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HP Shows Foreign Bribery Can Bite U.S. Companies at Home

Hewlett-Packard (HPQ) is grappling with a bribery scandal in two countries: Germany and Russia. Authorities are looking into claims that the company paid millions in bribes to sell equipment, through a German subsidiary, into Russia. The mess may soon recall military tactics from World War II, because HP's battle on the eastern front could also turn into a struggle on the western front in the U.S.; Chances are good both the SEC and the Department of Justice will open investigations into the matter. For industries like high tech -- whose companies regularly do business in parts of the world where corruption is commonplace -- the possibility of ending up under U.S. scrutiny for "sales tactics" used in another country is a very real risk.

In HP's case, the charge is that several employees paid $10.9 million in bribes through a German subsidiary to win a Russian computer contract. The company has already tried to distance itself from the matter:

"This is an investigation of alleged conduct that occurred almost seven years ago, largely by employees no longer with H.P.," Hewlett-Packard said [in a statement late Wednesday]. "We are cooperating fully with the German and Russian authorities and will continue to conduct our own internal investigation."
According to a German prosecutor, the investigation currently views HP as a victim of the action by a few rogue employees. But in the U.S., none of that may matter, which is why operating in countries were bribery and corruption are more common can become a problem back home.

"I think it's incredibly likely, almost a certainly, that there will be an investigation on the U.S. side, especially since the money allegedly was channeled through shell companies in Delaware and Wyoming," says Matt Reinhard, a Miller & Chevalier attorney who specializes in white collar crime. According to Reinhard, there are two areas in which an investigation, at least, is likely to happen. One is on the civil side through the SEC, which is unlikely to be swayed by HP's claim of victim status:

The SEC requires that companies have adequate controls in place to prevent this very thing from happening. The SEC will say that it may have been rogue employees, but you didn't have sufficient controls in place to prevent this from happening or even alert you it was happening.
A civil case could be no trifle, because SEC penalties can be "pretty severe," including disgorgement of all profits from the transactions in question. If prosecuted and convicted, a company like HP could potentially have to cough up millions that it had made. A concerted effort would also be required to restore the integrity of the HP brand.

It seems fairly certain that the DOJ will investigate whether HP violated the Foreign Corrupt Practices Act. Reinhard thinks that there may already be an investigation under way, because of the close working relationship between German and American anti-corruption authorities after the big Siemens $800 million settlement for allegations of $1.4 billion in bribery payments. That gives an idea of how bad monetarily things can get.

[UPDATE: The SEC has now officially started an investigation of whether HP violated any provisions of the Foreign Corrupt Practices Act, or FCPA.]

If you think that perception of corruption correlates to the actual practice, then some of the biggest foreign countries for U.S. high tech companies have have some of the worst exposure. Transparency International's 2009 Corruption Perceptions Index, based on surveys, rates countries on a 1 to 10 scale, with higher scores meaning that countries are perceived as less corrupt. The top score of 9.4 goes to New Zealand. Germany is in 14th place with 8. The United States sits at number 19 with a score of 7.5. China's score is 3.6, with India getting a 3.4. Russia is at 2.2. Chances of running into trouble -- or having employees who bring it to you -- seem increasingly high, and, as the saying goes, "ignorance of the law is no excuse."

A short aside -- just what do you have to do to get smacked down for bribery in Russia, which has a long-standing reputation for corruption? Could HP, through the actions of some employees, have become the pawn in some internal Russian political fight? Could that turn into yet another source of pain for the company? And one more question: could the equipment exported have violated U.S. technology export controls? There is much to watch, but many US tech firms may have in interest in the outcome.

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