On August 16, 2012, the Securities & Exchange Commission ("SEC") charged Oracle Corp. with violations of the Foreign Corrupt Practices Act ("FCPA") arising out of its failure to prevent its subsidiary in India from secretly setting aside money that was used to make unauthorized payments to vendors. The SEC's Complaint alleged that Oracle's India subsidiary structured transactions with India's government that allowed local distributors to "park" $2.2 million of proceeds outside Oracle's books and records, thus "creating the potential for bribery or embezzlement." Based on these allegations, the SEC charged Oracle with violating the FCPA's books and records provisions and internal control provisions. Oracle agreed to pay $2 million to settle the charges. This SEC enforcement action highlights the FCPA risks arising from foreign subsidiary operations of technology and other companies, and underscores the need for companies operating abroad to have effective controls in place to eliminate any possible opportunities for illicit payments through local partners.
Oracle's Operations in India
Oracle, the California-based enterprise software company and provider of computer hardware products and services, operates in India through its wholly owned subsidiary Oracle India Pvt. Ltd. ("Oracle India"). According to the SEC's Complaint, during the relevant 2005-2007 time period, Oracle India's typical business model involved selling software licenses and services through local distributors. Oracle India was heavily involved in identifying and working with end-user customers, selling products and services to them and negotiating the final price. The purchase order, however, was placed by the customer with Oracle India's distributor. The distributor bought the licenses and services directly from Oracle and then resold them to the customer at the higher price that had been negotiated by Oracle India. The difference between what the customer paid the distributor and what the distributor paid Oracle was the margin retained by the distributor as payment for its services.
Alleged Misconduct by Oracle's Subsidiary and Distributor
The SEC's complaint alleges that on approximately 14 occasions related to eight different government contracts between 2005 and 2007, certain Oracle India employees created extra margins between the end-user and distributor price, and directed the distributor to hold the extra margin in side funds that would purportedly be used...