Reinhard Siekaczek was half asleep in bed when his doorbell rang early one morning in November 2006.

Still in his pyjamas, he peeked out his bedroom window, hurried downstairs and flung open the front door. Standing before him in the cool, crisp dark were six German police officers and a prosecutor. They held a warrant for his arrest.

At that moment, Siekaczek (pronounced See-kah-chek), a stout, greying former accountant for Siemens AG, the German engineering giant, knew that his secret life had ended.

“I know what this is about,” he told the officers crowded around his door. “I have been expecting you.”

The first thing they asked for was the key to his safety deposit box, he recalls. A short while later, he was driven to jail, to be locked away for two weeks in investigative custody.

Siekaczek had already decided to cooperate fully with the investigation. He produced 38 file folders with documents he had collected over the previous two years and had stored in a secret place (not his safety deposit box). The documents illustrated the type of shadowy dealings that had been going on within Siemens for decades – but mainly they served to prove he was not the only senior company executive who knew of and approved the bribes. Those folders proved a treasure trove for the prosecutors.

To understand how Siemens, one of the world’s biggest companies, ended up paying $1.6bn in the largest fine for bribery in modern corporate history, it’s worth delving into Reinhard Siekaczek’s unusual journey.

According to German and US court records, Seikaczek, as a mid-level executive at Siemens, had been one of several people who arranged a torrent of payments that streamed to well-placed government officials around the globe, from Vietnam to Venezuela, from Italy to Israel, to Russia, Nigeria and Bangladesh.

What is striking about Siekaczek’s account of those dealings, which flowed through a web of secret bank accounts and shadowy consultants, is how entrenched corruption had become at a sprawling, sophisticated corporation that, externally, embraced the nostrums of a transparent global marketplace built on legitimate business transactions.

Siekaczek says that, from 2002 to 2006, he oversaw an annual bribery budget within his own division of about $40m to $50m. Company managers and sales staff used the slush fund to cosy up to corrupt government officials, worldwide. The bribe payments, he says, were vital to maintaining the competitiveness of Siemens overseas, particularly in Siekazcek’s subsidiary, which sold telecommunications equipment. “It was about keeping the business unit alive and not jeopardising thousands of jobs overnight,” he said in an interview.

Siemens executives saw it as a pragmatic way to do business: The company was “not in the practice of dictating political standards”. 

“Nobody was hurt, except maybe the taxpayers of the country [where the project was being built]”, one Siemens executive said. “The customers determined our actions.” [See Editorial.]

Siemens is hardly the only corporate giant caught in prosecutors’ cross-hairs. Three decades after the US Congress passed a law barring American companies from paying bribes to secure foreign business, law enforcement authorities around the world are bearing down on major enterprises, like Daimler and Johnson & Johnson, with scores of cases now under investigation. Both those companies declined comment, citing continuing investigations.

 
Siemens's Reinhard Siekaczek

Albert J Stanley, a legendary figure in the oil patch, and the former chief executive of the KBR subsidiary of Halliburton (former US Vice President Dick Cheney’s company), recently pleaded guilty to charges of paying bribes and skimming millions for himself. He was sentenced to a seven-year jail term.

But the Siemens case is notable for its breadth, the sums of money involved, and the raw organisational zeal with which the company employed bribes to secure contracts. It is also a model of something that was once extremely rare: cross-border cooperation among law-enforcement officials.

German prosecutors initially opened the Siemens case in 2005; US authorities followed a year later. (The company’s shares are traded on the New York Stock Exchange, so it is subject to US law. More significantly, the company, with 20,000 employees in the US and 386,000 worldwide, competes around the world with US firms who demand that their government ensures an “even playing field”.)

In its settlement in December last year with the US Justice Department and the Securities and Exchange Commission, Siemens pleaded guilty to violating accounting provisions of the Foreign Corrupt Practices Act, which outlaws bribery outside of the US.

Although court documents are salted throughout with the word “bribes,” the US Justice Department allowed Siemens to plead to accounting violations because it cooperated with the investigation, and because pleading to bribery violations would have barred Siemens from bidding on government contracts in the United States. In a major recession, no government wants to be seen to be responsible for closing down a major employer.

