Managers approved requests for product discounts and marketing funds from subsidiaries in Turkey, the United Arab Emirates and India without requiring documentation, resulting in money getting used to make corrupt payments to foreign buyers, the Securities and Exchange Commission says in charges it settled with technology giant Oracle.
“The creation of off-book slush funds inherently gives rise to the risk those funds will be used improperly, which is exactly what happened here at Oracle’s Turkey, UAE, and India subsidiaries,” Charles Cain, the SEC’s foreign corrupt practices act (FCPA) chief, said last week in announcing the settlement.
The company agreed to pay a $15 million penalty and disgorge $8 million. It was the second time in a decade that the company was hit with FCPA violations after a foreign subsidiary created a slush fund. The earlier violation, a 2012 case involving an Indian subsidiary, was settled for $2 million.
The SEC credited the company for acting quickly this time around. Executives fired the employees involved, broke off relationships with the participating partner companies, and beefed up controls, among other things. The SEC says it took all that into account in determining the penalty.
“Oracle’s cooperation included sharing facts developed in the course of its own internal investigations, voluntarily providing translations of key documents, and facilitating the staff’s requests to interview current and former employees of Oracle’s foreign subsidiaries,” the SEC said in its settlement order.
Lax documentation
Central to the charges is managers letting subsidiaries sell products at a discount, or request marketing expense reimbursements, without requiring written justification.
“While Oracle policy mandated that all discount requests be supported by accurate information and Oracle reviewers could request documentary support, Oracle policy did not require documentary support for the requested discounts – even at the highest level,” the SEC said.
Subsidiary employees would use the margin between the discounted price and what they actually charged the customer to fund off-book accounts. In Turkey, employees called the fund “havuz,” or “moneybox,” and in the UAE, they referred to the funds as wallets.
Subsidiary employees would also put marketing expense reimbursements into the funds. In one instance, employees said they needed extra money for marketing because of intense competition for a contract but in fact the buyer, an agency of the Turkish government, had stipulated that any bidders had to use Oracle products.
“In reality, the MOI [Ministry of the Interior] did not conduct a competitive bidding process for this contract,” the SEC said.
Subsidiary employees, working with distribution and reselling partners, would use the funds to pay for travel and other expenses of potential customers outside of Oracle’s policies.
“The sales account manager for the MOI, with the knowledge of the then-country leader, sought to improperly influence relevant officials and planned a week-long trip to California for four MOI officials,” the SEC said. “The meeting at Oracle’s headquarters only lasted approximately fifteen to twenty minutes. During the rest of the week, the Turkey Sales Representative entertained the MOI officials in Los Angeles and Napa Valley and took them to a theme park.”
In India, a subsidiary employee was trying to make a deal with the Indian Ministry of Railways. The employee said the deal would be lost without a 70% discount because of competition, but the higher-level employee with responsibility to approve the discount never asked for documentation.
“The Oracle designee provided approval for the discount without requiring the sales employee to provide … documentary support for the request,” the SEC said. “In fact, the Indian [agency’s] publicly available procurement website indicated that Oracle India faced no competition because it had mandated the use of Oracle products for the project.”
The margin from the discount ended up in the slush fund, with money intended for a government official.
“A total of approximately $330,000 was funneled to an entity with a reputation for paying [agency] officials and another $62,000 was paid to an entity controlled by the sales employees responsible for the transaction,” the SEC said.
Corrective steps
Among the actions taken to curb future violations by subsidiaries, Oracle fired the managers and other employees who were involved, ended relationships with the participating distributors and resellers, and beefed up controls to require more transparency from employees to get discounts and reimbursements.
The company also added limits on funds that can be used for “incentives and business courtesies” available to third parties, particularly in public sector transactions.
“This matter highlights the critical need for effective internal accounting controls throughout the entirety of a company’s operations,” the SEC’s Cain said.
