Greece must not let history repeat itself

June 2, 2015

In April 2012, German manufacturing behemoth Siemens agreed to pay US$336 million to the Greek Ministry of Justice to resolve longstanding bribery allegations. The allegations related to the alleged payment of €70 million (US$76 million) in bribes by Siemens to Greek telecoms operator Hellenic Telecommunications (OTE) in order to secure the sale of equipment.

How the Greek government could do with those funds today.

As this edition of Compliance Insider® goes to press, the Greek government is running out of time as it seeks to avoid defaulting on its loans by striking a deal with its Eurozone partners. Debt interest payments are fast accumulating, while the country has to pay the International Monetary Fund (IMF) €200 million (US$220 million) on 1 May followed by €760 million (US$810 million) on 12 May.

In February, the Eurozone agreed a four-month bailout extension with the new Greek coalition government of Syriza party leader Alexis Tsipras. This ends on 30 June. If Greece does default, there is every chance that it will have to exit – or Grexit as it has become known – the euro and return to the drachma.

Lessons from the past

The payment of US$336 million by Siemens in April 2012 related to allegations of bribery and money laundering that first surfaced 17 years ago. Then, in March this year, the Greek authorities subsequently indicted 64 people to stand trial over the same allegations, which followed a probe of corporate dealings between 1992 and 2006.

At the time of the indictments, Siemens president and chief executive officer Joe Kaeser said that Greece should focus on its future rather than its past. Speaking to CNBC at the Egypt Economic Development Conference in Sharm el-Sheikh, Kaeser said: “I really believe the country [Greece] can move to the future, rather than trying to find the solutions in the past. Looking at the past doesn’t help the future because the past is the past.”

However, a quick review of Greek economic history could actually be very informative for the country’s future [see ‘A history of bankruptcy’ below].

Greece, and the government of Tsipras, could do worse than to follow the example set by its German critic Siemens. The Munich-based multinational settled bribery charges brought by the United States Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) in 2008 by paying US$800 million.

The settlement remains the largest FCPA enforcement action, but perhaps more importantly it led to Siemens initiating comprehensive measures to make compliance a top priority. In the wake of the FCPA violations, the company designed a programme that has since been described by the DOJ as a ‘new state-of-the-art system’.

Siemens employed more than 500 full-time compliance officers and founded a compliance investigation unit headed by a former Interpol official. In only two years, more than one-third of the company’s global workforce had been trained on anti-corruption compliance measures.

Further displaying its ethical commitment, Siemens launched the Global Siemens Integrity Initiative, which, according to Siemens’s website, is ‘an initiative that supports organisations fighting corruption and fraud through collective action, education and training’. With this novel strategy, Siemens smartly lifted compliance to the cornerstone of its business, turning it into a competitive advantage.

Like Siemens, Greece has had to contend with plenty of examples of bribery allegations. For example, Athens has always committed enormous resources in the field of military equipment – wary perhaps of a perceived threat posed by neighbour Turkey. And, like Siemens, there have been other German companies that have allegedly paid bribes in Greece.

German arms dealer Rheinmetall, for example, recently settled out of court with the Bremen prosecutor’s office after denying allegations that it had bribed Greek officials to secure military contracts. The Dusseldorf-based company allegedly paid €127 million (US$147 million) in bribes in 2009 to military officials in Greece in order to facilitate the sale of 353 ‘Leopard 2’ battle tanks.

Elsewhere in Europe, Airbus’ wholly-owned subsidiary Airbus Helicopters recently denied allegations in the German media that it had bribed Greek officials. Reports in German newspaper Bild had accused the rotorcraft manufacturer of giving bribes to Greek officials in exchange for their purchase of NH-90 helicopters. The German newspaper alleged that €41 million (approximately US$45 million) was paid in bribes to secure the purchase of the 20 military helicopters.

If these allegations are proven – and they are just the tip of the iceberg – then Greece (like Siemens before) would do well to acknowledge its past if it wishes to pursue a brighter future.

The government of Tsipras is certainly making the right noises. The beleaguered Prime Minister has acknowledged that corruption is ‘continuing to hold Greece back’, and has announced radical measures aimed at what he calls the ‘oligarchs’. According to the BBC, this includes re-licensing private TV channels, bringing an end to ‘crony’ bank loans for the well-connected, conducting aggressive tax audits of those with offshore bank accounts, and unwinding some key privatisations.

Given the influence that these oligarchs appear to hold over politicians, state officials and the local media, these measures are to be welcomed. However, the Organisation for Economic Co-operation and Development (OECD) has released a report urging the Greek government to do more to combat foreign bribery by Greek companies.

In the report, the international economic organisation alleges that government investigations into cases of overseas corruption lack thoroughness, and that the authorities are failing to promote awareness of foreign bribery. As a remedy, it suggests the introduction of a whistleblower law in order to help uncover more corruption by Greek companies overseas.

The report also claimed that the country’s five-year timeframe for bringing prosecutions was too short given the pace of investigations in Greece.

ooOoo

Prime Minister Tspiras won a landslide victory in January’s Greek national elections largely on a platform of seeking to end austerity. If he is given the time to follow through on his proposed measures, he has said he will be able to collect €5.5 billion (approximately US$5.9 billion) more in annual revenue by cracking down on corruption and tax evasion. Such news would certainly be welcomed by Greece’s Eurozone partners.

