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Another Diluted Oracle Enforcement Action

By on September 29, 2022 in Internal Controls, Oracle, Parent – Subsidiary Issues
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This post highlighted the SEC’s recent $22.9 million Foreign Corrupt Practices Act enforcement action against Oracle based on subsidiary conduct in Turkey, the United Arab Emirates, and India.

It was the second time in the past approximate decade that Oracle has resolved an FCPA enforcement action (see here). The first time Oracle resolved an FCPA enforcement action, this post was titled “The Dilution Of FCPA Enforcement Has Reached A New Level With The SEC’s Enforcement Action Against Oracle.”

The second FCPA enforcement action against Oracle this week was just as diluted – an issue apparent when actually reading the SEC’s findings.

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Oracle Becomes The 20th Corporate FCPA Repeat Offender

By on September 28, 2022 in 2022 Enforcement Action, Customer Discounts, Distributor Issues, India, Oracle, Repeat Offenders, SEC Enforcement Action, Technology Industry, Turkey, United Arab Emirates
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As highlighted in this prior post, in 2012 Oracle resolved a $2 million SEC Foreign Corrupt Practices Act enforcement action finding that “Oracle violated the books and records and internal accounting controls provisions of the FCPA by failing to prevent Oracle India Private Limited from keeping unauthorized side funds at distributors from 2005 to 2007.”

As a condition of settlement, Oracle consented to the entry of a final judgment, among other things, “permanently enjoining it from future violations” of the books and records and internal controls provisions and in resolving the matter the SEC noted the “significant enhancements” Oracle made to its FCPA compliance program.

Yesterday, the SEC announced a $22.9 million FCPA enforcement action against Oracle “to resolve charges that it violated provisions of the FCPA when subsidiaries in Turkey, the United Arab Emirates, and India created and used slush funds to bribe foreign officials in return for business between 2016 and 2019.”

In resolving a second FCPA enforcement action, Oracle becomes the 20th corporate FCPA repeat offender (see here for the list).

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Former Assistant Chief Of The DOJ’s FCPA Unit Blasts Aspects Of SEC FCPA Enforcement

By on February 4, 2014 in Internal Controls, Oracle, SEC

This post has a similar theme to this prior post.  The theme is – all one has to do is wait for former DOJ and SEC FCPA enforcement officials to blast various aspects of the current FCPA enforcement climate.

Touching upon the same issues I first highlighted in this August 2012 post titled “The Dilution of FCPA Enforcement Has Reached a New Level With the SEC’s Enforcement Action Against Oracle,” as well as prior posts here, here and here, a former Assistant Chief of the DOJ’s FCPA Unit (William Stuckwisch – currently a partner at Kirkland & Ellis) blasts certain aspects of SEC FCPA enforcement in this recent article published in Criminal Justice.

The article begins:

“Imagine the following scenario: You have guided your client, a publicly traded company, through the long and winding process that is a Foreign Corrupt Practices Act (FCPA) internal investigation. Afterward, or increasingly more often simultaneously, you then lead your client through presentation of the results of the investigation to the United States Department of Justice (DOJ) and Securities and Exchange Commission (SEC) (collectively, “government”). Ultimately, neither the internal investigation nor the government’s investigation finds any improper payment (or offers of payments) to any foreign official, or any other knowing misconduct. As a result, the government cannot pursue substantive FCPA antibribery charges against your client, and the DOJ cannot pursue any other FCPA-related criminal charges. Just when you begin to savor this significant success, you are ripped back to reality, as the SEC informs you that, nevertheless, your client faces civil enforcement under the FCPA’s internal controls provision and demands a significant penalty.  Unfortunately, this scenario is not a hypothetical for the FCPA Bar to deliberate at conferences and include as footnotes in memoranda addressing real-world client issues. Instead, it mirrors the facts publicly alleged in the SEC’s August 2012 enforcement action against Oracle Corporation, a case considered by many FCPA practitioners to be a stunning result.  […]  In Oracle, the SEC faulted the US parent corporation for not auditing local distributors hired by its Indian subsidiary, without alleging that the distributors (or anyone else) had made any improper payment to any foreign government official.  Oracle is the latest example of the SEC’s expansive enforcement of the FCPA’s internal controls provision, and it potentially paints a bleak picture—one in which the provision is essentially enforced as a strict liability statute that means whatever the SEC says it means (after the fact).”