But Siemens doesn’t dispute the US government’s account of its actions:

Matthew Friedrich of the Justice Department’s criminal division, called corruption at Siemens “systematic and widespread.” Joseph Persichini Jr, the director of the FBI’s Washington field office, which led the investigation, called it “massive, wilful and carefully orchestrated.”

Siekaczek’s telecommunications unit was awash in easy money. It paid $5m in bribes to win a mobile phone contract in Bangladesh, to the son of the prime minister at the time, and other senior officials, according to court documents. Siekaczek’s group also made $12.7m in payments to senior officials in Nigeria, for government contracts. Court documents show that the telecommunications unit paid more than $800m of the $1.4bn in illegal payments that Siemens made between 2001 and 2007.

In Argentina, another Siemens subsidiary paid at least $40m in bribes to win a $1bn contract to produce national identity cards. In Israel, the company provided $20m to senior government officials to secure a contract to build power plants. In Venezuela, it was $16m for urban rail lines. In China, $14m for medical equipment. And in Iraq, $1.7m to Saddam Hussein and his cronies. [See Join the dots.]

How were bribes paid?

Extra payments were added to the price of a contract for the personal use of government officials in foreign countries. Sometimes, luxurious gifts such as Rolex watches or treatments in European clinics were provided to a foreign official’s wife, children or family. In the 1990s, the payments often involved large amounts of cash that Siemens employees were authorised to withdraw from an account at Deutsche Bank or Dresdner Bank in downtown Munich. The money was then carried in a briefcase or suitcase to a branch of DG Bank or Hypo Bank a few blocks away. Or it was deposited in accounts in Salzburg or Innsbruck in Austria. “A Siemens employee testified during the trial that one suitcase load of cash he had had to carry had been so heavy he subsequently suffered from back problems,“ says Baemler-Hoesl, the lead prosecutor in the case.

The back-breaking sum must have been substantial. “You don’t need a large suitcase for one million euros,” comments Siekaczek. “200,000 Euros can comfortably be carried in a coat pocket.” Siemens employees walking around downtown Munich with several hundreds of thousands of euros, or dollars or Swiss francs was not uncommon, he adds. He clearly knows about these things.

While Seikaczek and friends might have dismissed the ultimate victims of their systematic bribery as mere “taxpayers” in distant lands, prosecutors have argued to good effect that the bribes caused great anger among competitors who were shut out of contracts, and led to the citizens of poor countries paying more than they should have for necessities like schools, roads, power plants and hospitals.

Because government contracting is an opaque process and losers don’t typically file formal protests, it’s difficult to know the identity of competitors who lost out to Siemens. US companies have long complained, however, that they face an uneven playing field in competing overseas.

Ben Heineman, a former general counsel at General Electric and a member of the American chapter of Transparency International, says the enforcement of some anti-bribery conventions remains scatter-shot. “Until you have energetic enforcement by the developed-world nations, you won’t get strong anti-bribery programmes or high-integrity corporate culture,” he said.

Evidence produced in the Security Exchange Commission’s case suggests that Siemens paid its heftiest bribes in China, Russia, Argentina, Israel and Venezuela. (That US prosecutors focused on bribe payments that had, somewhere along the way, been channelled through banks within their jurisdiction, might explain why South Africa, also a probable target, doesn’t feature on their list.)

“Crimes of official corruption threaten the integrity of the global marketplace and undermine the rule of law in the host countries,” said Lori Weinstein, the US Justice Department prosecutor who oversaw the Siemens case.

All told, Siemens was to pay more than $2.6bn to clear its name: $1.6bn in fines and fees in Germany and the United States, and more than $1bn in fees for internal investigations and reforms. That’s a record sum – but it’s well to keep in mind that it’s barely more than 2% of the $108bn in revenue that the company earned last year alone.

Siemens’s general counsel, Peter Solmssen, in an interview outside a marble-lined courtroom in Washington, said the company acknowledged that bribes were at the heart of the case. “This is the end of a difficult chapter in the company’s history,” he told the assembled media. “We’re glad to get it behind us.”

Other observers might be less sanguine in their expectations of a company that has depended for decades on bribes for its worldwide success.

In July last year in Germany, Siekaczek was found guilty on 48 counts of “criminal breach of trust”, and was sentenced to a fine of 108,000 euros (over R1m), plus two years on probation – a mild sentence, considering the pivotal role he played in a long-standing international criminal conspiracy.

