Recent statistics depict that corruption is the biggest cause of poverty and the main factor that diminishes democracy. The World Bank and IMF depict that corruption mainly in developing nations accounts for $8.4 to $9 trillion, which is more than ten times the amounts these nations loose from corruption (Claros, 2015: Salas, 2016). However, the corruption index depicts that most countries are implementing anti-corruption regulations to facilitate change and inhibit the vice. The U.S. Foreign Corrupt Practices Act (FCPA) of 1977 is playing a key role as countries adopt most of its statutes in the bid to mitigate the escalating levels of corruption by domestic companies in foreign countries.
Congress formulated the law to end bribery of foreign officials and reinstate public confidence in American company’s integrity or foreign issuers of securities in America (Claros, 2015). FCPA provided two provisions of implementing its laws namely to bring to justice any bribery of foreign officials and the requirement of transparency in the companies’ bookkeeping. However, these laws reduced the ability of American companies to compete in countries that required the companies to engage in some form of corruption to acquire licenses or other necessary provisions needed to operate in these countries. Therefore, the FCPA exempts facilitation payments from other forms of bribery.
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The law did not have much significance in the first two decades after its enactment, but since the turn of the 21st century, the Security and Exchange Commission (SEC) and the Department of Justice (DOJ) have brought to justice various companies for engaging in corruption in foreign countries. One of the most recent cases involved the charges and settlement of the case against Daimler AG in 2010 (U.S. Securities and Exchange Commission, 2010). Daimler AG formerly known as DaimlerChrysler AG violated the FCPA by bribing foreign officers to facilitate and maintain their competitive advantage in 22 countries. The German-based automobile manufacturing company engaged in systematic practice in the 22 countries for approximately 10 years accounting to $56 million illegal payments. These payments led to the company earning over $1.9 billion and $90 million in revenue and illegal profits respectively. Daimler engaged in over 200 illegal transactions involving 6,300 and 500 commercial and passenger vehicles (U.S. Securities and Exchange Commission, 2010). The company received subsidies and other unwarranted benefits following such payments while recording was amiss with the over 200 transactions recorded as "interne Fremdkonten" or "internal third-party accounts", necessary payments, special discounts, and consultant companies among other methods to balance their accounts (U.S. Securities and Exchange Commission, 2010). Some of the 22 countries are China, Vietnam, Russia, Nigeria, Latvia, Croatia, Hungary and Bosnia among other countries.
The company agreed to settle the case by paying $91.4 million and $93.6 million to settle the SEC’s charges and fines in the separate criminal proceedings respectively. The settlement also involved the company promise to formulate a system that would reveal and prevent employees or the company from violating the FCPA (U.S. Securities and Exchange Commission, 2010). The case was a major victory to the SEC and a lesson for other companies to embrace transparency and integrity in their operations. However, it is essential to understand the root cause of these bribes in order to determine the best way to enhance integrity and design a pro-active rather than reactive way of ending international corruption. Therefore, this study analyzes management, cultural dynamics, types of illegal payments, the strategy and structure used or violated by Daimler. The analysis provides an understanding of Daimler’s point of view and the international diversity aspects that are vital in providing applicable recommendations. The final chapter of this paper summarizes all the major issues discussed in the paper.
Daimler’s Management
Daimler AG is a German-based automobile manufacturer with its headquarters in Stuttgart. The company decentralized based on the different locations of their companies. For instance, DaimlerChrysler China Ltd (DCCL), DaimlerChrysler Automotive Russia SAO (DCAR) currently known as Mercedes-Benz Russia, and DaimlerChrysler AG in Northern America which was a merger of Daimler and Chrysler following the financial constraints during the 1990s and early 2000s. As earlier stated, the SEC and DPA allegations, the company engaged in systematic efforts to hide the payments. The use of third-party accounts (TPAs), necessary payments, among other ledge accounts thus depicting that the management was aware of these payments.
