No Oracle Could Have Foreseen This: SEC Finds FCPA Fault With Oracle Corporation Despite The Absence Of Any Payment To Government Official

The U.S. Securities and Exchange Commission (SEC) last week announced a settlement with Oracle Corporation (Oracle) in which the California software company agreed to pay a $2 million penalty to settle charges that it violated the books and records and internal controls provisions of the U.S. Foreign Corrupt Practices Act (FCPA).1 Notably absent from the enforcement action was any allegation of an improper payment to a foreign government official — an element present in practically all other FCPA enforcement actions to date.

This enforcement action is significant because it shows that the SEC has broadened the scope of its FCPA enforcement to an unprecedented level. The SEC complaint alleges that Oracle violated the FCPA by failing to record "side funds" on its books and records and by failing to prevent its wholly-owned subsidiary from creating the funds, which in turn created "a risk that [the funds] potentially could be used for illicit means, such as bribery or embezzlement." The complaint does not allege that Oracle or its subsidiary made any improper payments. By bringing an enforcement action based solely on the failure to record funds and the failure to prevent conduct that creates the mere potential for bribery, the Oracle settlement marks a departure from the SEC's past enforcement practices.

The SEC complaint alleges that between 2005 and 2007, Oracle India Private Limited (Oracle India) inflated margins typically retained by its distributors and instructed its distributors to hold the additional margins in unauthorized side funds in order to pay third parties. Oracle's business practice in India involved selling the company's software licenses and services to distributors, who in turn would sell the same licenses and services to end user customers at a higher price, retaining the margin as profit to the distributor. The SEC alleged that in approximately 14 such transactions related to eight separate government contracts, Oracle India inflated the margins between the distributor and end user prices of the Oracle products and instructed distributors to retain the extra margin in side funds. Oracle India then instructed its distributors to use the side funds to pay third-party vendors, "purportedly for marketing and development expenses," even though some of the third-party vendors did not exist. Over the course of two years, Oracle India amassed approximately $2.2 million in side funds intended for third party payments.

The SEC...