Microsoft FCPA Settlement Underscores Third-Party Risks (Part II of III)
Microsoft’s bribery and controls violations reflect significant risks facing companies that rely on distributor and reseller networks to sell their products. Companies often enter and operate in emerging markets through complex networks of third parties. Such distribution systems create significant anti-corruption risks that have to be managed and mitigated.
It is worth taking the time to examine the precise outlines of the conduct at issue in this enforcement action.
In Hungary, from at least 2013 to 2015, a Microsoft senior executive and other employees participated in a scheme to inflate margins in the sales channel in connection with the sale of software licenses to Hungarian government agencies.
First, Hungary executives and employees falsely represented to Microsoft that steep discounts were needed to reach agreement with certain deals with resellers who bid for contracts to sell software to Hungarian government agencies. After implementing the discounts, Microsoft and channel partners failed to pass on these discounts to its government customers but used such funds to pay illegal bribes to Hungarian government officials. The discounts were falsely recorded in Microsoft’s books and records as “discounts.”
Second, DOJ outlined two specific schemes as examples of Microsoft’s illegal conduct:
The NAV Contract – NAV, Hungary’s National Tax and Customs Administration issued a public tender in early 2014 for Microsoft desktop licenses. Microsoft employees sought a one-time 27.85 discount below the standard discount, claiming without any justification that such a discount was needed to respond to competition with other bidders, end customer price sensitivity and the possibility of winning related service contracts. Microsoft approved the discount on condition that the deal be reached by March 31 third quarter end. The tender was cancelled and reissued in mid-March 2014.
On April 25, 2014, NAV announced the tender winner as Microsoft and a specific licensed solutions provider (LSP) third-party the winner of the tender. Interestingly, Microsoft ultimately sold the licenses using a different LSP who did not bid on the tender. This different LSP eventually resole the licenses to NAV without passing on to NAV the full discount, reserving additional funding for payment of illegal bribes to Hungarian government officials.
The ORFK Select Plus Agreement: On September 1, 2014, ORFK, Hungary’s National Police (under the Ministry of Interior). Microsoft employees sought a one-time 28.30 discount below the standard discount, claiming without any justification that such a discount was needed to respond to competition with other bidders, end customer price sensitivity and the possibility of winning related service contracts. Microsoft eventually approved a 31.53 percent discount.
An LSP purchased software licenses from Microsoft for the tender for approximately 2.2 million euros. A different LSP won the tender and signed the agreement with ORFK. The new LSP did not provide any specific services and the LSP resold the licenses for a gross margin of 1.56 million euros. The difference in total gross margin was used to fund illegal bribery payments to Hungarian government officials.
Service Contractors to NAV and ORFK – From 2014 to 2015, Microsoft paid third-party subcontractors to provide related consulting services to Hungarian government customers. For some subcontracts, Microsoft has no documentation what services, if any, they provided to the customer. For another vendor, Microsoft failed to conduct any due diligence and Microsoft employees raised concerns about the competence of the vendor.
Microsoft provided consulting services to OFI, the Hungarian Office of Education. As part of the contract, Microsoft subcontracted with a third-party consultant, who was employed by OFI at the same time.
Microsoft did not conduct any due diligence of the consultant. The consultant’s time was recorded using a false name.
Other Country Conduct
In Saudi Arabia, between 2012 and 2014, Microsoft Saudi Arabia employees diverted at least $440,000 of funds designated for marketing and business development proposals to a slush fund to pay travel expenses for Saudi government employees and for gifts, furniture, laptops, tablets and other equipment.
Microsoft funded the slush fund through larger than usual discounts and payments to two of its vendors and two of its LSPs. The fund was maintained by two of Microsoft’s vendors who disbursed it at the direction of Microsoft employees. The vendors received payments totaling approximately $130,000 for serving as the conduit for purchasing the gifts and arranging the travel for Saudi government officials.
In Thailand, between 2013 and 2015, a Microsoft employee along with an LSP employee provided more than $100,000 in gifts and travel to employees of non-government banking customers while engaged in business with then end customers. The LSP employee set up an account funded through discounts; however, instead of using the money for discounts to the end user, the Microsoft and LSP employees used the proceeds to purchase technology equipment and travel expenses. The LSP employee submitted false purchase order which were improperly recorded in Microsoft’s books and records. The LSP received a fee for creating and submitting a false purchase order.
In Turkey, in July 2014, Turkey’s Ministry of Culture issues a public tender for Microsoft licenses and consulting services. The tender was awarded to a system integrator that was not an authorized LSP. A Microsoft employee did not disclose the role of the system integrator, and there was no evidence that the system integrator provided any services or that the discount was passed on to the end user customer.