Elsewhere, Stuckwisch, the lead author of the article, notes:

“[G]iven the highly subjective nature of the internal controls provisions, companies will continue to feel at the SEC’s mercy once it opens an FCPA investigation, even if no improper payments (or offers of payments) are ever found.”  […]  In our view, the true lesson of Oracle is not that this particular type of internal control is required, but rather that the internal controls provision is so broad, and the statutory standard of reasonable assurances so subjective, that the SEC has an almost unfettered ability to insist on a settlement, including a civil penalty, at the conclusion of virtually any FCPA investigation. Companies may be willing to enter into such settlements—particularly because, in the absence of a parallel DOJ action, they need not make any factual admissions (due to the “neither admit nor deny” nature of SEC settlements in such circumstances), and the cost of a settlement is often lower than continuing investigative and representative costs. But such settlements can have severe, unintended consequences. Perhaps most significantly, these settlements can lead other companies to misdirect their scarce compliance resources.”

Stuckwisch’s final observation is of course spot-on and generally restates the thesis from my 2010 article “The Facade of FCPA Enforcement.“

Scrutiny Alerts And Updates

By on April 3, 2013 in H-P, IBM, Image Sensing Sytems, InBev, Net 1, Oracle, Panasonic, UBS, Wal-Mart

This post revisits themes originally explored in this prior post “The Sun Rose, A Dog Barked and a Company Disclosed FCPA Scrutiny” and this prior post “Recent Disclosures Raise Many Questions.”

Why, in this era of increased FCPA compliance, does there seem to be more, not less, FCPA inquiries?  Does effective compliance reduce FCPA scrutiny or does effective compliance uncover more potential FCPA issues?  If every company hired FCPA counsel to do a thorough review of its world-wide operations would – given the current enforcement theories – 50% of companies find technical FCPA violations?  75%? 95%?  If the answer is any one of these numbers (and my guess is that 95% is probably the best answer), is that evidence of how corrupt business has become, evidence of how unhinged FCPA enforcement theories have become, or evidence of something else?

In other words, what does it say about enforcement of a law if, at any given time, the majority of corporations are on the wrong end of how that law is being enforced? 

After all, according to the FCPA Blog’s most recent corporate disclosure list (here) approximately 90 companies are currently under investigation for FCPA violations.  As the FCPA Blog rightly notes “nearly all entries are based on disclosures in SEC filings. That means non-issuers (non-public companies) aren’t included. And perhaps not all issuers have made a disclosure about a pending FCPA investigation, in which case the company may not appear on this list.”

This post highlights FCPA scrutiny and developments concerning the following companies:  UBS, Panasonic, Image Sensing Systems, H-P, Oracle, IBM, InBev, Wal-Mart, and  Net1,

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UBS

It reads like a law school issue-spotting exam.

A Kuwaiti sheik (and also a former Minister of Interior) alleges that a company subject to the FCPA offered a $20 million commission to derail a bid by a company for various telecommunication assets so that the subject company could get a lead role in finding a different buyer.  The sheik alleges that he then used his influence, on the subject company’s behalf, placed a series of telephone calls, and the bid was derailed.  The sheik then assisted the subject company in landing a lead advisory role on the sale to a different buyer giving the subject company a $22.5 million fee.  The subject company then offers the sheik a job paying over $600,000 a year.

So reads this recent article in the Wall Street Journal concerning a Kuwaiti sheik and UBS and the sheik’s efforts to obtain the fee he says he is owed.

Panasonic

According to this recent Wall Street Journal article, “U.S. authorities are investigating whether [Panasonic Avionics Corp. (“PAC”)  a U.S.-based subsidiary of Japanese electronics giant Panasonic Corp. that makes in-flight entertainment and communications systems for airlines] paid bribes abroad to land business.”  According to the article, PAC’s legal department has instructed certain executives and employees to preserve documents “concerning any benefits or gifts provided, or the payment of anything of value, by Panasonic or PAC to any airline employee or government officials.”