The essence that some of the employees used their accounts to pay the bribes to the superior officials in the various countries proves that Daimler’s management encouraged the violation of the FCPA in the bid to enhance its sales. For example the systematic corruption in Iraq whereby the company used the Iraq Oil-for-Food Program to sell its trucks at higher prices than the normal costs and passing on the overpayments to a Swiss bank account belonging to an Iraqi official. The trucks regular price was $130,000 but sold for $143,000 to the government, which the company recorded in the ledges as $130,000 as the $13,000 was sent to the Swiss Bank and recorded as a TPA (Lambsdorff, 2008). This is just a single grand systematic corruption of the allegations made by the SEC against Daimler. The case demonstrates that the company knowingly engaged in repeated violation of the FCPA and tried their best to hide these transactions. The essence that the internal auditors raised questions after noting some issues regarding the TPAs in 2000 but the company never revised the guideline on the bookkeeping problems or employment of the over 200 transactions supports the allegations of the company participating and encouraging bribery. Hence, the move by the SEC to charge the company for its violation of the FCPA and conspiracy to violate the law.
Cultural Dynamics
According to Jiang (2017), corruption is a complex term to define due to the multiple issues, factors, behaviors, and environment associated with the definition of corruption. The depicted that corruption meaning may vary due to the person or society’s understanding or perception on the issue of corruption. For instance, in America, transparency is vital for trust and confidence towards a given entity whereas in most socialist and hierarchical countries transparency is of less value because the leader’s attitude towards the company is enough to gain trust from other people in the society (Jiang, 2017). Therefore, for all the wrongs perpetrated by Daimler, it is would be naïve to accuse the company of its wrongdoing without determining the key course of their actions. Failure to understand these factors would result in assuming that the company culture is unethical. Therefore, this section reviews and analyzes the corruption perception and integrity or the steps undertaken by the various governments to facilitate or inhibit corruption. The paper intends to discuss the cultural dynamics of some of the 22 countries whose officials received bribes from Daimler.
China
According to the SEC complaint filed against Daimler, the company used about 71 intermediaries for illegal payments in China (U.S. Securities and Exchange Commission, 2010). In 2006 Sinopec, a Chinese company that was among the main companies closely linked with DCCL reported that it seized to trade with Daimler after the company bribed one of its employees to enhance its customer connections. The company engaged in at least $5.6 million in different payments to gain the government’s and the Chinese companies support as it tried to accelerate its connection with Chinese companies from 2000 to 2005 ("FCPA Spring Review 2010", 2010). Other companies that the company made improper payments in China are Changqing Petroleum Exploration Bureau and Bureau of Geophysical Prospecting (BGP) that helped the company increase the prices of its vehicles and spare parts ("FCPA Spring Review 2010", 2010). The company sent the excess amounts to Chinese officials or employees for helping the company expand its sales or penetrate the Chinese market.
Over the past two decades, China is a force to reckon with due to its market, economic expansion and might due to its rapid growth, which makes it the second largest economy after America. However, due to the ideologies enforced under the leadership of Chairman Mao, Chinese culture tends to socialist. Therefore, social trust and confidence of a foreign company are only possible if the company aligns with domestic companies or has support from the government. In the bid to protect the domestic companies from foreign companies and products, the Chinese government has laws that hinder foreign companies from entering the market.
However, if the foreign company is willing to merge or join the market through joint ventures with the local firms, the company receives huge discounts and tax exemptions thus enhancing their growth in the country and enhancing the local company through the joint venture. These restrictions and the benefits of integrating with the local firms make companies entering the Chinese market to opt for a joint venture (Jiang, 2017). The DCCL a wholly subsidized Daimler company in China enjoyed these benefits but was unsatisfied with the slow market penetration ("FCPA Spring Review 2010", 2010). To hasten the growth and its sales the company made the improper payments to different companies, government officials, and highly ranked employees.
The whistleblowing activity from the Sinopec reports curtailed its growth thus losing trust and confidence from the potential customers. According to Wolf (2014), prosecution for corruption in China is inadequate with people or companies prosecuted for corruption based on serving partisan purposes. For instance, once Sinopec revealed the bribery perpetrated by DCCL, the government was quick to disclaim and open charges in the bid to prove to the public that it was ruthless on foreign companies’ corruption that result in unfair competition for the domestic companies. The case did not result in naming the Chinese officials who received these payments thus supporting the claim made by Wolf (Wolf, 2014). Similar characteristics tend to define Vietnam with the low corruption perception index grouping the two Asian countries among the bad due to the governments’ failure to curb corruption. China and Vietnam have a corruption perception index of 37 and 31 respectively (Transparency International, 2016).
