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Creation of Leybold’s Internal Compliance System

by David Albright and Corey Hinderstein

March 30, 2002

The German firm Leybold AG is an important example of how to create an internal compliance system aimed at ensuring that "dual-use" exports do not contribute to a proliferant state's nuclear weapons program. A world-renowned exporter of vacuum pumps, furnaces and other vacuum-related equipment, Leybold acted quickly in the early 1990s to create an internal system that exceeded the requirements of newly strengthened German export laws. Within a short time it transformed itself from a company that placed little thought on limiting its exports to one with an exemplary set of internal export control practices. During the 1970s and 1980s, Leybold provided a range of exports to Iraq's, Pakistan's, and South Africa's unsafeguarded nuclear programs. In addition, Leybold officials appeared prepared to provide equipment to Iraq in the mid-1980s knowing that the end-use was a nuclear weapons program. A trip report of an Iraqi participant in the negotiations makes it clear that Leybold officials knew, and may not have cared, that the purpose of a foundry sought by Iraq would be to make uranium metal for nuclear weapons. Suspicions remain that Leybold knowingly provided Pakistan with furnace equipment specifically for its program to make nuclear weapons. Leybold has denied that its officials knowingly exported items to a proliferant's nuclear weapons program. Iraq, for example, decided not to buy the foundry from Leybold. U.S. and German legal investigations after the Persian Gulf War also did not lead to any successful prosecutions. Leybold officials, however, conceded that many Leybold items ended up in Iraq's secret gas centrigfuge program and acknowledged that weaknesses in German export laws and the climate among its employees discouraged adequate follow-up aimed at confirming the end-use of orders. As a result of its activities, Leybold was subjected to enormous critical media attention in the 1980s and early 1990s. According to Leybold officials, these reports tarnished the company's reputation and resulted in significant business losses in Japan and the United States. U.S. government officials, particularly at the Defense Department and the CIA, openly criticized Leybold during the 1980s and early 1990s.

A Radical Transformation

In October 1990, Leybold decided that drastic steps were needed to improve its export practices, and it installed a new management team headed by Leybold's Chairman of the Board and Chief Executive Officer Dr. Horst Heidsieck. A priority of this new team was to dramatically change Leybold's export practices. Some Leybold personnel, including one very senior offical, were fired. The resulting policies exceeded the requirements of the new German export laws, which were implemented after the Persian Gulf War and a multitude of export scandals involving German companies came to light. Leybold established an internal Corporate Export Controls Office (CECO) in May 1991. Under revised German law, each company had to nominate a senior "export-responsible executive," who is held personally accountable for any illegal actions by the firm. Heidsieck was the responsible official at Leybold. The CECO conducted the daily work to ensure Leybold was in compliance with export laws. In March 1992, the company's board announced the Leybold Charter, which contains a set of principles controlling the export of its products and services. These dramatic principles underpinned Leybold's commitment to the nonproliferation of nuclear weapons and nuclear-capable delivery systems and to ensure that its products would not end up in nuclear weapons programs Several of these principles are paraphrased below (click here for the whole document):

• Leybold attaches priority to the goal of nonproliferation of nuclear weapons and their delivery systems over commercial interests.
• All Leybold employees will actively assist in the achievement of Leybold's nonproliferation goals. Relevant employees will learn, and strictly abide by, applicable national, foreign, and international export controls and regulations.
• Even if a particular export is legal, Leybold and its subsidiaries will neither directly nor indirectly supply commodities, technology, or services if the company knows or has reason to believe that such items will be used by the customer or end-user for the development or production of nuclear weapons or nuclear-capable delivery systems. This policy applies to nonnuclear weapon states that are not signatories to the Non- Proliferation Treaty or an equivalent international treaty, do not have in place full-scope IAEA safeguards--or if there is any doubt about their implementation, or are "sensitive" for other reasons.
• Leybold and its subsidiaries will exercise the same restraint domestically, if the firm has reason to believe that its products are to be diverted to nuclear weapons projects in sensitive countries.
• The firm will maintain regular contact and consultation with government agencies connected with export policy to track countries and goods of concern. In the event of any doubt about a transaction, Leybold will contact responsible agencies for information and advice. If concerns continue about the end-use of an item, Leybold will not export it.