Image Sensing Systems

Image Sensing Systems Inc. (a Minnesota based provider of above ground detection and information management solutions for markets including security, police and parking) disclosed in this recent release as follows.

“The Company has learned that Polish authorities are conducting an investigation into alleged violations of Polish law by two employees of ISS Poland, who have been charged with criminal violations of certain laws related to a project in the City of Lodz, Poland. Neither the Company nor any of its subsidiaries has been charged with any offense. A committee of the Company’s independent directors, with the assistance of independent counsel and accounting advisors, is conducting an investigation into these matters focusing on possible violations of Company policy, internal controls, and laws, including the Foreign Corrupt Practices Act, the U.K. Anti-Bribery Act and Polish law. This investigation is ongoing, and the Company is voluntarily disclosing this matter to the Securities and Exchange Commission and the Department of Justice.  ‘We take these matters very seriously, and are cooperating fully. Image Sensing Systems aims to conduct its business lawfully and ethically.  We have taken remedial actions, including ending the employment of the two Polish employees.  We are also assessing and implementing enhancements to our internal policies, procedures and controls.  The Company’s known costs related to the investigation to date were immaterial in 2012 and approximately $1.5 million through March 22, 2013. While we are working diligently towards a timely conclusion, we are presently unable to determine the likely outcome or range of loss, if any, or predict with certainty the timeline for resolution of these matters.'”

H-P, IBM and Oracle

This recent ProPublic report highlights the relationship between various tech companies including H-P, IBM and Oracle with a “senior technology officer for Poland’s national police and, later, the nation’s Interior Ministry, [who] set the terms for hundreds of millions of dollars in technology contracts and decided which ones should be awarded without competitive bidding.

According to the article, Polish prosecutor say that the individual “received more than a $1 million in cash and brand-name gifts in exchange for steering government contracts to the three American companies, as well as to a Polish company called Netline.  According to prosecutors, the gifts included a BMW motorcycle, a Nissan SUV, a Harmon Kardon home theater, a Sony 50 inch television, 12 HP laptops, several iPads and a refrigerator.”

The article further states as follows.

“IBM and Hewlett-Packard said in statements  that they were cooperating with Polish authorities. Hewlett-Packard noted that “no current HP employees are suspects in this case,” while IBM pointed out that “press reports” on the case referred to a “former IBM employee.”  The company said in its statement that it “believes in the highest ethical standards for its employees and is committed to the principles of business ethics and lawful conduct.”  Oracle, whose possible entanglement in the investigation had not been publicly known before today, would not comment for this article”

IBM and Oracle have both recently been the subjects of FCPA enforcement actions (see here and here) and as noted in this post H-P has been under FCPA scrutiny since approximately April 2010.

AB InBev

InBev, a leading global brewer based in Belgium with ADRs traded on the N.Y. Stock Exchange, recently disclosed in its annual report as follows.

“We have been informed by the SEC that it is conducting an investigation into our affiliates in India, including our nonconsolidated Indian joint venture, InBev Indian Int’l Private Ltd, and whether certain relationships of agents and employees were compliant with the FCPA. We are investigating the conduct in question and cooperating with the SEC.”

As noted in this Bloomberg article, AB InBev’s market share in India is about 2 percent and operations are run by an Indian subsidiary, Crown Beers India, and a joint venture with RKJ Group for local production, in which AB InBev holds a minority stake.

Other beverage industry companies also currently the subject of FCPA scrutiny include Owens Illinois (see here for prior post), Beam Inc. (see here for the prior post) and Central European Distribution Corp. (see here for the prior post).

An industry sweep?  (See here from the Wall Street Journal Corruption Currents).

Wal-Mart

In its recent 10-K filing, Wal-Mart stated, in pertinent part, regarding its FCPA scrutiny as follows.

“Our process of assessing and responding to the governmental investigations and the shareholder lawsuits continues. While we believe that it is probable that we will incur a loss from these matters, given the on-going nature and complexity of the review, inquiries and investigations, we cannot reasonably estimate any loss or range of loss that may arise from these matters. Although we do not presently believe that these matters will have a material adverse effect on our business, given the inherent uncertainties in such situations, we can provide no assurance that these matters will not be material to our business in the future.”

