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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 
 
BERLIN 00000046  002 OF 003 
 
 
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, 
 
BERLIN 00000046  003 OF 003 
 
 
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