Leybold officials recognized that corporations must share in the responsibility to stop the proliferation of weapons of mass destruction. Heidsieck said that industry "must cooperate in preventing the further proliferation of weapons of all types." He added that a corporation has the duty to "check, on its own initiative, whether exports to certain countries can be responsibly justified or not." Implementation of these principles cost the company tens of millions of Deutsch Marks (DM) in lost business, particularly in exports to countries most directly affected by the new policies. Nevertheless, Leybold officials said that they expected to make up for these losses by earnings in other areas of the world. Bernhard Herkert, who was the first head of CECO, noted in 1993 that, whereas in the past sensitive export matters rarely reached top management, "now that has drastically changed." He said that by 1993, his office had dealt with about 3,500 export cases, and had turned down many orders that could not meet Leybold's strict policies. Company officials were required to know government export regulations and laws, and had to submit sensitive orders through a detailed company approval process that checked for possible misuse. His office required company personnel to obtain detailed information about the customer and final purpose of this equipment. Training was a critical part of this transformation. Both the staff of the CECO and other Leybold personnel attended in-house events focused on national and international export control laws and Leybold's requirements. Newsletters and frequent communication from the CECO were necessary to implement the internal compliance system. A particular challenge was ensuring that employees understood what was controlled. The German export list covered not only finished products, but also parts of products. Herkert explained that some vacuum pumps are controlled when their pumping speed is above a certain value. "If that kind of pump is built into a system, we need an export permit-otherwise, we are violating the law," he added.

Internal Compliance System

Leybold AG's internal compliance system was applied throughout its many divisions and subsidiaries in Germany and the United States. Figures 1 and 2 show the origins, ownership, and subsidiaries of Leybold AG in 1992 that were affected by this system. The specific goals of Leybold's internal compliance system included:

• Avoiding violation of export-related laws and regulations, and damage to the company;
• Maintaining transparent decision-making and responsibilities for exports;
• Developing regular contacts between Leybold's export control officials and national export licensing agencies;
• Centralizing export-related questions and issues in the CECO;
• Standardizing procedures;
• Providing "early warning" and screening of inquiries and orders;
• Generating coherent and complete documentation of all sensitive exports; and
• Training all employees engaged with exports.

The export control hierarchy at Leybold flowed from the Chairman of the Board of Directors, to the CECO office, and then to the managing directors of various business divisions. This hierarchy required the Leybold divisions and the CECO to work together through a sophisticated export control examination of each sale of their products, technology, or services. Leybold recognized that increasingly sophisticated export controls would be impossible for one person to handle. Thus, the CECO oversaw a centralized examination and was responsible to the Chairman of the Board. The fundamental policy document was the Leybold Charter. Based on these principles, Leybold developed a set of criteria to examine each sale. The criteria included a screening of the customer or end-user, focusing on its field of activity and reliability. Particular attention was paid to whether the product or service was for military use or subject to licensing. Finally, the nonproliferation credentials of the recipient country were screened. The implementation of these policies was centered on a set of actions taken at the department level. The export control steps are described in a flow diagram in Figure 3. Each major step in the purchase and manufacturing process, such as request for quotation, negotiations, manufacture, changes in contract, or shipment, is accompanied by an "EXCO Form" that examines the item's suitability for export. Many of EXCO forms require multiple signatures, including the head of the CECO, before an item can proceed to the next step. EXCO Forms 1 and 2 are intended to establish the credentials of the customer and end-user. The full set of EXCO forms can be found here (warning: this is a large .pdf file which you can view using Adobe Acrobat). The full EXCO form package can be found here (warning: this is a large file). EXCO From 2 contains a list of 26 questions that seek to thoroughly establish that an export will not be misused. These questions include:

• Is the identity of the requesting customer or end-user fixed and clear?
• Is any intermediary involved?
• Does the customer give clear and complete information about the intended final use?
• Is equipment to be installed in an area under strict security control or adjacent to military-related facilities?
• Is the request unusual concerning shipment or labeling of goods?
• Does the request have unusually favorable payment terms, prices, or other conditions offered by customer?
• If the requested order is part of a major project, does the customer refuse to provide sufficient information about the complete scope of project?
• Is access by Leybold personnel to other parts of customer's plant restricted?

