FCPA: Internal Controls and Discounts

In terms of anti-bribery compliance, discounts have been found to serve as a means of facilitating the payment of bribes.  Discounts accorded to distributors and third parties not passed on to the end users require special attention.  Discounts have at times been used to divert funds for the payment of improper inducements.  This is particularly so in situations where deep discounts or discounts that may not be standard discounts are used.  In many of these situations, records are often falsified or misleading to justify the discounts.

The U.S. Securities and Exchanges Commission (“SEC”) has found that internal controls must be implemented to ensure that discounts are appropriately passed through to end users.  In the SEC’s resolution with Microsoft,1 the cease-and-desist order made specific note

that payments were made through third party vendors, consultants, distributors and resellers, including in circumstances where there was no evidence of any services provided by the third parties. Improper payments were also funded through excessive discounts that Microsoft’s senior executives in Hungary approved based on vague justifications without ensuring they were passed on to the end government customers.2

In the Microsoft matter, foreign subsidiaries of Microsoft were directly involved.  The practice was for discounts more than standard discounts were to be justified and approved by the subsidiary.3  In terms of the internal controls, the order found that “Microsoft did not have sufficient procedures in place to determine whether the discount requests were legitimate and whether the approved discounts were being passed on to end customers.”4

The situations cited by the cease-and-desist order related to a government-related procurement opportunities or “tenders,”5 which, from an anti-bribery compliance perspective, often pose a greater risk of corruption.   Also involved was the provision of service agreements to Hungarian government end users.6  In many instances, false or misleading records were prepared to indicate that work was performed when the work was not actually been performed.7

Violations of both the FCPA‘s record-keeping and internal control violations were found.8  While the violations related to an issuer subject to the accounting and record-keeping provisions9, the underlying practices, that is, the use of discounts and the falsification of records to justify the discounts, should be a focal point of any effective anti-bribery compliance program.  In short, such practices need to be careful review and monitoring to ensure that they are not being used for improper purposes.

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1Order Instituting Cease-and-Desist Proceedings, In the Matter of Microsoft Corporation, Admin. Proceeding No. 3-19260 (July 22, 2019).

2Id. at ¶ 2.

3Id. at ¶ 16.

4Id. at ¶ 16.

5Id. at ¶¶ 17-22.

6Id. at ¶ 23.

7Id.

8Id. at ¶¶ 28-29.

9Id. at ¶ 5.  15 U.S.C.§§ 78m(b)(2)(A), (b)(2)(B).

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