Bonum Certa Men Certa

EPO and Microsoft Collude to Break the Law -- Part XII: Foreign Corrupt Practices, Bid Rigging and “Slush Funds”

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FCPA



Summary: Microsoft has come under repeated scrutiny for alleged breaches of the FCPA

In the last part we saw how Microsoft has repeatedly featured on the radar of anti-trust regulators and has come under scrutiny for its anti-competitive practices on both sides of the Atlantic.



But anti-competitive practices are not the only reason why the company has attracted unwanted attention from regulators.

"...anti-competitive practices are not the only reason why the company has attracted unwanted attention from regulators."In its home country, the Redmond behemoth has also been subject to investigation by the Department of Justice (DoJ) and the Securities & Exchange Commission (SEC) due to suspected violations of the US Foreign Corrupt Practices Act (FCPA) which prohibits US companies, as well as entities acting on their behalf, from bribing foreign officials.

Back in March 2013, it was reported that the DoJ and the SEC were investigating Microsoft in connection with an alleged kickback scheme operated by the company in China, as well as irregularities in its relationships between itself and resellers in Italy and Romania.

According to the Wall Street Journal the investigation was started after an anonymous tipster spilt the beans to US investigators in 2012. It was alleged that at least one Microsoft executive in China gave instructions to offer unspecified kickbacks to Chinese government officials in exchange for green-lighting Microsoft contracts.

In Italy, the investigation centered on how Microsoft handled deals with consultants there. The WSJ’s report claimed that Microsoft consultants that worked in customer loyalty-related positions would offer gifts like trips to acquisition officials as barter for government contracts.

"It was alleged that at least one Microsoft executive in China gave instructions to offer unspecified kickbacks to Chinese government officials in exchange for green-lighting Microsoft contracts."The Romanian investigation related to Microsoft’s involvement with its resellers allegedly offering “bribes” to win large government contracts with the Ministry of Communications.

Later on, in August of the same year, it was reported that federal investigators had extended their inquiry to include Microsoft partners in Pakistan and Russia.

In Russia, an anonymous tipster told Microsoft that resellers of its software allegedly funneled kickbacks to executives of a state-owned company to win a deal.

In Pakistan, a tipster alleged that Microsoft authorized a consulting firm to cover the expenses for a five-day trip to Egypt for a government official and his wife in order to win a tender. The contract Microsoft won in this case was reportedly worth USD 9 million and was signed three months after the paid trip to Egypt.

Giving bribes
The ‘Microsoftgate’ scandal rocked Romania in 2014



There isn't a lot of information out there about the result of the US FCPA investigations that were launched in 2013. It seems to be almost impossible to find any details about what became of the investigations into the Chinese kickback scheme and the other alleged irregularities in Italy, Russia and Pakistan.

"In Pakistan, a tipster alleged that Microsoft authorized a consulting firm to cover the expenses for a five-day trip to Egypt for a government official and his wife in order to win a tender."What is a matter of public record, however, is that Microsoft's shenanigans in Romania led to a domestic criminal investigation and triggered a major political scandal in that country, known as the Microsoft licensing corruption affair or "Microsoftgate" for short.

This was reputed to be the "biggest ever" corruption case in Romania and it rocked the country's political establishment as local investigations progressed during 2013 and 2014.

Nine government ministers from the education, finance and communication ministries of various governments stood accused of approving contracts selling IT licenses to Romanian schools at highly inflated prices. Damages linked to the case were estimated at €53.7 million.

As things turned out, most of the former government officials were charged with abuse of office after the 10-year statute of limitations had already expired. The contract for the first Microsoft IT licence was signed in 2004 and most of the indictments were not filed until 2015. Whether this was due to incompetence on the part of the prosecutors or the result of corruption is unclear.

"The contract for the first Microsoft IT licence was signed in 2004 and most of the indictments were not filed until 2015. Whether this was due to incompetence on the part of the prosecutors or the result of corruption is unclear."In any event most of the charges were dropped in 2018 due to this prosecutorial cock-up.

Nevertheless, the case did have some success in terms of convictions. Former communications minister Gabriel Sandu, a former mayor Gheorghe Stefan from the town of Piatra Neamt in northeastern Romania, and businessmen Nicolae Dumitru and Dorin Cocos were jailed after they admitted to accepting bribes from people interested in getting the contracts through.

Sandu, who was Romania’s communications minister between 2008 and 2010, allegedly favoured a company owned by local investors Dinu Pescariu and Claudiu Florica and granted it the contract to supply Microsoft licenses to state institutions for a year without a public tender, according to the prosecutors.

After his conviction, Sandu filed a denouncement with the National Anticorruption Directorate (DNA) in 2017. In his denouncement which he made public he claimed that former president Basescu, former prime minister Emil Boc as well as former US ambassadors, Nicholas Frank Taubman and Mark H. Gitenstein, pressured him into making payments to the firm represented by Pescariu and Florica and that former Microsoft Romania managers were also allegedly involved in the scheme.

