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 The June 2009 report on the audits, other internal Cisco documents,
and interviews with two sources familiar with the situation, raise
questions about whether the company knew what was happening to
telecom equipment sales going through its resellers in Russia, as
well as whether discounts were passed on to customers as planned.
Cisco, like many Western companies, often relies on local resellers,
or distributors, to sell its products in such countries.
Cisco is currently conducting an investigation into allegations of
possible violations of the U.S. Foreign Corrupt Practices Act at the
request of the U.S. Department of Justice and the U.S. Securities
and Exchange Commission. The allegations concerned Cisco's
operations in Russia and certain of the Commonwealth of Independent
States, and some resellers of its products, the company said in a
filing on February 20, without elaborating further.
Cisco has not said whether the probe concerns one or both of the
main parts of the law - the anti-bribery or the accounting
provisions. Under the former, it is prohibited for American
companies and persons to make corrupt payments to officials of
foreign governments or state-controlled companies. Under the
accounting provisions, companies must keep books and records that
accurately and fairly reflect transactions and have an adequate
system of internal accounting controls.
"It's is an ongoing investigation and we're putting a lot of
resources into making sure it is done right," said Mark Chandler,
Cisco's general counsel, in a statement to Reuters. "We're fully
cooperating with and sharing the results with the SEC and the
Justice Department. The outcome of the investigation isn't
determinable, but we don't expect it to have any adverse material
impact on Cisco."
Cisco, which has hired the law firm WilmerHale to do the internal
probe, declined to be more specific about the investigation or to
comment on the audits summary and other documents.
A source familiar with the matter said that the DOJ and the SEC are
carrying out their own investigations into Cisco's behavior to see
if it breached the FCPA. Often U.S. authorities will ask a company
to carry out an internal investigation and determine any possible
penalties based on the levels of thoroughness of the probe and the
amount of cooperation they receive.
According to a March 30 article on the online news website
Buzzfeed.com, a whistleblower went to the SEC with the allegations
last year. Whistleblowers can be eligible to receive up to 30
percent of fines a company pays to the DOJ and the SEC for FCPA
breaches.
SOME DOCUMENTS "FALSIFIED"
The June 2009 audits summary shows that Cisco was having trouble
knowing what happened to the product it was selling.
Out of $23 million in sales bookings for Cisco's telecom equipment
destined for Svyazinvest during 2008-2009 that were examined in the
audits, only $5 million, or 22 percent, "are likely to be ok," the
summary said. Those sales to Svyazinvest - which is now part of
state-controlled Rostelecom - went through a company called
Compulink.
An opinion on almost two thirds of these bookings, or $14.7 million,
"could not be rendered due to partner refusal to provide supporting
documentation," the summary said. Those sales were handled by a
reseller called Step Logic Companies.
And another $3.1 million, or 13 percent, through two firms - AKOM
and Stins Coman - were described as "misrepresented." Some Stins
Coman documents were classified as "falsified" in an accompanying
table in the summary.
A Rostelecom spokesman said that "we have not heard about such
facts" and declined further comment.
A Compulink spokeswoman said Cisco does not carry out audits of the
company, while Stins Coman spokesperson Ida Gill said it has not had
any contracts with Svyazinvest. Step Logic denied withholding audit
documents from Cisco, according to Inna Ozerova, the firm's
marketing director. AKOM could not be located for comment.
The summary of the audits and other documents do not allege that
inappropriate payments were made. It is unclear whether the
inability to verify the sales are part of the FCPA investigations by
either the authorities or Cisco.
The purpose of the audits was to increase the level of assurance
about the "integrity" of orders that went through the resellers and
the "appropriateness" of a 68 percent discount provided by Cisco on
the sales the resellers reported they had made to Svyazinvest,
according to the summary. The report does not reach a conclusion on
what happened to the discount and whether it was allocated as Cisco
wanted.
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FOLLOW THE MONEY
A separate report of a meeting in February 2008 shows that after
various costs - including tax and a margin for the reseller -
Svyazinvest should have received 56 percentage points of the 68
percent discount, though that document said there was "a lack of
clarity" about the final price it paid.
One of the sources familiar with the transactions says that
Svyazinvest appears to have paid full price for at least some Cisco
equipment, raising questions about whether resellers offered or
applied the discount.
Three legal and compliance experts who have been briefed on the
audits summary say one key question that Cisco is likely to be
trying to answer is where the 68 percent went. They said the other
critical issue concerns the company's records and controls.
"The first thing it would trigger in my mind is ‘we have to know
where our money is.' We have people in our distribution system who
are not giving us reports, and we have money in our transactions
that does not seem to be visible to us," said Stephen Clayton, an
attorney who was head of anti-corruption compliance at server maker
Sun Microsystems before it was bought by Oracle Corp in 2010.
"The most critical part of the FCPA is not bribery, it is that you
are required by U.S. law as a public company to have accurate books
and records and to have an adequate system of corporate controls,"
Clayton added.
In a guide to the FCPA published in November 2012, the SEC and the
DOJ said that "unreasonably large discounts to third-party
distributors" is a common red flag that might indicate there could
be a violation of the law.
"If people are unwilling to turn over documents or the ones they
turn over on their face have been falsified, it raises numerous
questions," said Peter Bible, the chief risk officer at U.S.
accounting firm EisnerAmper, and a former chief accountant at
General Motors. Bible, who spent time in Russia when GM was setting
up a joint venture about 10 years ago, said that documentation
problems were common there.
The summary contains a series of actions that it said were agreed to
by Cisco's Russia leadership team, including issuing warnings to
some staff involved in the Svyazinvest business, terminating "Cisco
partner status" for at least one reseller, and tightening controls.
Bible said this seemed to signal that Cisco was at the time taking
the correct steps to sort out the problem. Based on the summary,
"they didn't just sweep it under the rug," he said.
It is unclear whether Cisco followed through on all the actions
outlined in the document. Cisco declined to comment.
BIGGER DISCOUNTS
The size of the discount offered to the resellers does not seem to
have been extraordinary for Russia. Another document reviewed by
Reuters reported a "Customer/Key Partner" as saying that Cisco
rivals, Juniper Networks and China's Huawei Technologies Co offered
higher discounts to distributors - 75 percent in Juniper's case and
75-83 percent for Huawei.
In August 2013, Juniper said that the U.S. Department of Justice and
the SEC were conducting investigations into possible violations by
the company of the FCPA, though it did not mention any specific
countries.
In a statement to Reuters, Juniper said it didn't comment on
reseller prices or the terms it gave them. "We cannot comment on the
specifics of the SEC's investigation, however, we are cooperating
with the investigation."
Huawei declined to comment and said it does not disclose details
about commercial arrangements.
(Reporting By Marina Lopes, Nicola Leske and Dena Aubin in New York,
Aruna Viswanatha and Alina Selyukh in Washington D.C., and Megan
Davies and Maria Kiselyova in Moscow; Edited by Martin Howell)
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