Raid on Siemens throws new light on seamy side of buying and selling telco equipment

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This week saw a police raid on telecoms equipment manufacturer Siemens at its fixed line telecoms unit in Munich. The investigation is in its early stages but according to a report in the German weekly Focus it could involve sums in excess of US$128 million being used for bribes to win company contracts. Russell Southwood looks at whether this is just the tip of the iceberg in a sector where cut-throat competition seems to go hand-in-hand with “marketing costs”.

According to Spiegel Online, two board members of Siemens COM, the fixed line communications division of the company are under investigation as part of a dozen people who are the focus of the investigation. The raid was no trivial matter as it involved 270 tax inspectors, police officers and investigating officers.

The “dirty dozen” are being investigated for using company money to bribe their way into winning contracts, channelling cash through Swiss bank accounts, and from there to offshore firms via dummy companies. “Based on our investigation so far, we have reason to suspect that Siemens ran black accounts .… that allowed it to open new markets through secret payments to potential and existing business partners,” said Jeanette Balmer, as spokeswoman for prosecutors in Ber, Switzerland.

Although the main contract at the heart of the investigation is an Olympic Games security contract, Siemens telecoms contracts under investigation include deals in Egypt, Saudi Arabia and Kuwait as well as Indonesia and Vietnam.

Those with longer memories will remember that in May 2002 the Algerian police probed allegations of bribery in the award of a tender for an addditional 400,000 GSM lines for the state-owned Algérie Télécom that had been awarded to Siemens.

Algeria's regulatory commission first became suspicious when reviewing the final bidding report submitted to it by the Ministry of Post and Telecommunication (MPT). The watchdog branded MPT's justifications for ruling out bidders Alcatel, Motorola and Ericsson, as insubstantial.

It was then alleged by local newspaper Liberté that MPT officials had been flown to Munich via Paris at the expense of Siemens, prior to the announcement of the tender's winner. Moreover, an MPT official was said to have altered the final bidding report so as to favor Siemens’ offer.

Business has not been good for fixed line equipment manufacturers and Siemens is in the process of merging this unit with Nokia’s fixed line business, the prospects of which cannot have been improved by news of last week’s raid.

However, police investigations have not just touched the German manufacturer but have also pointed the finger at Alcatel. It is also alleged that French telecoms equipment manufacturer funnelled US$13 million of bribes in Kenya, Tanzania, Nigeria and Sudan through Swiss company Telliac SA. Paris magistrate Philippe Courroye investigated two alleged payments made by Alcatel to Swiss financial vehicle Telliac SA as part of a probe into the Swiss company’s transfers, according to the web site.

It is also allegedly transferred US$15 million to a consulting firm between 2000 and 2003 to obtain cellular networks contracts with Costa Rica’s national carrier, ICE. Costa Rican prosecutors allege that some of this money was used to pay bribes while it was negotiating a $149 million cellular contract in 2001 and a fixed line contract in 2002. The scandal exploded in October 2004 when the former Costa Rican power and telecommunications director Jose Antonio Lobo was quoted by the Costa Rican daily La Nacion as saying that he and former Costa Rica President Rodriguez had received a $2.4 million bribe from Alcatel in 2001. The company was also the subject of an investigation in Taiwan that also encompassed Siemens AG.

European and US companies tend to find themselves in the spotlight for bribery because there is legislation (in the case of the USA, the Foreign Corrupt Practices Act) or pressure that can be put upon them if a case sees the light of day as in the case of Costa Rica.

Non-European companies operate under almost little or no pressure to steer clear of paying bribes and are often quite blatant about it. A senior mobile company executive told us that one company made a straightforward offer of a bribe to one of its senior managers that was duly refused. Not all company executives – whether working for state or privately owned companies - are as scrupulous.

Often the consequence of equipment bought as a result of the payment of bribes is that the system subsequently does not work. Those with a trained eye can spot those occasions where new equipment fails to integrate with existing systems or things like billing systems that completely fail to operate.

But bribery to achieve contracts is only part of the story. The other area is offering financial advantages to achieve licences. An operator needs to be able to get sufficient political influence to land a much-needed licence. It looks to work with a local partner who can deliver this influence.

Sharp as ever, Business Day’s Leslie Stones asked MTN’s CTO Karel Pienaar (at GSM 2006) what its local partner was investing in its new Iran operation. In this case, Pienaar said, it was buildings and property but is it always a two-way traffic of investment and reward?

Enterprising Kenyan journalists were perhaps not entirely surprised to discover that five per cent of Safaricom were owned by a mystery company called Mobitelea Ventures Limited. It was believed that Vodafone owned 40% of Safaricom until last week it revealed the mystery 5% shareholder without offering any details as to who the owners might be.

The situation is made more complicated by there being two potential layers of ownership: Vodafone Kenya’s shareholding in Safaricom and shareholdings in that company from outside Kenya. Vodafone told blog” We have an effective interest of 35%. There is no further information available”. However Vodafone reported in its 2003 annual report that it had acquired a 5% indirect interest from Mobilitea Ventures.

The Government has been equally evasive about the identity of Safaricom's mystery shareholder. After the story was broken exclusively by the Nation's sister paper, The EastAfrican, Information and Communications minister Mutahi Kagwe said the government was not interested in the details of the Vodafone shares, but only in the 60 percent held by Telkom.

Contacted by the Nation, Investment Secretary Ms Esther Koimett: "I am not aware. We have got no such information. I have no idea and I'm not sure if the information is true." She said the Treasury did not know of any other arrangement apart from a 2000 shareholders agreement that, she noted, could have been renegotiated to include a third shareholder.

Telkom Kenya, the main shareholder in Kenya's biggest mobile company, was equally in the dark. Managing director Sammy Kirui said their records show that Safaricom has two shareholders, themselves and Vodafone. "That was the position in 2000 when Telkom's shares were unbundled . As far as we know, the shareholding portfolios remains that way," the MD said.

But Information and Communication minister Mutahi Kagwe said that records at the Registrar of Societies showed that Telkom and Vodafone were the only two companies owning Safaricom. "There are only two shareholders, Telkom and Vodafone," he said.

How is it possible to create a level playing field that discourages bribery? Well under the US Foreign Corrupt Practices Act US military and intelligence contractor Titan (owner of the defunct Titan Wireless) was fined USD28 million for paying a USD2 million bribe to the 2001 re-election campaign of President Mathieu Kerekou of Benin to secure the purchase of state incumbent OPT with a dowry to carry out capital projects. Will Titan make another bribe any time soon? If the price for doing so is over ten times the bribe given, it will surely hesitate.