Long before it got caught paying bribes, Daimler blew a chance to clean up its dirty laundry

Daimler bribes: a blown chance to clean up its act

WASHINGTON — At a 1999 meeting in Germany, board members at Daimler, one of the world’s largest vehicle manufacturers, took a step that could have saved the company the guilty pleas and $185 million in civil and criminal payments it agreed to in a U.S. courtroom Thursday.

Before a federal judge, Justice Department prosecutor John Darden outlined some of the dirty laundry of the company best known for its elegant Mercedes-Benz autos. His account and court papers reveal a pattern of bribery that for many decades helped fuel the company’s sales and illicitly added millions of dollars to its profits.

U.S. District Judge Richard Leon accepted guilty pleas from Daimler lawyer Gero Herrmann on behalf of Daimler’s Russian and German subsidiaries and deferred prosecution agreements from parent Daimler AG and its Chinese subsidiary. Together, Daimler and its subsidiaries agreed to pay the U.S. government $93.6 million in criminal fines and $91.4 million in disgorgement of profits to settle a civil complaint by the U.S. Securities and Exchange Commission.

The securities commission said Daimler and its subsidiaries made at least $56 million in improper payments over more than a decade in at least 22 countries to illicitly earn at least $90 million in profits through tainted sales of 6,300 commercial vehicles and 500 passenger cars. It said bribes were paid to win sales to governments in Russia, China, Vietnam, Nigeria, Hungary, Latvia, Croatia and Bosnia, among others.

“These companies got the message and are taking the right steps to solve the problem,” Leon said. “It is an appropriate and just resolution of this matter.”

In a statement, the company’s chairman, Dr. Dieter Zetsche, said Daimler “has learned a lot from past experience. Today we are a better and stronger company, and we will continue to do everything we can to maintain the highest compliance standards.”

According to court papers filed in the case, the company’s board 11 years ago adopted an integrity code with anti-bribery provisions. The problem is, Daimler failed to enforce it; many Daimler executives actively resisted it, and improper payments continued until 2008.

The court papers provide a case study of how executives at one of the world’s blue chip companies responded when governments said “no” to bribery.

Of course, Daimler, through its subsidiaries, is hardly the first corporate giant to be caught paying off foreign officials to get contracts.

In December 2008, for example, engineering company Siemens AG agreed to pay more than $1 billion in fines in Germany and the U.S. after being accused of bribing officials with suitcases stuffed with money.

Ten years earlier, Germany ratified an international anti-bribery agreement; an implementing law took effect in early 1999.

At a Daimler Board of Management meeting that year, the company’s chief internal auditor proposed changing the company’s way of doing business. He advocated a new integrity code with “anti-bribery provisions in light of the new German law which had the effect of outlawing tax deductions for foreign bribes,” according to the court papers.

In response, participants at the meeting discussed the prospect “that adopting such policies would result in Daimler losing business in certain countries,” the court documents state.

Inside Daimler, bribes were referred to as “useful payments” and the money for them came out of what Daimler executives called “TPAs,” short for “third-party accounts.”

“At that time, Daimler maintained over 200 TPAs, and was aware of methods through which its employees, subsidiaries, and affiliates had regularly paid bribes to assist in securing business,” according to the court records, which are signed by Daimler’s legal team and U.S. prosecutors.

“Internally, the TPAs were used and supervised by the most senior management of Daimler’s sales organization,” the court papers add.

Daimler’s board did what the internal audit chief wanted. It adopted an integrity code, but that wasn’t enough to stop the payoffs.

Daimler failed to enforce the integrity code, train employees to comply, audit the TPAs or otherwise ensure bribery was abandoned, the court papers state.

A year after the integrity code was adopted, Daimler’s internal audit chief — unnamed in the court papers — issued a warning to senior sales and finance executives and Daimler’s legal department.

In a May 2000 memo, he voiced concern that company personnel would continue to use TPAs for bribes. He said minimal oversight of the TPAs combined with their use of cash transactions for commissions and rebates did not comport with the new ethics code or the anti-bribery law and could be seen as “facilitating fraudulent transactions.”

In 2001, the audit chief flatly recommended closing all TPAs, but Daimler’s overseas sales chief and other top overseas sales managers “resisted this recommendation,” the court papers state.

Still, the pressure to reform had an impact.

By 2004, Daimler had reduced its TPAs from more than 200 to about 40. However, only in 2005, after U.S. investigators began looking into Daimler, did the company stop using the accounts, according to the court papers.

The threat of criminal prosecution didn’t stop the illegal activity entirely.

“Certain improper payments even continued as late as January 2008,” the court papers say.

How long did Daimler pay bribes? The court papers don’t say, but they reveal internal concern as early as 1977 about the accounts that were the conduit for the bribes.

Daimler had some written policies governing the TPAs “since 1977, although until recently none of those policies addressed improper payments to government officials, or the inaccurate recording of payments to government officials in the company’s books,” the court record states.

Daimler merged with U.S.-based Chrysler Corp. in 1998. In 2004, an auditor at Chrysler blew the whistle on Daimler to the U.S. Labor Department. David Bazzetta said he learned during a corporate audit executive meeting at Daimler offices in Stuttgart, Germany, that payment of bribes was a common practice.

His disclosures triggered Securities and Exchange Commission and Justice Department investigations.

Daimler had wired improper payments to U.S. bank accounts and to foreign bank accounts of U.S. shell companies. That made the company and its subsidiaries subject to the U.S. Foreign Corrupt Practices Act, which bars companies from paying bribes to win business.

Under the deferred prosecution agreement, Daimler AG, the parent company, agreed to have an independent officer, former FBI Director Louis Freeh, monitor its compliance with anti-bribery steps for the next three years.