HP, Three Subsidiaries Pay $108 Million To Settle FCPA Charges

by Dorsey & Whitney LLP
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The Russian, Polish and Mexican subsidiaries of Hewlett-Packard Company resolved criminal FCPA charges with the Department of Justice while the parent corporation settled with the SEC. ZAO Hewlett-Packard A.O., or HP Russia, agreed to plead guilty to a criminal information alleging conspiracy and violations of the FCPA bribery provisions. U.S. v. ZAO Hewlett-Packard A.O., CR 14 201 (N.D. Cal.). Hewlett-Packard Polska, Sp.Z.o.o., or HP Poland, resolved FCPA accounting violations by entering into a deferred prosecution agreement (U.S. v. Hewlett-Packard Polska, SP.Zo.o., CR 14 202 (N.D. Cal.)) while Hewlett-Packard Mexico S.D. R.L. de C.V., or HP Mexico, entered into a non-prosecution agreement. In total the three entities agreed to pay $76,760,224 in criminal penalties and forfeiture.

Hewlett-Packard Company, the parent of HP Russia, Poland and Mexico, resolved SEC FCPA books and records and internal control provision charges with the Commission. The firm consented to the entry of a cease and desist order based on Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B). HP also agreed to pay disgorgement of $29 million and prejudgment interest. A portion of the firm’s disgorgement obligation will be satisfied by the payment of $2,527,750 in forfeiture as part of HP Mexico’s resolution with the DOJ. The parent company also agreed to report to the Commission staff periodically, but not less than once each year, for three years on the status of its remedial efforts and the implementation of compliance measures. In addition, the company will report any credible evidence not previously reported of questionable or corrupt payments or transfers of property interests. In sum, the three subsidiaries paid over $108 million to resolve the charges. In the Matter of Hewlett-Packard Company, Adm. Proc. File No. 3-15832 (April 9, 2014).

HP is a global provider of personal computers, printers, software and related items. It operates through wholly owned or indirect subsidiaries. The firm’s operations are organized by geographic regions and sub-regions as well as business units. The foreign subsidiaries were subject to compliance policies and directives developed by HP and implemented at the local subsidiary level by the country or regional management. Although the firm had certain anti-corruption policies and controls they were inadequate.

Russia: Beginning in 2000, and continuing through 2007, HP Russia promised to, and did, pay bribes through agents and consultants to Russian government officials in order to win the first phase of a contract with the Russian government. The project was to automate the computer and telecommunications infrastructure of the Office of the Prosecutor General of the Russian Federation. The total project was worth more than $100 million. The first phase was seen by HP Russia as the path to other business.

To win the tender, HP Russia agreed to partner with a series of third party intermediaries with close ties to Russian officials overseeing the tender. In December 2000 a small U.S. company with ties to the Russian government officials approached HP Russia and warned that the deal was in jeopardy. The subsidiary agreed to pay the agent up to $1.2 million if the deal moved forward and to make it the principal subcontractor. In January 2001 HP Russia secured the contract.

Following an initial failed attempt to finance the transaction through a U.S. export bank, a German bank agreed to finance the deal. When Russian officials considered issuing a new tender and reopening the bidding, HP Russia executives promised to pay the officials €2.8 million through a German agent. Approximately €8 million was passed through the German agent and various shell companies. One of those entities was associated with a senior Russian official.

To facilitate the payments HP Russia maintained two sets of project records. One set identified the recipients of the improper payments. Another version of the same records was sanitized for management in the credit, finance and legal offices outside of HP Russia.

HP Russia’s credit officer initially denied credit approval for the German agent. Questions were raised about the substantial fee. Additional documentation was requested when HP Russia employees claimed that the funds were for various work related to the project. Although a list of purposed subcontractors was furnished to secure approval, the material provided to the credit officer did not identify payment entities.

During the project over €21 million passed through the German agent. The agent retained less than €200,000 of that amount. The balance was passed on. Portions of the money went for goods and services actually provided. A portion of the €8 million paid to the German agent went to shell companies that did not provide any services. Over €311,000 went to bank accounts associated with the Russian government official. Another €2.2 million was wired to the Latvian and Lithuanian accounts of other shell companies. It was used to purchase expensive jewelry, luxury automobiles, travel and for other items. The payments to the agent were falsely recorded in HP’s books and records. Earnings from the project were about $10.4 million.

Poland: From about 2006 through 2010 HP Poland, through certain agents or employees, made improper payments to public officials to secure and maintain contracts with Komenda Glowna Policji or KGP , the Polish national police academy. Payments were made in the form of cash bribes, travel and entertainment and gifts to the KGP’s Director of Information and Communications Technology. The official was give bags filled with cash totaling hundreds of thousands of dollars, HP desktop and laptop computes, mobile devices and leisure trips to Las Vegas.

Overall at least $600,000 in cash, gifts worth over $30,000 given in violation of company policy, and several thousand dollars in travel and entertainment benefits were paid by HP Poland. In return the Polish government awarded at least seven contracts for KPG-related information technology product and services with an overall value of $60 million. To conceal communications regarding the scheme executives used anonymous email accounts and prepaid mobile telephones.

Mexico: In 2009 HP Mexico paid commissions to an entity with ties to Mexican public officials in connection with its bid to obtain lucrative government contracts. In mid-2008 the subsidiary began seeking business form Pemex, the Mexican state-owned petroleum company. The software and licensing contracts it sought were worth about $6 million. To secure the contracts HP Mexico retained a third-party consultant with close ties to senior executives of Pemex. It then agreed to pay a $1.41 million commission to the consultant. The consultant and commission were not approved in accord with HP procedures. Accordingly, the arrangement was funneled through a previously approved HP channel partner.

Cooperation: The DOJ and the SEC acknowledged the cooperation of HP. It consisted of conducting what the DOJ termed a “robust” internal investigation; voluntarily making U.S. and foreign employees available for interviews; collecting, analyzing and organizing voluminous amounts of evidence; and taking extensive anti-corruption remedial efforts. Those efforts included appropriate disciplinary action against culpable employees and enhancing internal controls.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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