Oracle Corporation will pay a $2 million penalty to settle charges brought by the Securities and Exchange Commission (SEC) last week.
The SEC alleged that Oracle violated the Foreign Corrupt Practices Act (FCPA) by failing to prevent a subsidiary from secretly setting aside money off the company’s books that was eventually used to make unauthorized payments to phony vendors in India.
The company neither admitted nor denied violating the law.
Oracle was represented by Leslie Caldwell at Morgan, Lewis & Bockius in New York.
The SEC alleges that certain employees of the India subsidiary of the Redwood Shores, California-based enterprise systems firm structured transactions with India’s government on more than a dozen occasions in a way that enabled Oracle India’s distributors to hold approximately $2.2 million of the proceeds in unauthorized side funds.
Those Oracle India employees then directed the distributors to make payments out of these side funds to purported local vendors, several of which were merely storefronts that did not provide any services to Oracle.
Oracle’s subsidiary documented certain payments with fake invoices.
“Through its subsidiary’s use of secret cash cushions, Oracle exposed itself to the risk that these hidden funds would be put to illegal use,” said Marc J. Fagel, Director of the SEC’s San Francisco Regional Office. “It is important for U.S. companies to proactively establish policies and procedures to minimize the potential for payments to foreign officials or other unauthorized uses of company funds.”
According to the SEC’s complaint filed in U.S. District Court for the Northern District of California, the misconduct at Oracle’s India subsidiary – Oracle India Private Limited – occurred from 2005 to 2007.
Oracle India sold software licenses and services to India’s government through local distributors, and then had the distributors “park” excess funds from the sales outside Oracle India’s books and records.
Oracle India secured a $3.9 million deal with India’s Ministry of Information Technology and Communications in May 2006. As instructed by Oracle India’s then-sales director, only $2.1 million was sent to Oracle to record as revenue on the transaction, and the distributor kept $151,000 for services rendered. Certain other Oracle India employees further instructed the distributor to park the remaining $1.7 million for “marketing development purposes.”
Two months later, one of those same Oracle India employees created and provided to the distributor eight invoices for payments to purported third-party vendors ranging from $110,000 to $396,000. In fact, none of these storefront-only third parties provided any services or were included on Oracle’s approved vendor list. The third-party payments created the risk that the funds could be used for illicit purposes such as bribery or embezzlement.
The SEC’s complaint alleges that Oracle violated the FCPA’s books and records provisions and internal controls provisions by failing to accurately record the side funds that Oracle India maintained with its distributors.
Oracle failed to devise and maintain a system of effective internal controls that would have prevented the improper use of company funds.