Siemens Settlement: Relief, But Is It Over?

Now that Siemens has settled corruption charges, it must prove it can win business honestly, even when rivals may continue to bribe

It's not often that a $1.3 billion legal settlement is viewed as good news for the company that has to pay it, but that is how stock markets greeted the announcement that German engineering and electronics giant Siemens (SI) has resolved corruption charges brought by U.S. and German authorities. As major indexes in Europe and the U.S. fell on Dec. 15, Siemens shares rose 1% in New York trading amid investor relief that the company, accused of massive bribery to win contracts around the world, now can begin putting the case behind it.

Siemens will pay fines and other penalties totaling $800 million in the U.S. after pleading guilty in U.S. Federal Court in Washington, D.C., to violations of the Foreign Corrupt Practices Act. The agreement also resolves a civil suit brought by the U.S. Securities & Exchange Commission. In addition, Siemens agreed to pay $540 million to German authorities, in addition to a $274 million fine already levied. The company already has set aside enough money to pay the penalties. "For Siemens, the corruption cases in Germany and the U.S. are now over," Siemens Supervisory Board Chairman Gerhard Cromme told reporters at a press conference in Munich. "Now we can concentrate on business."

The fine blows away the previous record for a violation of the Foreign Corrupt Practices Act, the $44 million paid by oil field service company Baker Hughes (BHI) in 2007. Yet it could have been worse. In recognition of Siemens' having spent billions on an internal investigation and provided most of the evidence for its own prosecution, U.S. authorities did not seek to ban the company from competing for government contracts. And prosecutors agreed to appoint former German Finance Minister Theo Waigel, a Bavarian who is unlikely to take a hostile approach to the region's major employer, as in-house monitor to ensure that Siemens remains corruption-free.

Making Sales without Bribes

Still, Siemens is not done struggling with the consequences of the scandal. The scale of the bribery, which Siemens has admitted involved officials all over the world from Nigeria to Norway, suggests that bribery was a common way to win contracts. Now, the company must prove that it can win business honestly—even when competitors may continue to bribe.

Stricter enforcement has curtailed corruption by multinational corporations, experts say, but it remains widespread. "How competitive are they [Siemens] going to be if bribery is not part of their tool kit?" asks Alexandra Wrage, president of Trace International, an Annapolis (Md.) organization that advises companies on how to avoid corruption. "If I were a shareholder, I wouldn't imagine this was the end."

But Peter Solmssen, Siemens management board member responsible for compliance, says the company already has proved it can boost sales without greasing palms. Sales have continue to rise in the two years since raids by Munich prosecutors brought the scandal to light, he points out. "We're a high-tech company. There aren't many people who make what we make," he says of Siemens, whose products include medical scanners, high-voltage transformers, and wind turbines. "There is a myth you have to pay bribes to do business in [developing] countries."

Settlement Hurts Profits

At least Chief Executive Peter Löscher, hired in 2007 to oversee an aggressive internal cleanup, now has one less major headache as he steers the Munich-based company through a global slowdown that is already hitting profits. In the quarter ended Sept. 30, Siemens reported a $3.3 billion loss, in part because the company set aside $1.3 billion to cover a settlement in the corruption case.

The scandal has been deeply painful for Siemens. It swept away a whole generation of senior executives, including former Chief Executive Heinrich von Pierer and much of the company's board of management. They stood accused of, at best, turning a blind eye to widespread bribery to win contracts. Von Pierer and former CEO Klaus Kleinfeld—now the CEO of aluminum giant Alcoa (AA)—have denied wrongdoing. Dozens of middle managers also have had to go, and even employees who weren't involved suffered from the internal turmoil and trauma. Many also spent long hours gathering information sought by Debevoise & Plimpton, the law firm hired to conduct an internal probe. "It has been a huge distraction," Solmssen says.

The larger question is whether the Siemens case will deter other companies from corrupt practices. Prosecutors still could decide to pursue criminal charges against individual managers. Execs being marched off to jail would amplify the shock effect. "Certainly the $800 million will have an effect, but it's the orange jumpsuits that get everybody's attention," says Wrage of Trace International.

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