During a lengthy interview in Munich, a few blocks from the Siemens world headquarters, Siekaczek provided an insider’s account of corruption at the company. The interview was his first with the English-language media.

Siekaczek isn’t a stereotype of a white-collar villain. There are no Ferraris in his driveway, or villas in Monaco. He dresses in jeans, loafers and leather jackets. With white hair and gold-rimmed glasses, he passes for a kindly grandfather ­ albeit one who can discuss the advantages of offshore bank accounts as easily as last night’s soccer match.

Siemens began bribing long before Reinhard Siekaczek applied his accounting skills to the task of organising the payments. The sprawling company was one of the first true multi-national corporations, having run overseas operations since the 1800s. It currently generates 80% of its revenue outside Germany, and throughout its history has been part of an elite global club, which essentially controlled business in different parts of the globe. (In fact, the company was a founder member of the European electrical cartel, which was secretly established in the 1930s – see Join the dots.)

According to American prosecutors, after World War II had left the company shattered, its factories bombed and its trademark patents confiscated, the company, just to survive, turned to markets in less developed countries. Bribery became a reliable and ubiquitous sales technique. (As did market rigging and price fixing.)

If you ask who built any particular telephone network in Africa, chances are the answer will be Siemens. Power plants in the Middle East? Generators and switchgear most likely also built by Siemens.

“Bribery was Siemens’s business model,” said Uwe Dolata of the German association of crime investigators. “Siemens had institutionalised corruption.”

Siemens was hardly alone. Germany is the world’s leading exporter of manufactured goods, and German companies are especially dependent on export markets. “You have to wonder whether the success abroad [of German firms] can be attributed at least in part to bribery,” Dolata said. “Whenever a lot of money is involved, we tend to see high rates of corruption.”

South Africa experienced this with its arms purchases in the 1990s. Siemens was a member of several German consortia that, against all the odds, “won” multi-billion rand contracts for the supply of frigates and submarines to the SA Navy.

Before 1999, bribes were deductible as business expenses under the German tax code, and paying off a foreign government official was not a criminal offence. Inside Siemens, bribes were referred to as “NA” ­ a German abbreviation for the phrase “nützliche Aufwendungen”, which means “useful expenditure.” Siemens bribed wherever executives felt the money was needed, paying off officials not only in countries known for government corruption, like Nigeria, but also in countries with reputations for transparency, like Norway, according to court records.

(The company also used payola to install management-friendly union representatives in the Siemens’ Munich headquarters. “The company’s philosophy seems to have been: We can buy anything,” says Dolata.)

The payment of substantial “commissions” to agents or consultants, for no apparent services rendered – so that the agent could use the money to pay off government officials – seems to have been a long-standing practice at Siemens. (This appears also to have been a method used by British and German arms suppliers in South Africa.)

"I first noticed that Siemens paid large commissions in the mid-90s,” recalls Siekaczek. When asked what the money was for, he remembers being told that these payments were “customary in the export business”  – but he was cautioned that the practice should not be discussed publicly. One of Siekaczek’s former colleagues, who asked not to be identified, confirmed that nobody at Siemens openly talked about bribes – or Schmiergeld (“grease money”). “We used the terms ‘bonus payments’, ‘fees’ or ‘useful expenses’ – with a wink.”

In February 1999, more than twenty years after the US Congress passed the Foreign Corrupt Practices Act – the world’s first comprehensive ban on bribing foreign officials – Germany finally subscribed to the Organisation for Economic Co-operation and Development’s convention banning such bribes. Inside Siemens, however, not much changed at first.

“I don’t think German companies took the new laws seriously,” says Siekaczek. “We signed and filed away the forms, somewhat amused about the new regulation,” he says.

In 2000 authorities in Austria and Switzerland began recording suspiciously large sums of dollars flowing from Siemens to offshore bank accounts. But nothing came of this. Not immediately, anyway.

Siemens managers had instituted a compliance programme, but it was generally treated with contempt: it existed on paper alone – a toothless internal anti-corruption system that did little to punish wrongdoers. (In 2002, a Norwegian Siemens employee noticed financial irregularities in a deal with the Norwegian military. Per Ygnve Monsen contacted senior Siemens officials – who got him fired.)

