GERMANY REVISITS ANTI-CORRUPTION MEASURES IN LIGHT

UNCLAS SECTION 01 OF 03 BERLIN 000046

SIPDIS

SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN ETRD GM KCRM OECD
SUBJECT: GERMANY REVISITS ANTI-CORRUPTION MEASURES IN LIGHT
OF SCANDALS


1. Summary. The arrest of a former top Siemens board member
brings to six those detained in a scandal drawing attention
to German corporate governance. The Siemens case is the
latest of a number of corporate scandals that include a
Volkswagen prostitution and embezzlement ring and German
activities under the Iraqi Oil-for-Food affair. In response,
the government has drafted legislation expanding the scope of
punishable white-collar crimes and jurisdictions. German
business, lamenting what it sees as an ineffective and
burdensome regulation, has called for self-policing of its
industries. End Summary.

ARRESTS AT SIEMENS, VICE AT VOLKSWAGEN
--------------


2. A number of high-profile cases in recent months have
drawn public attention to corporate corruption in Germany.
In December, Thomas Ganswindt, a former member of the
supervisory board of Munich-based Siemens, once rumored to be
a candidate for CEO, was arrested on bribery, embezzlement,
and tax evasion charges. Ganswindt lies at the heart of a
scandal in which Siemens employees in Greece and Germany
allegedly embezzled over U.S. $550 million to pay bribes
outside Germany via shell companies throughout Europe. While
the most prominent deal involved major contracts for
fixed-line telephone service and security technology during
the 2004 Athens Olympic Games, allegations extend around the
world. Police detained five other Siemens managers while
prosecutors have repeatedly questioned CEO Klaus Kleinfed
after raids on his and other Siemens executives' homes and
offices.


3. The scandal has drawn widespread business attention.
Siemens' credit rating has consistently been downgraded over
the last two months and its minority shareholders association
called for Heinrich von Pierer, who was CEO when the alleged
events occurred, to resign his current post as supervisory
board chairman. For nearly a month, the scandal threatened
to derail the nearly U.S. $20 billion merger between Siemens'
and Nokia's fixed-line and wireless network infrastructures.
Transparency International, the anti-corruption watchdog
organization, terminated Siemens' membership in light of the
affair.


4. Siemens, in response, restated its 2006 and 2005 profits
nearly $100 million lower and paid almost $220 million in
additional taxes. The company has made exceptional efforts
to appear more transparent while distancing itself from the
alleged malefactors. The suspects, Siemens says, are
unrepresentative of an otherwise ethical Siemens culture. At
one point the firm claimed that a criminal gang appeared to
have infiltrated the company. To rehabilitate its image,
Siemens hired Michael Hershman, the founder of Transparency
International, as a special advisor on regulatory compliance.
On January 1, the firm went on to hire a veteran
white-collar crime prosecutor as its new compliance officer
and empowered him with previously unmatched oversight and
access.


5. In another high-profile scandal, prosecutors in Lower
Saxony indicted Hans-Juergen Uhl on January 4 in a Volkswagen
prostitution and embezzlement affair. Uhl, a Social
Democratic member of the Bundestag and formerly a senior
member of Volkswagen's influential employee council, stands
accused of perjury and assisting former Volkswagen personnel
chief Peter Hartz in the cover-up. Klaus Volkert, the former
head of the employee council, confessed recently that he
received U.S. $2 million in "special bonuses" from Hartz to
supply Spanish and Korean prostitutes to senior managers on
overseas business trips while funding lavish sex parties in
Germany. Hartz, who developed former Chancellor Schroeder's
labor reforms, will stand trial beginning January 17 on
forty-four counts of breach of trust. Thirteen additional
Volkswagen executives remain under investigation.

IRAQ/OIL-FOR-FOOD SCANDAL RE-EMERGES FOR SIEMENS AND OTHERS
-------------- --------------


6. The Iraqi Oil-for-Food scandal has compounded the
appearance of widespread corporate malfeasance. Recent
developments follow the Volker Commission's 2005 UN report
alleging 63 German companies paid bribes to Saddam Hussein's
Iraq. On January 3, Bavarian prosecutors announced deeper
investigations of Siemens for allegedly bribing Iraqi
authorities to win contracts in the medical and power supply
sectors under Saddam. State prosecutors in Frankfurt then

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publicly announced an Oil-for-Food bribery investigation
against B. Braun Melsungen, whose upervisory chairman,
Ludwig Georg Braun, is alsopresident of DIHK, the German
Chamber of Industr and Commerce. Melsungen, Siemens, and
Volkswagn join some of Germany's most prestigious companies
now under heavy scrutiny for bribery scandals, icluding
DaimlerChrysler, BMW, and Linde.

