When the Foreign Corrupt Practices Act is mentioned it typically brings to mind stories of foreign bribery and perhaps some of the sensational tales of U.S firms toppling foreign governments that originated during the legislative process. Yet at the time the draft legislation was being crafted, it began with books and records. Then SEC Enforcement Director Stanley Sporkin pushed hard for the books and records provisions based on the straight forward proposition that corporations are stewards of shareholder money and owed them a duty to say what is being done with it. The internal control provisions were written by then SEC Chief Accountant Sandy Burton who went on to serve as the Dean of the Columbia Graduate School of Business for years.
Senator Proxmire championed the bribery provisions over the strong objections of the Commission. Director Sporkin and others at the SEC wanted to stay focused on disclosure, not get involved with the difficult of trying to prove bribery in a foreign country. Everyone of course got what they wanted – books and records, internal controls and bribery. Despite the notoriety that cases under these statutes receive, it is the Commission’s books, records and internal controls provisions that are the work-horse of the FCPA. The point is reflected in the most recent FCPA case filed by the SEC and the DOJ, In the Matter of Microsoft Corporation, Adm. Proc. File No. 3-19260 (July 22 2019).
The case is built on the interaction, and at times inaction, of Microsoft’s subsidiaries and systems – Microsoft Magyarorszag Kft. or MS Hungary, Microsoft Ireland Operations Ltd or MIOL and other subsidiaries in Arabia, Turkey and Thailand.
Microsoft does not directly enter into contracts with end customers. Rather, in certain foreign countries, it operates through a subsidiary. Its software licenses in certain volume-licensing programs, for example, are sold through distributor and/or third party resellers called a Licensing Solution Partner or LSP – the approval person.
The firm does have estimated retail prices for its software. To maintain consistency with its LSPs in tenders, MIOL offers standard discounts to approved LSPs that reflect a built-in margin. In certain instances, the discounts can be lowered but the necessary approvals must be obtained. The firm also sells consulting and other services which subsidiaries typically subcontract with third parties to provide. Firm policies also required that appropriate transactional records be maintained in sufficient detail.
Collectively, the firm’s policies and procedures were designed to ensure compliance with the applicable provisions of the Exchange Act. Yet here, in certain instances, they failed to halt inappropriate practices. For licensing transactions in Hungary over a two-year period beginning in 2014, for example, the managers and employees obtained approvals for discounts to LSPs. The company did not, however, have adequate procedures to determine if the requests for the discounts were legitimate and, when they were, if the discounts were passed on. In fact, these discounts were used to make improper payments and secure over $13.7 million in in business.
The Hungry subsidiary had a similar issue with services. During the same two-year period it entered into two separate agreements regarding the provision of services. The work was subcontracted out. Yet there is little evidence of what work was performed. This is contrary to Microsoft policies.
In Saudi Arabia the local subsidiary had a similar problem with discounts and records. For example, about $400,000 of funds intended to be used for marketing and developing proposals turned into a slush fund paying for gifts to government employees. The fund was financed though larger than usual discounts and aided by records that did not properly track the cash.
Finally, the subsidiaries in Thailand Turkey also experienced difficulties. In Thailand over $100,000 gifts were furnished to employees of non-governmental banking customers by using funds intended for certain training and recorded under false documents. In Turkey a non-authorized LSP was used in conjunction with an additional and unauthorized discount to pay a government customer. The Order alleges violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B).
In resolving the matter, the Commission considered the fact that although the company did not self-report it did cooperate and take certain remedial actions. In addition, Microsoft entered into a three-year non-prosecution agreement with the DOJ and, after making admissions, paid a criminal penalty of $8,751,795.
To settle with the Commission, the company consented to the entry of a cease and desist order based on the sections cited in the Order. The company will also pay disgorgement of $13,780,733 and prejudgment interest of $2,784,41792.