Siekaczek’s business unit remained one of the most egregious offenders.

Did he think he and his colleagues would ever be caught? “I would never have thought I’d go to jail for my company,” Siekaczek said. “But we did joke amongst ourselves that if our actions ever came to light, we’d all go to jail together and there would be enough people to play a game of cards.”

More seriously? Siekaczek expected Siemens’s management would take care of any such problem: “People discussed the possibility that the head of compliance could go to the sauna with a politician and clear up the matter,” he says.

Equally naive seemed a system that relied on yellow post-it notes for the two signatures required for every money transfer order issued by Siemens. (Executives believed that Siekaczek would remove the yellow post-its in case of a police raid, to protect his higher-ups. “A childish system,” he now acknowledges.)

In 2002, a money laundering investigation in Liechtenstein did finally shake the sense of security that relied on post-its and sauna visits. Managers in the telecommunications group decided to deal with the possibility of a crackdown: they would have to make its bribery procedures more difficult to detect.

On a winter’s evening that year, five executives from the telecommunications group met for dinner at Der Alte Wirt (“The Old Innkeeper”), a traditional Bavarian restaurant in a Munich suburb. According to Siekazcek, surrounded by dark wooden panels and posters celebrating German engineering, the group discussed how better to disguise its payments, while making sure that employees didn’t pocket the money.

To handle the business side of bribery, the executives turned to Siekaczek, a man renowned within the company for his personal honesty, his deep company loyalty ­ and his experiences in the shadowy world of illegal bribery.

“It had nothing to do with being law-abiding, because we all knew what we did was unlawful,” said Siekaczek. “What mattered here was that the person put in charge was stable and wouldn’t go astray.”

Siekaczek reluctantly accepted the job. If Siemens didn’t pay bribes, he believed it would lose contracts and its employees might lose their jobs.

There was also a logistics issue. Bribes were already built into the contracts for many complex, multi-year logistics projects. The company had paid so much money in so many places that bribery simply could not be stopped overnight.

“We thought we had to do it,” Siekaczek said. “Otherwise, we’d ruin the company.”

He describes himself as “the man in the middle,” “the banker”, or, with tongue in cheek, “the master of disaster.” But, he said, he never set up a bribe. Nor did he directly hand over money to a corrupt official.

German prosecutors have found no evidence that he personally enriched himself.

“I was not the man responsible for bribery,” he said. “I organised the cash.”

Siekaczek set things in motion by moving money out of accounts in Austria to Liechtenstein and Switzerland, where bank secrecy laws provided greater cover and anonymity. He said he also reached out to a trustee in Switzerland, who set up front companies to conceal money trails from Siemens to offshore bank accounts in Dubai and the British Virgin Islands.

Each year, managers in Siekaczek‘s unit set aside a budget of about $40m to $50m for the payment of bribes. [The ultimate amounts appear to have been a lot higher.] For Greece alone, Siemens budgeted $10m to $15m a year. Bribes were as high as 40% of the contract cost in especially corrupt countries. Typically, amounts ranged from 5% percent to 6% of a contract’s value.

The most common method of bribery involved hiring an outside consultant to help “win” a contract. This was typically a local resident with ties to ruling leaders. Siemens paid a fee to the consultant, who in turn delivered the cash to the ultimate recipient. (See Bangladesh.)

Siemens has acknowledged having had more than 2,700 business consultant agreements, worldwide. Those consultants were at the heart of the bribery scheme, sending millions to government officials. (After the scandal broke, the company terminated nearly half of them for not having a “valid business purpose”.)

Siekazcek was painfully aware that he was acting illegally. To accumulate evidence that he didn’t act alone, he and a colleague began copying documents stored in a basement at Siemens’s headquarters in Munich, that detailed the payments.

In 2004, Siemens executives told him that he had to sign a document stating he had followed the company’s compliance rules. Reluctantly, he signed, but resigned from his job soon thereafter. He continued to work for Siemens as a consultant, before finally resigning in 2006. As legal pressure mounted, he heard rumours that Siemens was setting him up for a fall.

“I was deeply disappointed. But I told myself that people were going to be surprised when their plan failed,” Siekaczek recalled. “It wasn’t going to be possible to make me the only one guilty, because dozens of people in the business unit were involved. Nobody was going to believe that one person did this on his own.”