Russia and other Low-Ranked European Nations
Daimler paid over $3million improper payments to Russian officials to enhance the sales of the vehicles. For instance, the selling of two passenger cars to two Russian governmental entities provide the company with an opportunity to use employees to make illegal payments to these government officials and entities. The company received subsidies of about 10 to 30% for services and add-ons that were never delivered thus inflating the contract prices. The company recorded the transaction as credits to inter-company and debtors’ accounts and credited the TPA or necessary payments to hide these transactions. According to Wolf (2014), Russia is one of the many countries that support corruption. He claims that Russia and Nigeria are some of the countries where the person who reports a corruption faces prosecution or loses whereas no action is enforced towards the perpetrator. He argues that even after FBI provided the Russian government with the evidence of bribery and paid $27 million to settle on the allegations made by its subsidiary in Russia, the government has taken no action to prosecute Daimler (Wolf, 2014).
According to Claros (2015), the inactivity and complacency to act on the evidence provided to the Russian government are because of the corruption culture that leaves Russia among the most corrupt nations in the corruption perception index. The author states that the decentralized aspects of Russia’s corruption make it dispersed, unpredictable, and difficult to mitigate. Therefore, police officers, the public, government officials, and employees expect to receive bribes even to perform their duties (Claros, 2015). Claros argued that unlike in the Soviet Union, which had a centralized corruption system, the current Russia decentralized corruption lacks any formal system to mitigate or prevent corruption. The widespread aspects of corruption increase systemic corruption characterized by lack of any form of system to limit bribery among other forms of corruption (López Claros, 2015). Latvia, Hungary, Croatia, and Bosnia fall in the same culture as Russia although Latvia, Hungary, and Croatia have an index of 55, 51 and 51 respectively (Transparency International, 2016). Russia and Bosnia have a lower index at 29 and 38 respectively thus depicting their dire need for changes.
Nigeria
The SEC complaint depicted that the company made improper payments to Nigerian officials through the Anammco TPAs of sales contracts of more than $73 million. The improper payments included incorrect sums or records to hide the improper payments. As earlier stated, Nigeria is among the countries that punish the whistleblower rather than the briber. According to Wolf (2014), in a past incident involving the firing of the bank governor by the then Nigerian President after the governor reported missing billions in the expected oil revenues to the Senate (Wolf, 2014). The example depicts that corruption is accepted as a social norm in the country hence the low levels of corruption perception index of 26 (Transparency International, 2016).
Comparison with the U.S.
In all the above countries, their governments are inactive towards curbing corruption hence the lower rating. It is evident that given such inactivity corruption becomes a norm in business. These low ratings compared to the 76 rating of the United States shows a huge gap in ideologies and perception towards corruption (Transparency International, 2016). America’s FCPA and the extensive willingness to prosecute any violation of the law is proof of the pro-active characteristic that differentiates it from the other countries discussed above. Companies operating in the U.S. understand that making improper payments will result in prison, payments of at least $2million for the actions hence the great efforts shown by Daimler in trying to hide improper payments.
Bribes or Grease Payments
Bribes are the gifts, money, and favors given to a person holding a high position with the expectation that the person will favor the briber’s interests in return. The briber such as Daimler paid money or provided tickets to Russian officials to support the company expand their sales. The person receiving the bribe is bound to honor the bribe by acting or abusing power to support the briber’s needs or expectation. He or she is willing to abuse office for private interests. Grease payments, on the other hand, are payments made to facilitate activities for instance, due to the difficulty of foreign companies to acquire licenses in some countries due to bureaucratic reasons a company may provide the government officials to hasten or shorten the time taken for the licenses. Grease payments although illegal are exempted under the FCPA but the company should register them in the correct manner.
