Technology Company Resolves DOJ And SEC FCPA Allegations, With Hungary Subsidiary Entering Three-Year, Monitor-Free NPA

Shearman & Sterling LLP

Shearman & Sterling LLP

On July 22, 2019, the United States Department of Justice (“DOJ”) and Securities and Exchange Commission (“SEC”) announced that they had resolved allegations of Foreign Corrupt Practice Act (“FCPA”) violations against Microsoft Corporation and one of its wholly owned subsidiaries, Microsoft Magyarország Számítástechnikai Szolgáltató és Kereskedelmi Kft. (“MS Hungary” and, together with Microsoft Corporation, “Microsoft”).  As part of the settlement, Microsoft agreed to pay a total of approximately $25 million to the DOJ and the United States Securities and Exchange Commission (“SEC”), and MS Hungary entered into a three-year non-prosecution agreement (“NPA”).  See Non-Prosecution Agreement, Microsoft Magyarország Számítástechnikai Szolgáltató és Kereskedelmi Kft. (July 22, 2019); DOJ Press Release, Hungary Subsidiary of Microsoft Corporation Agrees to Pay $8.7 Million in Criminal Penalties to Resolve Foreign Bribery Case (July 22, 2019); In the Matter of Microsoft Corporation, Exchange Act Release No. 86421 (July 22, 2019).

The DOJ allegations focused exclusively on MS Hungary, which is a wholly owned Microsoft subsidiary that markets Microsoft’s products to various end-users, including Hungarian governmental agencies.  According to the admitted facts in the NPA, from 2013 to June 2015, certain employees and at least one senior executive of MS Hungary misrepresented to Microsoft that the company would have to offer steep discounts in order to sell software licenses and related products to the Hungarian government.  Microsoft approved the requested discounts and recorded them in its books and records, but the lower prices were not passed on in full to end-users.  Rather, the discounts were secretly retained in the Microsoft sales channel and used to fund corrupt payments to government officials.  In total, the DOJ alleged that MS Hungary caused Microsoft to report false discounts for a number of licensing deals that resulted in cumulative profits of approximately $14.5 million, but was only required to pay a fine of $8,751,795 as part of the NPA.

Although the involvement of a high-level executive in the discount scheme weighed against the company, the NPA nevertheless provided MS Hungary a discount of 25% from the United States Sentencing Guidelines because of multiple other factors, including the lack of any prior disciplinary history, “full credit” for cooperation and MS Hungary’s decision to engage in “extensive remedial measures.”  Notably, although the DOJ imposed a three-year reporting requirement, it found that an independent compliance monitor would be “unnecessary” in this case—another example of the DOJ’s shift away from presumptively requiring independent monitoring.  Instead, the NPA praised MS Hungary’s commitment to enhancing its compliance programs and internal controls, specifically mentioning the company’s overhaul of its transaction monitoring systems and discount transparency requirements.

Meanwhile, the SEC’s allegations included details of operations in several countries beyond Hungary, but like the DOJ, the SEC recognized remedial efforts and cooperation.  The SEC alleged that Microsoft violated the books and records provisions of the FCPA, but allowed Microsoft to resolve the allegations in an administrative proceeding on a neither-admit-nor-deny basis.  Microsoft agreed to pay $13,780,733 in disgorgement (an amount notably less than the profits alleged by the DOJ), plus pre-judgment interest but was not required to pay a separate civil penalty in light of the DOJ fine.  Notwithstanding the admitted facts in the NPA, Microsoft did not admit or deny any of the SEC’s allegations.

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