[…]

“These matters may require the involvement of certain members of the Company’s senior management that could impinge on the time they have available to devote to other matters relating to the business. The Company expects that there will be on-going media and governmental interest, including additional news articles from media publications on these matters, which could impact the perception among certain audiences of the Company’s role as a corporate citizen.”

Related to Wal-Mart’s overall FCPA scrutiny, this recent article in the Wall Street Journal suggests that Wal-Mart’s “compliance crackdown” is one of the reasons for the company’s stalled growth in India.  Another reason discussed is “India’s labyrinthine process for developing commercial real estate and operating stores”

Net1

As noted in this previous post, in December 2012, Net1 UEPS (a South African telecommunications company with shares traded on a U.S. exchange) disclosed that it received letters from the DOJ and SEC informing the company that the agencies had begun an investigation into whether Net 1 violated the FCPA by engaging in a scheme to make corrupt payments to officials of the Government of South Africa in connection with securing a contract with the South African Social Security Agency to provide social welfare and benefits payments.

The company recently announced as follows.

“[A] full bench of the South African Supreme Court of Appeal (“Appeal Court”) unanimously ruled that the tender process followed by the South African Social Security Agency (“SASSA”) in awarding a contract to Net1’s wholly owned subsidiary Cash Paymaster Services (Proprietary) Limited (“CPS”) was valid and legal.”

The Dilution Of FCPA Enforcement Has Reached A New Level With The SEC’s Enforcement Action Against Oracle

By on August 17, 2012 in 2012 Enforcement Actions, Books and Records, Distributor Issues, Enforcement Agency Speeches, India, Internal Controls, Oracle, SEC Enforcement Action, Technology Industry

Yesterday,the SEC announced (here) a Foreign Corrupt Practices Act books and records and internal controls enforcement action against Oracle Corporation.

With the enforcement action, the dilution of FCPA enforcement has reached a new level.   The only allegations against Oracle itself is that it failed to audit distributor margins against end user prices and that it failed to audit third party payments made by distributors.  It is common for large multi-national companies to have hundreds, if not thousands, of distributors.  Because of this, audits Oracle was held liable for not conducting are not practical or cost-effective absent red flags suggesting improper conduct. The SEC did not allege any such red flag issues.  In fact, the SEC alleges that Oracle’s Indian subsidiary “concealed” and kept “secret” the conduct from Oracle.  Congress did not intend for the FCPA’s books and records and internal control provisions to be a strict liability statute.  The SEC used to recognize this.  However, it no longer does as once again demonstrated by the Oracle action.

In reading the Oracle action, I was reminded of a 1981 speech by Harold Williams (Chairman of the SEC) regarding the FCPA books and records and internal control provisions.  See here for the prior post.  Williams stated that the provisions are not “independent unrestrained mandate[s] to the Commission to establish novel or unprecedented corporate recordkeeping standards.”  Williams further stated as follows.  “Depending on the circumstances, intentional circumventions of a company’s system of records and of accounting controls by a low-level employee would not always be considered violations of the Act by the issuer. No system of adequate records and controls – no matter how effectively devised or conscientiously applied – could be expected to prevent all mistaken and improper transactions and disposition of assets. Given human nature, regardless of the adequacy of the system, a bookkeeper may still erroneously post entries, an overzealous agent may make unauthorized payments, or an unscrupulous employee may falsify records for his own purposes. The Act recognizes each of these limitations. Neither its text and legislative history nor its purposes suggest that occasional, inadvertent errors were the kind of problem that Congress sought to remedy in passing the Act. No rational federal interest in punishing insignificant mistakes has been articulated. And, the Act’s accounting provisions do not require a company or its senior officials to be the guarantors of all conduct of company employees.”

Back to the SEC’s enforcement action against Oracle.

The SEC complaint (here) states in summary fashion as follows.