 

Stamping out bribery

Companies should have a vigorous books and records system that allows them to monitor payments. If a payment seems suspicious then it should be investigated. Staff should receive anti-bribery training and refresher training on a regular basis. Sales staff are often considered as priority employees for receiving this type of training because they are often under heavy pressure to reach sales targets and commission. Training for sales staff should be specifically tailored to circumstances where bribery may commonly arise in their industry, and be coupled with tone messaging from management that sales should be won squarely within the boundaries of the law.

Partnering with people who are under investigation or who have a history of corruption requires careful consideration as to whether any issues can be remediated or whether it is better to walk away from the deal.

A conflict of interest policy should be in place to best ensure that these personal connections are declared properly by staff. Training should be given to demonstrate how personal relationships can be taken advantage of to give rise to improper conduct, and this topic should be featured in a company’s code of conduct.

 

A history of bankruptcy

The Greek economy first faced bankruptcy in 1893. This was primarily due to three reasons. Firstly, the Greek government embraced the concept of borrowing from the very beginning of its struggle for independence.

During the Greek War of Independence (1821-1827), the European forces financially supported the Greek uprising against Ottoman rule. However, these European loans unfortunately carried with them enormously high interest rates. Thus, upon completion of the war in 1827, the temporary Greek government declared bankruptcy and an inability to repay loans that had been spent on weapons and general conduct of the war.

Secondly, the price of raisins – then the main export item of an independent Greece (the mass export of olive oil followed the First World War) – plummeted on the world market.

And, finally, the Greek government made a series of irrational investments on national capital projects – chief among them being construction of the Corinth Canal.

The cost of building the Corinth Canal greatly exceeded the original financial plans. As a result, an ambitious plan modelled on the Suez Canal in Egypt was abandoned, and Greece resorted to use of Nero’s projects for the Corinth Strait.

Although costs were relatively low as most of the work was completed without the use of machinery, the depleted workforce included prison labour, prisoners of war and the military. And then there was the cost of purchasing the land on the route of the Canal, which at the time was nationalised.

The Greek government of Prime Minister Charilaos Trikoupis could no longer repay the annuities, and administration of the Canal ended up in the hands of a consortium of foreign banks. It was the epilogue of uncontrollable borrowing, which at the time was referred to as ‘modernisation borrowing’.

The Greek government had wanted to demonstrate that the country was developing, and that it was making progress towards the so-called Megali Idea – a concept of Greek nationalism that had the goal of establishing a Greek state encompassing all ethnic Greek-inhabited areas with the return of Constantinople (Istanbul today) as its capital.

Therefore, in the period between 1879 and 1893, Greece was borrowing at a brisk pace, having reached an agreement on nine international loans and increasing its debt every eighteen months or so. But the Megali Idea was coming at a high price. It meant modernisation of Greece’s traffic (and economic) infrastructure, as well as expensive weapons to continue the war for liberation of the remaining Greek historical territory still under Ottoman rule.

Greek nationalists, unhappy as Western European countries imposed a king from the Bavarian dynasty, wanted to resolve the situation through continuation of the war. Greece thus launched a new war against Turkey, which in turn ended with a shameful defeat in 1897. Instead of profiting from the war and eventual release of Greek territory, which would have strengthened the prestige of the Greek nationalist parties and appeased European creditors, Greece was forced to accept peace with Turkey. However, this was imposed by Austria, France, Germany, England, Italy and Russia, with Greece fearful that any total military collapse would result in default on its bank loans.

Greece therefore had to agree to additional expenditure, which included war reparations to Turkey in the amount of 95 million gold francs. The Western powers also created the Athens-based International Financial Commission (Διεθνής Οικονομικός Έλεγχος – DOE), which took control of revenues generated by the Greek state’s monopoly on salt, tobacco, petroleum, matches, playing cards, revenue stamps and customs revenues.

Since the very beginning of independence, the Greek state administration has suffered from party politics, corruption and nepotism. During this time, the powers of the International Financial Commission spread. With little alternative but to agree to such financial controls Greece went on to accumulate additional debt until 1978 when work by the Commission completed.

The sale in Greece of cigarettes, matches and salt even included a special ribbon that carried the inscription, 'DOE – proceeds go to benefit the International Financial Commission'.

Since 1893, and despite the work of the International Financial Commission, Greece has on two occasions declared a moratorium on the return of its debts – in 1921, and in 1932: the fourth time the country declared bankruptcy.

More recent membership of the European Union (EU) enabled Greece to benefit from the EU’s Structural and Cohesion Funds, which were designed to stimulate growth and convergence. However, these funds failed to help Greece survive the global financial crisis of 2008, which again revealed structural weaknesses in Greek society, including corruption, cronyism and nepotism.

Greece only survived bankruptcy for a fifth occasion when the EU and international financial institutions intervened after 2008. However, the anti-austerity measures of Alexis Tsipras’ Syriza party have since led to a loss in confidence on the part of Greece’s EU partners, as well as its investors and creditors.

 

 

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