From Russia with concern: Cisco's audits raised red flags about resellers

Wed May 14, 2014 11:31am EDT
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By Marina Lopes and Aruna Viswanatha

NEW YORK/WASHINGTON (Reuters) - 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 February 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 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, 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.   Continued...

A visitor walks past a Cisco advertising panel as she looks at her mobile phone at the Mobile World Congress in Barcelona February 27, 2014. REUTERS/Albert Gea