NEXTLEGAL STEPS, REGULATORY ENVIRONMENT
--------------


7. A serious regultory and legal framework to fight
corruption in Germany only emerged in the last decade in
response to similarly sensational corporate scandals in the
1990's. In 1999, Germany implemented the 1997 OECD
Convention on Combating Bribery of Foreign Public Officials
in its own statues. Now the government intends to strengthen
anti-corruption measures. The draft bill, originally a
mechanism simply to implement EU regulations, has assumed
more political symbolism in response to the recent scandals,
but not more teeth. The law will make existing criminal
statutes against bribing government officials within Germany
and EU member states applicable worldwide. Any German or
foreign national working for German firms could be charged
regardless of where the crime takes place. The law will also
expand existing measures against money laundering.


8. Federal anti-corruption measures remain constrained by
the decentralized process articulated in Germany's
constitution. Virtually all prosecution of corruption lies
at the state level, with jurisdiction determined by the
location of the accused firm's headquarters, rather than the
location of the crime. The sixteen states maintain their own
corruption "blacklists," which only prevent named companies
from participating in government contracts with the
respective state for a certain period. National companies
can simply maneuver around one blacklist to work elsewhere.
No formal mechanisms exist to share information among the
sixteen states or with the federal government. The OECD has
often complained Germany's that lack of coordination and
limited federal jurisdiction has hindered other member
nations from engaging with their German counterparts,
particularly on transnational cases.

GERMAN MANAGERS, PUBLIC GROW CYNICAL
--------------


9. Representatives of Germany's major industries, despite
agreeing on the need for greater anti-corruption efforts,
feel existing and proposed legislation create a costly
compliance burden without improving enforcement. As a
result, the traditionally business-oriented Christian
Democrats and their Grand Coalition partner Social Democrats
have not taken on the issue in earnest; instead, the minority
Green party is creating most of the political momentum. The
Federation of German Industry (BDI) and the German Bankers
Forum have both called for industry-based internal controls
within their own sectors, preferring to make the business
case against corruption as the key deterrent.


10. Such internal controls already exist with varying
impact. The annually-updated German Corporate Governance
Code contains statutory regulations in line with
international standards for German publicly-listed companies,
and serves as a benchmark for transparent and ethical
business practices. Nevertheless, the Code resembles more of
a list of recommendations, remains unbinding, and only
requires firms to declare any non-compliance in annual
shareholder's reports. The BDI implements its own
anti-corruption guidelines and its broad membership has
tended to view the BDI standard as sufficient and effective.
Ironically, some of its key points were drafted with language
from Siemens' own internal corporate conduct code.


11. German society's attitudes towards corruption, once
surpassingly tolerant, are shifting. Until recently, German
firms could legally claim tax deductions on bribes paid
overseas as "business expenses." Germans also distinguish
between corruption cases in which managers act against the
company to enrich themselves (e.g. embezzlement or padded
expense accounts) versus practices of bribing government
officials or other authorities. Germans can offer a
see-no-evil deference in how companies manage their internal
affairs, but remain vigilant in any perceived perversion of
their public and social institutions. For instance, Siemens'
legal problems do not appear to affect domestic sales,

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suggesting consumer behavior remains tied to price and
quality, rather than corporate governance. Nevertheless,
picking up on growing public cynicism, Transparency
International's annual European survey ranked Germany third
in terms of public dissatisfaction with white-collar crime.


12. COMMENT. The entrenched interests of varied
stakeholders -- firms, consumers, politicians, and legal
authorities -- ensure real progress in expanding Germany's
anti-corruption measures will require yet-to-be-seen major
political efforts. Thus far, the Siemens affair appears to
have grabbed the nation's attention, but not enough to
warrant real movement beyond handwringing and sound bites
from Germany's political and private sector leadership. END
COMMENT.
TIMKEN JR