[SOLVED] David Bazzetta learned in July 2001 at

David Bazzetta learned in July 2001 at a corporate audit executive committee meeting in Stuttgart Germany that DaimlerChrysler “business units ‘continued to maintain secret bank accounts to bribe foreign government officials,’ though the company kn[e]w the practice violated U.S. laws.”1 As a result, he filed a whistleblower complaint under the U.S. Foreign Corrupt Practices Act (FCPA) that ultimately led to a multiyear investigation of surprising scope and U.S. charges against a company head- quartered in Germany for bribes made to foreign officials around the world.
On April 1, 2010, the German and Russian business units of Daimler AG2 pleaded guilty to charges laid under the FCPA for bribing foreign officials and for failing to maintain books and records and internal controls as required under the FCPA. As a result, Judge Richard J. Leon of the U.S. District Court for the District of Columbia approved an arrange settlement that included the following:
• Payment of $91.4 million to the Securities Exchange Commission (SEC) for disgorgement of profits earned as a result of bribery. Daimler was subject to the U.S. law since it was a registrant with the SEC in order to raise capital (issue shares and debt) in the United States.
• Payment of $93.6 million to the U.S. Department of Justice for related criminal charges.
• Deferred prosecution and independent monitoring for two years by former
Federal Bureau of Investigation Director Louis Freeh. 3
The scope of Daimler’s bribery operation was staggering. From 1998 to 2008, payments for bribes, kickbacks, gifts of armored Mercedes, a golden box, 10,000 copies of an official’s personal manifesto translated into German, and lavish travel4 had been given to officials in at least twenty- two countries, including Russia, China, Vietnam, Nigeria, Hungary, Latvia, Croatia, Bosnia, Egypt, Greece, Hungary, North Korea, and Indonesia.5 Focusing on just fifty-one transactions out of a much higher total, the U.S. investigation found the following:
• Tens of millions of dollars “were made through the use of U.S. mails or the means or instrumentality of U.S. inter- state commerce.” 6
• “Daimler also violated the FCPA’s books and records and internal controls provisions in connection with the 51 trans- actions and at least an additional 154 transactions, in which it made improper payments totaling at least $56 million to secure business in 22 countries.… [Through these transactions that] involved at least 6,300 commercial vehicles and 500 passenger cars, Daimler earned $1.9 billion in revenue and at least $91.4 million in illegal profits.” 7
• “Nineteen of these transactions … involved direct and indirect sales of motor vehicles and spare parts under the United Nations Oil for Food Program.” 8
In addition, the investigators found that many of the personnel and systems that should have provided safeguards against such illegal activities were actively supporting them. The SEC Complaint indicated the following:
5. A number of Daimler’s former senior executives, who operated in a decentralized corporate structure, permitted or were directly involved in the Company’s bribery practices, including the head of its overseas sales department, who reported directly to the Company’s most senior officers. The Company’s internal audit, legal, and finance and accounting departments, which should have provided checks on the activities of the sales force, instead played important roles in the subversion of internal controls and obfuscation of corporate records.
6. The improper payments were made possible in part as a result of the falsification of corporate records and a lax system of internal controls.
7. In this environment, Daimler developed several organized procedures and mechanisms through which improper payments could be made. Daimler’s books and records contained over 200 ledger accounts, known internally as “interne Fremdkonten,” or, “internal third party accounts,” which reflected credit balances controlled by Daimler subsidiaries or outside third parties. Certain Daimler employees used numerous such accounts to make or facilitate improper payments to foreign government officials. Bribes were also made through the use of “corporate cash desks” where sales executives would obtain cash in amounts as high as 400,000 Deutsche Marks for making improper payments), deceptive pricing and commission arrangements, phony sales intermediaries, rogue business partners and misuse of inter-company and debtor accounts. 9
The SEC Complaint indicates that, although Germany outlawed bribery in 1999 when it ratified the OECD Anti- Bribery Convention, Daimler had become an SEC registrant in 1993 and became subject to the FCPA at that time.10 Also in 1999, Daimler created an Integrity Code that included antibribery provisions but these were essentially ignored.11
Prior to 1999, under German law, bribery of foreign officials was legal and tax deductible in Germany, but bribery of German officials was not—and it seems that Daimler continued to hold and act on this outdated perspective. In summary form, Daimler continued to bribe foreign officials with the knowledge and approval of very senior company officials using
hundreds of ledger accounts on Daimler’s own books, corporate “cash desks” (where sales person- nel would obtain cash), deceptive pricing and commission arrangements, offshore bank accounts, inflated service fees, and nominees for government officials improperly described as “sales intermediaries” and “consultants.”12
These arrangements are detailed in the SEC Complaint, as is the company’s reac- tion when its internal audit staff advised top management in 1986 that these practices could be illegal and in 1999 that internal controls were too weak to prevent misuse.
Essentially, in 1986, Daimler made the practices subject to “absolute confidentiality”13 and known to only a few employees but took no action in 1999 to improve the internal controls. However, an internal review of all special ledger account transactions outside of Germany was undertaken in 2000 and a report made to top management with recommendations, but once again, no actions were taken, and no further audit work was ordered.14 Investigators found that the special ledger accounts were finally closed after their investigation began in 2004 and 2005. Bribes,15 however, continued to be funded through other general ledger accounts, both directly and indirectly through agents and other means. These are detailed in the SEC Complaint.
On hearing the judge’s verdict approving the settlement, Dieter Zetsche, chairman of Daimler’s board, said in a statement, “We have 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.”16
Questions
1. Apparently, Daimler executives were not concerned enough with personal sanctions to change the company’s bribery practices to comply with German and U.S. statutes. How can these attitudes be changed?
2. What internal controls could have been usefully introduced to prevent bribery at Daimler?
3. What should Dieter Zetsche do to ensure the highest compliance standards?
4. Whistleblowers on FCPA matters are eligible for up to 25% of the settlement and/or fine that results depending on a hearing by a tribunal on the import of their evidence (see page 68 for a discussion of this). How much of the $91.4 million restitution payment would you award David Bazzetta if you could make the decision? Provide your reasons for the choice you advocate.
5. Did David Bazzetta do what was expected of him as a professional accountant?

Question: David Bazzetta learned in July 2001 at