(Updating with background on Cisco)
By Marina Lopes and Aruna Viswanatha
NEW YORK/WASHINGTON May 14 In a series of
audits in 2009, Cisco Systems Inc found that much of
the business between resellers of its products and a Russian
state-owned telecommunications company, Svyazinvest, could not
be verified because it was either "misrepresented" or documents
were withheld by the resellers, according to an executive
summary of the audits reviewed by Reuters.
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.
San Jose, California-based 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 Feb. 20, without elaborating further.
Cisco, which is one of the world's largest telecom equipment
companies, 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
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
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.
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
"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.
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
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