Oracle has agreed to pay a $2 million penalty to settle charges of the U.S. Securities and Exchange Commission that it did not have proper controls to prevent employees at its Indian subsidiary from secretly setting aside funds from the company's books, SEC said on Thursday.
The funds were used to make unauthorized payments to phony vendors in the country, the agency said.
The Redwood Shores, Calif., enterprise software company has agreed to settle the SEC's charges without admitting or denying the allegations. It was charged with violating the Foreign Corrupt Practices Act (FCPA), but the SEC has not explicitly alleged bribery of foreign officials but did say the use of the funds to pay recipients who were not on Oracle's approved local vendor list, and in some cases did not exist or were just storefronts, "created a risk that they potentially could be used for illicit means such as bribery or embezzlement."
In a complaint before a court in California, SEC alleged that from 2005 to 2007 certain employees of Oracle India secretly "parked" with distributors and kept off Oracle India's books about $2.2 million of the proceeds from certain sales to the Indian government.
In the typical business model used by Oracle at the time, purchase orders were placed by customers on the distributor, who in turn bought software licenses and services directly from Oracle for sale to the customer for a margin, according to the complaint on Thursday.
On about 14 occasions related to eight different government contracts, certain Oracle India employees created extra margins between the distributor and end user price and directed the distributors to hold the extra margin in side funds, SEC said in the filing to the U.S. District Court for the Northern District of California, San Francisco division.
The distributor then made payments at the direction of Oracle India employees from the side funds to third parties, purportedly for marketing and development expenses, according to the SEC. Some of the recipients were not on Oracle's approved local vendor list, and in some cases did not exist or were just storefronts.
Between 2005 and 2007, government customers are said to have paid Oracle India's distributors at least $6.7 million on the sales, with Oracle receiving approximately $4.5 million in revenue and the balance of about $2.2 million parked with distributors.
Oracle, for example, booked only $2.1 million in revenue from a $3.9 million deal in May 2006 from India's Ministry of Information Technology and Communications. The balance was held by the distributor, who after keeping $151,000 for his services, was asked by Oracle India employees to park $1.7 million towards disbursement for "marketing development purposes," according to the complaint.
The amount was subsequently disbursed through eight invoices for payment to third-party vendors, which were later found to be fake, and none of the third-party vendors were approved by Oracle and were in fact just storefronts, SEC said in its complaint.
"As directed by the Oracle India employees, the distributor sent out the third party payments, which created the potential that they could be used for bribery or embezzlement," SEC said.