“This matter involves violations of the books and records and internal controls provisions of the FCPA by Oracle Corporation.  From 2005 to 2007, certain employees of Oracle’s Indian subsidiary Oracle India Private Limited (“Oracle India”) secretly ‘parked’ a portion of the proceeds from certain sales to the Indian government and put the money to unauthorized use, creating the potential for bribery or embezzlement.  These Oracle India employes structured more than a dozen transactions so that a total of around $2.2 million was held by the Company’s distributors and kept off Oracle India’s corporate books.  The Oracle India employes would then direct its distributor to disburse payments out of the unauthorized side funds to purported local ‘vendors.’  Several of the ‘vendors’ were merely storefronts that did not provide any services.  Oracle failed to accurately record these side funds on the Company’s books and records, and failed to implement or maintain a system of effective internal accounting controls to prevent improper side funds in violation of the FCPA, which requires public companies to keep books and records that accurately reflect their operations.”

Specifically, the SEC complaint states as follows.

“On approximately 14 occasions related to 8 different government contracts between 2005 and 2007, certain Oracle India employees created extra margins between the end user and distributor price and directed the distributors to hold the extra margin in side funds. Oracle India’s employees made these margins large enough to ensure a side fund existed to pay third parties. At the direction of the Oracle India employees, the distributor then made payments out of the side funds to third parties, purportedly for marketing and development expenses. Some of the recipients of these payments were not on Oracle’s approved local vendor list; indeed, some of the third parties did not exist and were merely storefronts.  Because the Oracle India employees concealed the existence of the side fund, Oracle did not properly account for these side funds. These funds constituted prepaid marketing expenses incurred by Oracle India and should have been recorded as an asset and rolled up to Oracle’s corporate books and records. These marketing expenses should then have been reflected in the income statement once they were used. Instead, the parked funds were not reflected on Oracle India’s books and were not properly recorded as prepaid marketing expenses. This incorrect accounting in turn affected Oracle’s books and records.  Between 2005 and 2007, government customers paid Oracle India’s distributors at least $6.7 million on these sales, with Oracle receiving approximately $4.5 million in revenue, resulting in about $2.2 million in funds improperly ‘parked’ with the Company’s distributors.”

The SEC further alleged as follows.

“Oracle lacked the proper controls to prevent its employees at Oracle India from creating and misusing the parked funds.  For example, Oracle knew distributor discounts created a margin of cash from which distributors received payments for their services.  Before 2009, however, the company failed to audit and compare the distributor’s margin against the end user price to ensure excess margins were not being built into the pricing structure.  In addition, although Oracle maintained corporate policies requiring approvals for payment of marketing expenses, Oracle failed to seek transparency in or audit third party payments made by distributors on Oracle India’s behalf.  This control would have enabled Oracle to check that payments wer made to appropriate recipients.”

Based on the above conduct, the SEC charged Oracle with FCPA books and records and internal controls violations.

In the SEC’s release, Marc Fagel (Director of the SEC’s San Francisco Regional Office) stated as follows.  “Through its subsidiary’s use of secret cash cushions, Oracle exposed itself to the risk that these hidden funds would be put to illegal use.  It is important for U.S. companies to proactively establish policies and procedures to minimize the potential for payments to foreign officials or other unauthorized uses of company funds.”  As noted in the release, without admitting or denying the SEC’s allegations, Oracle consented to the entry of a final judgment ordering the company to pay a $2 million penalty and permanently enjoining it from future books and records and internal control violations.  The release further states as follows.  “The settlement takes into account Oracle’s voluntary disclosure of the conduct in India and its cooperation with the SEC’s investigation, as well as remedial measures taken by the company, including firing the employees involved in the misconduct and making significant enhancements to its FCPA compliance program.”

It is typical for the DOJ and SEC to announce FCPA enforcement actions on the same day.  Thus, the absence of a parallel DOJ enforcement action as to the alleged conduct at issue suggests that there will be no DOJ enforcement action, a good result given the SEC’s allegations and for the reasons stated above.

However, it may be premature to conclude that Oracle’s FCPA scrutiny is over.  As noted in this prior post, in September 2011, the Wall Street Journal reported that the DOJ was investigating “whether Oracle employees or agents acting on the company’s behalf made improper payments in Africa in order to land sales of database and applications software.”

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The SEC’s enforcement action against Oracle  is not the first time distributor margin payments have served as the basis of an FCPA enforcement action.  See here for the 2005 enforcement action against InVison, specifically the Thailand allegations.  However, in that action the SEC alleged that the company was aware of the “high probability” that the margin was being used for improper purposes.

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