In Daimler’s case, bribes such as the payments made to Nigerian officials through Anammco depict the company’s violation and conspiracy to hide the funds from the U.S. government. It is difficult to provide a grease payment in Daimler’s case. Based on the expectations of expanding its Chinese customers, using a joint venture to enjoy subsidies and paying payments to increase the company’s connection with the public best suits a grease payment. However, overcharging the customers to pay improper payments to government diminishes the first objective thus making the Chinese incident to be classified as a bribe rather than a grease payment. In absence of the increased prices and continuous payments to the different companies and government officials, Daimler was trying to exploit the Chinese market by using popular companies in a society that trust only the local or foreign companies aligned to domestic firms. Therefore, the incident would qualify as a grease payment. The gifts, monetary, paid vacations, and hotel tickets are bribes that led to the payment of the settlement.
Strategy and Structure
In the early discussion and comparison in a cultural dynamic, it is clear that the company understood the hefty price of violating the FCPA hence the move to hide the improper payments and prevent any suspicion by using TPAs. In most cases, Daimler used credit or debtor’s accounts but to satisfy the double entry rule it used TPAs or necessary payments or commissions. The study also depicted that most of the improper payments used banks wiring the money to Swiss or international countries such as Germany, the U.S., and U.K. The use of such countries that tend to have strong anti-bribery rating makes it difficult for officials or the SEC to target the company for any improper payments. The allegations filed by the SEC depicted that Daimler used its employees’ accounts to pay such money and diminish any suspicious activities. However, the by agreeing to settle rather than face further investigations the company depicted that it knew its unethical practices. The payment of about $185 million confirmed to the public the improper business operations that can result in huge losses due to the negative publicity. Lastly, all the expenses paid and extreme lengths to hide the illegal payments were avoidable if the company operated ethically from the start.
Recommendations
According to Leskow (2013), the settlement suspended the investigations and provided Daimler with the opportunity to establish a group compliance, integrity, and legal affairs division with the help of the FBI. The cooperation enabled the support of developing a global systematic compliance program that analyzes the risks from a real-world situation by analyzing annual reports. Implementing such a program and understanding the main causes or factors that lead to bending the laws and encouraging workers’ engagement would transform the company’s culture (Leskow, 2013). The essence that six employees built a program to hide and manipulate the bribery in cooperation in 2012 shows a weak culture. The current FCPA failure to consider the inner workings and social aspects in regards to the social perceptions of corruption may be the cause of companies trying to hide such payments. However, changing the company’s culture and a system that identifies any improper payments or dubious ledgers and journal entry would enable the company to enhance trust and confidence among the potential customers. In addition, the design and strategy should be based on enhancing ethical operations.
Closing
The paper discussed and analyzed the SEC complaint against Daimler AG from 1998 to 2009. The company perpetrated multiple repeated bribery payments thus violating the FCPA Section 13(b)(2)(B) and Section 13(b)(2)(A) of the Exchange Act for failing in its internal control and using improper entries to hide the bribes (U.S. Securities and Exchange Commission, 2010). The company benefited from these corrupt business activities with profits of more than $90 million acquired or facilitated by the improper payments. The settlement may have depicted that the company did not accept or deny the charges, however; the public understands the settlement as a gesture of wrongdoing. These activities undermined the high value of transparency among democratic nations thus, may hamper the company is expanding its sales in such countries or fail to recover the large sales and subsidiaries it enjoyed in the U.S. and Canada before the charges. Lastly, it is evident that Daimler AG has a weak system that leads to company venerable to the different corrupt cultures but the costs of these ventures may ruin the company’s long-term future in a globalized world. The company’s greed and need to accelerate its sales in new markets led to the costs and loss of trust among millions of potential customers while waiting and focusing on marketing strategies would have led to a slow but steady growth of Daimler in these markets. Therefore, it is clear that ethics is a more valuable achievement than success in the long-term.
References
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Jiang, G. (2017). Corruption—Theories and Perspectives. Corruption Control In Post-Reform China , 11-29.
Lambsdorff, J. (2008). The institutional economics of corruption and reform . Cambridge, UK: Cambridge University Press.
Leskow, P. (2013). Compliance and corruption in the automobile industry: Daimler’s Integrity and Legal Affairs Division. Journal Of European Management & Public Affairs Studies , 1 (1), 5-10.
Transparency International (2016, February 1). Corruption perceptions index 2015 Retrieved October 22, 2018, from http://issuu.com/transparencyinternational/docs/2015_corruptionperceptionsindex_rep?e=2496456/33011041
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