Is There Another Bribery Case Brewing In IBM Poland?

| About: International Business (IBM)

Summary

Examining potential repeat violations of the FCPA.

IBM's illicit creativity in securing international contracts.

Investment implications for companies under international bribery investigation.

At first, the gifts seemed innocent enough: a free dinner and a private helicopter tour over the Grand Canyon. By the end of it, though, the Polish official was standing in a Warsaw parking lot, accepting $100,000 in bags of cash, given to him in exchange for multi-million-dollar government contracts.

You might be thinking that this government employee was being paid off by the mafia or some shadowy military contractor, but think again: According to the SEC and Polish prosecutors, the official was allegedly bribed by white-collar executives within Hewlett Packard (NYSE:HPQ) and IBM (NYSE:IBM), the American blue chip technology firms.

In 2014, the SEC charged HP with violating the Foreign Corrupt Practices Act in Poland. At the time, the agency explained HP executives "provided gifts and cash bribes worth more than $600,000 to a Polish government official to obtain contracts with the national police agency."

Click to enlarge

source: SEC - here

But after four years, in our view, regulators have taken no significant action on IBM to dissuade this type of behavior. For investors, bribery allegations against a company are incredibly important. It's a signal that the company might have an inferior product and it's struggling to compete in the marketplace.

Worse, it may also mean that the company has weak internal controls in place - which should really send shivers down your spine. Let me explain.

Corporate Quid-Pro-Quo

It all began in the fall of 2006 when Andrejz Machnacz, the Polish official identified by the investigative news site ProPublica, traveled to a conference in San Francisco. Machnacz held an important role within the Polish government: He controlled billions of dollars in government IT contracts and he apparently wasn't all that interested in playing by the rules.

"In the buttoned-down world of government officials who oversee computer contracts, Poland's Andrzej Machnacz cut a colorful figure," wrote investigative reporter Stephen Engleberg who covered the case. "He enjoyed fine cigars and tooled around Warsaw on a motorcycle."

As the SEC details in its report, it was after the 2006 conference when Machnacz returned to Poland, and the real bribery began.

HP executives allegedly showered Machnacz with iPods, flat screen televisions, cameras and a home theater system. In one instance in 2007, according to the SEC, an HP exec left a bag filled with $150,000 in cash outside Machnacz's home. To communicate, HP executives even devised a system of creating fake email accounts, sharing the password with Machnacz, and leaving messages for him saved in the "draft" folder.

source: SEC - here

Of course, there was a quid-pro-quo: For all the "favors" Machnacz received, he allegedly helped secure contracts for HP worth tens of millions of dollars. The HP executives rewarded Machnacz handsomely - he received a 1.2% commission of the revenue generated from some of the contracts, apparently on top of the cash bonuses he received. All the money came from off-the-books accounts.

In other words, it was a clear-cut case of bribery. HP settled out of court for $108 million, and the news cycle moved on.

And yet, as ProPublica makes very clear in its 2013 article, IBM was very much enmeshed in a similar bribery scandal with Machnacz. Polish prosecutors alleged that an IBM employee, Marcin Figiel, "gave Machnacz nearly $60,000 in brand-name consumer products" in exchange for a contract to design software for police.

Figiel was arrested in 2012 and apparently went on a hunger strike while in jail, alleging that American IBM employees were in on the bribes, according to Polish media. "Meanwhile, IBM employees from the US testified that they do not interfere in the details of tenders," according to a translation of a Nov 3, 2014 article in Fakt, a Polish tabloid.

So right now, it's a he-said she-said. And without a full investigation by regulators, we still don't have answers to a couple of major questions: First, what was IBM's specific role in bribing Machnacz? And second, did executives in New York know about the bribes?

IBM, for its part, has consistently disclosed the SEC investigation its quarterly reports. In its most recent annual report, the company noted: "In early 2012, IBM notified the SEC of an investigation by the Polish Central Anti-Corruption Bureau involving allegations of illegal activity by a former IBM Poland employee in connection with sales to the Polish government. IBM is cooperating with the SEC and Polish authorities in this matter. In April 2013, IBM learned that the U.S. Department of Justice (DOJ) also is investigating allegations related to the Poland matter, as well as allegations relating to transactions in Argentina, Bangladesh and Ukraine."

Still, the company has provided very few details about what's happening with the Polish investigation, which to me, is concerning. After all, there's a history with IBM and foreign bribery schemes.

Multiple FCPA Violations

In 2011, IBM reached a settlement with the SEC on charges that company reps gave over $200,000 in bags stuffed with cash to Chinese and South Korean officials in exchange for $54 million in government contracts. In that case, IBM neither admitted nor denied violating the law, but agreed to settle the case for $10 million - not a particularly huge fine for a company with a market cap of $150 billion.

Interestingly, the federal judge who was tasked with approving the settlement, Richard Leon, wouldn't approve the deal so easily. In court, Leon criticized what he perceived as a cozy relationship IBM seemed to enjoy with regulators. "I am not going to just roll over like the SEC has," he said in late 2012.

So Where's The Repercussions?

In company filings, IBM first notified the SEC in "early 2012" that they were facing an investigation by Poland's anti-corruption bureau, the CAB, regarding "allegations of illegal activity by a former IBM Poland employee in connection with sales to the Polish government." The company notes that it "is cooperating with the SEC and Polish authorities in this matter."

Still, no actions have been taken.

It gets more puzzling. On April 30, 2013, IBM reported in company filings that the Department of Justice (DOJ) is also "investigating allegations related to the Poland matter, as well as allegations relating to transactions in Argentina, Bangladesh and Ukraine."

So let's recap: Two federal agencies have been investigating IBM's behavior in Poland related to bribes for the last four years, following a major bribery scandal in China and South Korea settled in 2011. On top of that, there appears to be a brand new IBM bribery case brewing in Poland.

Yes, you read that correctly: Just this past summer, the Polish anti-corruption police raided IBM's offices - again!

Though the news has not yet been reported by any American media outlets, on July 20, 2016, federal agents from Poland's anti-corruption bureau stormed the offices of IBM, as well as Comarch, the global IT firm, two Polish universities and the National Centre for Research and Development, according to Polish media.

A translation of an article that ran in WRPost, a Polish newsweekly, reads in part that "prosecutors suspect the former chairman of the Centre for accepting bribes in exchange for favorable decisions."

CBA - Poland's anti-corruption bureau.

Ten days after that raid, the general manager of IBM Poland, Ales Bartunek, offered up a Q&A to Rzeczpospolita, a Warsaw-based newspaper, where he was asked about the recent "visit" by agents. "As a responsible company we cooperate with state authorities, responding to queries that are addressed to us, and do not comment on the details," he said according to the translation.

So, the million-dollar question, of course, is given the history of bribery at IBM and the detailed allegations in the Polish court case, why hasn't the federal government moved forward with an independent investigation on IBM's actions in Poland?

Whether or not Armonk executives knew about these bribes, it stands to reason, in our view, that IBM should face the same sort of scrutiny that HP faced in its own Polish bribery scandal. And while I can't confirm it, I have a feeling at least one federal judge is presumably watching: Judge Richard Leon.

Back in 2013, when Judge Leon agreed to settle the Chinese and South Korean bribery case with IBM, he made it very clear to everyone in the courtroom that if there were any other foreign bribery cases , IBM would likely have to contend with more than just a $10 million slap on the wrist.

"If there's a problem in the next two years," Leon said, "obviously it won't be a day like today - it won't be a happy day."

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