The investigation in Argentina required the cooperation of a large number of jurisdictions, including Germany, United States, Uruguay, Costa Rica, Panama, Cayman Islands, Bahamas, Channel Islands, British Virgin Islands, United Arab Emirates and Switzerland. The case evidences the international scope of corporate networks and transactions used to move money and create layers to hide corrupt payments.

As Siemens execs used financial accounts in different countries to funnel the bribe payments, it proved extremely challenging to identify the final recipients of the payments, according to the ruling.

One element in the structure of transactions and payments that drew investigator’s attention was that payments for consultant services were not agreed in the form of fees for costs, but were instead fixed amounts paid at staggered intervals. The payment arrangement tipped off investigators that these contracts were not legitimate, but instead instruments to convey bribes.

Investigators also questioned why Siemens subsidiaries outsourced advisory services for major IT projects to unknown offshore companies in other Latin American countries, including Brazil, Chile, Mexico and Uruguay. The companies were revealed to be mechanisms for moving bribe funds.

Case involved corporate collusion

The judge also noted that Siemens’ employees cut a deal with members of another Argentine company (SOCMA) in order to allow Siemens to win the bid for the ID card project.

Adding more doubts to the bidding process was the fact that a SOCMA subsidiary was later added to the project, as the company responsible for distributing documents across the country. The addition was approved by the Argentine Ministry of Interior Office.

Warning signs and affluent lifestyles

According to testimony from Siemens executives, there were rumors and warnings internally before the bribe scheme exploded into public view. Siemens employees stated that executives at the local subsidiary of Siemens had an opulent lifestyle that could be the result of corruption.

Michael Kutschenreuter, who served as business manager of one of the subsidiaries of Siemens, also submitted a brief internally in which he referred to certain issues related to the “Project ID.” He acknowledged that it was a controversial issue for the board of directors in Germany.

After the presidential elections in Argentina in 1999 that marked the end of the administration of Carlos Menem, Kutschenreuter said other executives at Siemens let him know that the project was blocked and could not continue due to the change of administration.

That reached the ears of one of the members of the board of Siemens in Germany, Volker Jung, who said that Argentina was worse than Iran because while the Iranians were corrupt at least they kept their word, carried out the projects and paid, while the Argentines were corrupt and were also unreliable.