Investigators in several countries had begun examining suspicious banking transactions. Prosecutors in Italy, Liechtenstein and Switzerland sent requests for help to counterparts in Germany, providing lists of suspect Siemens employees. When those six policemen knocked on Siekaczek’s door on the morning of 15 November 2006, some 200 other officers were also sweeping across Germany, into Siemens’s headquarters in Munich and the homes of several executives.

In addition to Siekaczek’s detailed payment records, investigators secured five terabytes of data from Siemens’s offices ­ a mother lode of information, equivalent to five million books.

Officials in the United States also began investigating the case shortly after the raids became public.

Knowing that it faced steep fines unless it cooperated, Siemens hired an American law firm, Debevoise & Plimpton, to conduct an internal investigation and to work with federal investigators.

As German and American investigators worked together to develop leads, Debevoise and its partners set more than 300 lawyers, forensic analysts and staff members to untangling thousands of payments across the globe. According to court records, American investigators and the Debevoise lawyers conducted more than 1,700 interviews in 34 countries. They collected more than 100 million documents, creating special facilities in China and Germany to house the records from that single investigation. Debevoise and an outside auditor racked up 1.5 million billable hours, according to court documents. They could only have scanned the documents in that time.

Siemens has said that the internal inquiry and related restructurings have cost it more than $1bn. (About R7.5bn.)

Siemens officials “made it crystal clear that they wanted us to get to the bottom of this and follow it wherever the evidence led,” said Bruce Yannett, a Debevoise partner.

At the same time, Siemens worked hard to purge the company of some senior managers and to reform company policies. Several senior managers have been arrested. Klaus Kleinfeld, the company’s CEO, resigned in April 2007. He has denied wrongdoing and is now head of Alcoa, the aluminium giant. Alcoa said that the company fully supports Mr Kleinfeld and declined to comment further.

According to a Bloomberg report, Siemens AG would demand that Kleinfeld, former chairman Heinrich von Pierer and nine other former officials pay damages for failing to halt a bribery scandal that has plagued the company since 2006.

Siemens would also be seeking compensation from former management board member Johannes Feldmayer (who allegedly authorised bribes to trade unionists) and former chief financial officer Heinz-Joachim Neubuerger.

Siemens is seeking 20 million euros from Feldmayer, according to a report by Suddeutsche Zeitung.

“It’s the first time that the supervisory board of a company decided to sue practically the whole old management board,’’ said Manuel Theisen, a business professor at Munich University. “That’s a paradigm shift.’

Earlier this year, Siemens’s current chief executive, Peter Loescher, vowed to make Siemens “state of the art” in anti-corruption measures.

“Operational excellence and ethical behaviour are not a contradiction in terms,” the company said in a statement. “We must get the best business ­ and the clean business.”

Siemens still faces legal uncertainties. The US Justice Department and German officials said that investigations were continuing and that current and former company officials might face prosecution.

Legal experts say Siemens is the latest in a string of high-profile cases that are changing attitudes about corruption. Still, they said, much work remains.

“I am not saying the fight against bribing foreign public officials is a fight full of roses and victories,” said Nicola Bonucci, the director of legal affairs for the Organisation for Economic Cooperation and Development, which monitors the global economy. “But I am convinced that it is something more and more people are taking seriously.”

For his part, Reinhard Siekaczek is uncertain about the impact of the Siemens case. After all, he said, bribery and corruption are still widespread.

“People will only say about Siemens that they were unlucky; that they broke the 11th commandment – the one that says ‘Thou shalt not get caught’.”

Our next issue will tell the overwhelmingly obvious and less obvious questions we have put to Siemens South Africa and Siemens AG – and give their answers.

After all, as its website so boldly declares: “Siemens answers the world’s toughest questions.”

•  This report is the result of a joint investigation of international bribery by PBS Frontline, ProPublica and the Investigative Reporting Program at UC Berkeley. A shorter version of this story appeared in the New York Times on 21 December 2008, under the headline “At Siemens, Bribery Was Just a Line Item”. A PBS Frontline documentary, “Black Money”, based on the authors’ interviews and research, was broadcast on PBS on 7 April, 2009. More information and new developments can be found at www.pbs.org/frontlineworld/stories/bribe. The version published here includes additional material by noseweek writers.