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Application of Forensic Accounting Concepts

CASE STUDY 28: Fighting International Fraud With the FCPA -

HEWLETT -PACKARD'S CURRENT PROBLEMS WITH INTERNATIONAL KICKBACKS

Andrew and Susie were on a Midwest college campus discussing current events over lunch. Susie found an article about one of the tropics they were studying in law and fraud class and brought it to Andrew's attention. "Andrew I just read in the Wall Street Journal (Crawford, 2012) that the Hewlett-Packard(HP) criminal bribery case the studied in class last semester is finally heating up. Remember the case was about a Germain branch of HP bribing a Russian official. The article says that German prosecutors filed bribery, tax evasion and embezzlement charges against Hilmar Lorenz, a German and former H-P marketing executive in Russia; ken Willard , a Germany based American H-P Manager, and Paivi Tiippana, a Finn and former manager at the company. Prosecutors also indicted ralf Krippner, local German politician and businessman as an accessory.

The indictment alleges that Kripper billed and H-P subsidiary for services that were never performed and helped relay the funds,"Susie noted", This case has not yet been brought to a U.S court . The Securities and Exchange Commission (SEC) is still investigating. If I remember correctly from articles we read (Yanner and Fuhr, 2010), the investigation began in 2007 after a German tax auditor became suspicious of payments totaling $ 22 million that a German HP subsidiary made to a small computer hardware firm near Leipzig from 2004 to 2006. They suspect Russian Officials received $ 7.5 million in KickBacks for a 35 million dollar contract to sell computer gear to Russia's Prosecutor General office, the very office responsible to stop bribes. (Crawford, 2012)"

Susie continued , " The HP subsidiary recorded the payment as having been made for services rendered in Moscow. The investigation also identified three payment intermediaries9Shell companion multiple jurisdictions) and a Moscow based computer supplier with foreign bank account as having conspired with HP to perpetrate the alleged bribery scheme. Using HP funds, the intermediaries, based in the former East German, allegedly paid fake invoices for equipment to the Shell companies, The Illicit funds then flowed through bank accounts all over the Wor, including the U. K., the U.S., New Zealand, the British Virgin Islands, Latvia, Lithuania, Belize, Austria, and Switzerland before making their way to Russia.(Yannet, and Fuhr, 2010)

This story is an International intrigue. The SEC has yet to file charge using the Foreign Corrupt Practices(FCPA) act of 1977. It amazes me how long it takes to bring these people and companies to justice. And, it seems like the HP employees did not even benefit from the fraud Expect for getting credit for the sale. I am looking forward to studying more international FCPA violations in our fraud and forensics course. It really takes a lot of information gathering and drilling down into the details to be able to bring a case like this to court. Andrew, what I don't get is that I thought all these U.S. companies have a code of conduct and policies to prohibit their employees from offering bribes to foreign officials. I thought the FCPA required the U.S. companies have accounting systems with adequate controls to prevent these fraudulent KickBacks. It has been years since the law was passed. How can this still be happening?

Individual Assignments.

Although the FCPA has been around since 1977, it is not until the last 12 years that the SEC has annually indicted multiple U.S. companies doing business in foreign countries using the FCPA. To gain an understanding of the FCPA, go to SEC's website http://www.sec.gov/spotlight/fcpa.shtml and click on the FCPA(Securities and Exchange Commission, 2012b) hyperlink on the bottom left.

Then answer the following questions.

1. Download the document, A Resource Guide to the U.S. Foreign Corrupt Practices Act(Criminal Division of the U.S. Department of Justice and the Enforcement Division of the U.S. Securities and Exchange Commission). A. Read Chapter 1," Introduction" which describes the scope of the FCPA, discusses the costs of corruption, and covers the evolution of the law as well as how the SEC partners with the Department of Justice to fine companies and imprison those that break the law. It also provides an introduction to the efforts of the Commerce and State Departments to assist U.S. companies by advancing anti-corruption and good governance initiatives as well as an introduction to the international landscape. B. Read Chapter 2, "The FCPA: Anti-bribery Provisions," which explains the anti-bribery provisions. C . How can a law that was enacted more than 35 years ago still be relevant today? 2. Review the annual list of enforcement actions by calendar year for the past five years. From the SEC website, select a sample of five companies to read about in more detail . What strikes you about the companies you received and their crimes? Go to www.cbsnews.com/8301-18560_162-4080920.html and view The Prices of Bananas video . you will also find the transcript of the video at that link. Be ready to discuss the video in class. a. Chiquita Banana was making payments to a militant group , how does this action fall under the FCPA? b. What would you have done if you were faced with threats of deadly action against those that worked at the Chiquita banana facilities under your supervision? c. What has been some of the fallout for Chiquita Banana? 3. Answer the questions in the FCPA Survey in the Appendix, be ready to defend your choice based on your understanding of the FCPA and your personal beliefs.

4. To learn about the code of conduct, read the article , "Use to Code", by Paine, L, Deshpande, R., Margolis, J ., and Bettcher, K. (2005) Harvard Business Review, 83(12), 122-133,

then answer the following questions:

a. Should a Company have a Uniform global code of conduct policy? Why or Why not?

b. Should these policies be implemented globally, or at a regional, country, or local level?

c. Should companies have specific global policies regarding gifts, gratuities, payments, entertainment, conflicts of interest, and related matter? Why?

d. Who should be responsible for communicating, monitoring, and enforcing the company's policy?

Team Assignments

Based on what you have learned above by completing the individual assignment questions, work with your team to complete the following:

1. On the SEC website, select a company from the SEC FCPA enforcement actions list from the two most recent years. click on the case on the SEC's website for additional information about the company, situations and issues.

2. Research the company to find their code of conduct. After reading their code, do you believe that management breached their duty to the company? Explain Your Answer.

3. Find a least three other references(e.g. documents, articles, web links) about the company's problems with the SEC.

4. Was the case you identified a civil or criminal proceeding? Explain the difference between the two types of indictments.

5. Were the parties involved fined and/ or served jail times? Where are Quilty parties today?

6. Write a five(5) page memo to the Board of Directors and create a 10 minutes Power point presentation to explain the fraud to the class. Includes a listing of who was involved in the fraud and their home country, how the fraud was perpetrated, how that led the company to be indicted by the SEC. and subsequent conviction or fines. Also explain the financial and nonfinancial cost to the company. Include the information you found in question 2 to 5 .

Investigate the website below and the latest Corruption Perceptions Index (CPI). How should this index raise concerns about doing business in countries that have the higher corruption ratings?

http://www.transparency.org/research/cpi/overview. Note the U. S. (or your home country) ranking. Was the Company your group researched doing business in countries included in the CPI?

If yes , what were the countries scores and rankings in the latest published CPI?

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