A Leybold memorandum dated August 6, 1992 states that EXCO forms had to be prepared for all products, spare parts valued over 5,000 DM, and spare parts ordered by "H countries" regardless of value. At the time, H countries included over 35 sensitive countries as defined by the German government. The memorandum stated that the supply of spare parts or service to "nuclear clients" in Algeria, India, Iraq, Iran, Israel, Jordan, Libya, North Korea, Pakistan, South Africa, Syria, and Taiwan, required the preparation of EXCO papers and the approval of the German Federal Export Office. Nuclear clients included nuclear power plants and nuclear research centers. As will be discussed in the next section, meeting these requirements did not mean that Leybold would necessarily export an item. The CECO exercised strong oversight on the shipping department, which was instructed not to permit any product to leave Leybold or its subsidiaries if the EXCO form (number six) did not have the signature of the CECO. This measure was also applied to any products destined for clients in Germany. Each employee was informed that his or her duty was to adhere to the company's export guidelines. In particular, employees were required, and when necessary reminded, to fill in the EXCO forms completely, accurately, and in a timely manner and ensure that proper signatures were obtained. Each manager was also held responsible for his or her employees' adherence to the export policies. The Board informed each employee that a violation of the export policies would result in severe penalties, including termination of employment or legal action. To enhance its system, Leybold established internal export control databases. One goal was to detect third party requests for sensitive items. Identifying and stopping "front" and "shell" companies is a difficult but important endeavor in curbing the misuse of dual-use items in proliferant states. In one case, after India was denied an export, the same request was received from a Bangkok trading company, which was also turned down. Subsequently, a request was denied from a firm in Moscow. Herkert said in 1993 that this type of situation happened "more than once." Despite the innovations, Leybold encountered problems in obtaining reliable, current information about end-users. This type of information is vital in deciding whether to refuse sales or reject contractual commitments, especially in cases where the export license has been granted by the German authorities, but the end use of the export remains in question. Companies typically have depended on governments for this type of information. In several cases Leybold had a difficult time obtaining reliable, timely information from either Germany or the United States about the end user. Leybold officials found that both countries lacked centralized information databases about front companies and potential end users. It also found that much of the existing information about end users was classified, and thus unavailable to Leybold.

Denials

Under the Leybold Charter, management may decide to deny certain exports, despite receiving permission from the German federal export office. These actions reflected Leybold's decision not to send an item if doubts or concerns remained about its possible end-use. As a matter of policy, Leybold consulted with both German and U.S. export officials if questions about an end-use developed. According to Leybold officials, the company decided not to complete an order if either U.S. or German export agencies continued to raise questions about an items's end-use. Leybold told the Soreq Nuclear Research Center of the Israel Atomic Energy Commission in 1992 that it could not provide spare parts for about 100 vacuum pumps it had supplied Soreq during the previous 20 years. In a September 9 letter, Soreq expressed its astonishment at Leybold's decision. The foreign purchasing manager at Soreq wrote: "Today, we are unable to obtain compatible heating elements from [any] other source but Leybold. We urgently ask for the equipment, or else some of our pumps may come to an abrupt and permanent end." In an October 10, 1992 letter explaining the reasons for Leybold's refusal, Herkert said: "We have, over the last six months, turned down many requests for quotation [price] for new equipment as well as orders for spare-parts needed for previously supplied equipment of certain customers in countries which have not accepted the full-scope safeguards of the IAEA. Thus, we see no other possibility but also to refrain from accepting your order for the said spare parts." Although all of these exports to Soreq complied with German export regulations and laws, he said that because of its new export policies, Leybold "assumed responsibility for proactively addressing the issue of the nonproliferation of sensitive technology." During the summer of 1992, Leybold notified the Indian government that it would not commission a vacuum furnace that it had previously sold the Indian Atomic Energy Department for civilian use at the Nuclear Fuel Complex at Hyderabad. In an August 26, 1992 letter to the Indian Department of Atomic Energy, Dr. W. Diemar, of Leybold Durferrit GmbH, a subsidiary of Leybold, informed India that Leybold Durferrit "could see no other possibility but to refrain from commissioning" the vacuum arc melting furnace it had supplied earlier. Diemar wrote: "Though the commissioning of the furnace does not come under U.S. jurisdiction, U.S. authorities have strongly advised against rendering such services to you." Diemar cited India's failure to sign the Nuclear Non-Proliferation Treaty as a major reason for not commissioning the furnace. In mid September, Mr. K. Balu of the Indian Department of Atomic Energy responded to Leybold: "I must express our sense of shock with the way a reputed German firm, such as yours," does not "honour their contractual commitments in international trade." He then warned Leybold: "Failure on your part to honour the contractual commitments may require [the] Government of India to review its policy vis-a-vis transaction of any business with your firm in the future." Leybold's refusal to commission the furnace also exposed it to possible legal action by India. In the end, Leybold had to pay a substantial financial penalty to the Nuclear Fuel Complex. Nevertheless, Heidsieck stated, "We remain committed to the strict adherence to our principles and procedures even under these circumstances."

Conclusion

The internal compliance system created by Leybold in the early 1990s was rigorous. Because the company was undergoing extreme criticism both at home and abroad, Leybold's senior management often expressed their view that the measures were justified, despite the loss of business from denied exports. These actions helped restore Leybold's credibility and meet more stringent export control laws in Germany. Implementing this system did not quiet all critics. Some U.S. officials criticized Leybold's actions as hypocritical. However, the vast bulk of comments, including those from the media, experts, German officials, and several U.S officials were complimentary. The Leybold case is a useful model for an internal compliance system. Leybold created this system rapidly, following extensive external criticism and scrutiny. Although some of the system's steps may be redundant, the system's thoroughness and toughness is applicable to many situations facing companies or entities today.