The dust from the licensing corruption affair in Romania had hardly begun to settle when Microsoft was back in the news again.

"The dust from the licensing corruption affair in Romania had hardly begun to settle when Microsoft was back in the news again."At the end of November 2018, a whistleblower lodged an FCPA complaint with the SEC alleging malfeasance in connection with a South African Department of Defence software procurement contract.

The contract which was worth EUR 6.6 million (ZAR 120 million in local currency) was awarded to EOH Mthombo a subsidiary of the EOH Group, a South African conglomerate specialising in the provision of technology services to businesses and government.

At the time in question EOH Mthombo was a reseller of Microsoft software licences via a Microsoft Channel Partner agreement.

The whistleblower accused Microsoft of being complicit in allowing EOH Mthombo to engage in a “corrupt” licensing transaction with the Department of Defence.

Microsoft extricated itself from the South African affair by terminating its partner agreement with EOH Mthombo in March 2019.

"The whistleblower accused Microsoft of being complicit in allowing EOH Mthombo to engage in a “corrupt” licensing transaction with the Department of Defence."Some months later, in July 2019, Microsoft hit the headlines again in the USA this time in connection with another FCPA investigation involving its subsidiaries in Hungary, Saudi Arabia, Turkey and Thailand.

According to the SEC, Microsoft's subsidiary in Hungary provided discounts on software licenses to its resellers, distributors and other third parties. Instead of passing on the discounts to Microsoft's government customers, the discounts were used to fund improper payments intended for foreign government officials to secure software license sales for Microsoft.

The SEC also found that Microsoft's subsidiaries in Saudi Arabia and Thailand provided improper travel and gifts to both foreign government officials and employees of non-government customers funded through slush funds maintained by Microsoft's vendors and resellers. In Saudi Arabia a USD 440,000 “slush fund” was “used to pay travel expenses for Saudi government employees and for gifts, furniture, laptops, tablets and other equipment for government agencies.”

Executives in Microsoft’s wholly-owned subsidiary in Turkey were found to have approved an excessive discount in a transaction involving the Ministry of Culture. Microsoft’s records did not reflect what services, if any, a third-party system integrator provided, and there was no evidence that the discount was passed on to the government customer.

According to the SEC, "Microsoft failed to make and keep adequate documentation related to third party vendors, consultants, distributors and resellers and failed to devise and maintain a sufficient system of internal accounting controls throughout the relevant time.”

On 22 July 2019 the SEC announced that Microsoft had agreed to pay more than USD 16 million to settle charges that it violated the FCPA in connection with its operations in these four foreign based subsidiaries and that it has violated the books and records and internal accounting controls provisions of the Securities Exchange Act of 1934.

Without admitting or denying the SEC's findings, Microsoft consented to a cease-and-desist order and agreed to pay disgorgement of USD 13.78 million and prejudgment interest of USD€ 2.78 million.

"The SEC also found that Microsoft's subsidiaries in Saudi Arabia and Thailand provided improper travel and gifts to both foreign government officials and employees of non-government customers funded through slush funds maintained by Microsoft's vendors and resellers."The settlement also included an agreement on the part of Microsoft's wholly-owned Hungarian subsidiary to pay a criminal penalty of more than USD 8.7 million to resolve the federal investigation into violations of the FCPA connected with the sale of Microsoft software licenses to Hungarian government agencies.

Microsoft appears to have successfully bought its way out of trouble on this occasion.

The negative PR for the company was limited by the fact that the bid-rigging and bribery affair in Hungary didn't cause any significant domestic political fallout in contrast to the "shit-storm" unleashed by the "Microsoftgate" corruption scandal in Romania in 2014.

Meanwhile, in Thailand, there was a request from the non-governmental organisation Anti-Corruption Organisation of Thailand (ACT) urging the National Anti-Corruption Commission (NACC) to investigate the Microsoft bribery case.

ACT secretary-general, Mana Nimitmongkol, made the call in response to reports of Microsoft's settlement with the SEC: "Now that the issue is public knowledge, the NACC has a duty to tell the public about what happened, and what it plans to do about it," Mr Mana said. "They can't just turn a blind eye to it."

Unfortunately there is no record of any subsequent investigation by the Thai NACC.

The reluctance of the NACC to investigate might be connected with Microsoft's role in Thailand which has been described as that of "a key player and partner in Thailand’s digital transformation process" and its lead position in "advising business and government leaders ... on AI technology".

"Microsoft appears to have successfully bought its way out of trouble on this occasion."That concludes our synopsis of Microsoft's involvement in alleged violations of the US FCPA.

As we move towards the concluding phase of this series we intend to return to the main focus, namely the questionable nature of Microsoft's prominent role in the EPO's current "digital transformation process".

Before tackling this issue in more detail we will take a look at another aspect of Microsoft's activities which seems to be of significance here, namely its position as a leading player in the global 'IP' arena.

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