Wednesday, August 21, 2013

US Investigating Microsoft Bribery in Pakistan's Punjab

Executives of Microsoft Pakistan are facing allegations of bribery in Punjab, a violation of US Foreign Corrupt Practices Act (FCPA).

Reports in US media indicate that an unnamed provincial minister in Punjab government and his wife traveled to the United States in December 2009 to close a $9 million deal for Microsoft Office software. The trip was booked by a travel agent working for Microsoft. Microsoft paid the costs of business class fare and stay at a luxury hotel in the United States, according to the Wall Street Journal.

A similar investigation is underway by the US Justice Department into allegations of kickbacks given by Microsoft to officials in Russia.

Microsoft says it has also started an internal investigation into the corruption allegations which it takes very seriously.  It is the result of an email tip to Microsoft.

Under the US Foreign Corrupt Practices Act (FCPA), all American companies are required to provide details of illegal payments made in foreign countries.

Similar allegations surfaced in FCPA cases relating to Siemens, Paxar and other foreign entities in Pakistan. Paxar Corporation, a New York listed company acquired by Avery, acknowledged paying $30,000 to bribe Pakistani customs officials in 2008 through its local customs broker. Avery, a California-based company, manufactures and markets various office products in several dozen countries around the world.

Raymond Baker, author of "Capitalism's Achilles Heel", has detailed billions of dollars worth of bribes received by government leaders in several developing countries including Pakistan.  Here's a brief except from Baker's book on Sharif family:

"At least $160 million pocketed from a contract to build a highway from Lahore, his home town, to Islamabad, the nation’s capital. At least $140 million in unsecured loans from Pakistan’s state banks. More than $60 million generated from government rebates on sugar exported by mills controlled by Mr. Sharif and his business associates. At least $58 million skimmed from inflated prices paid for imported wheat from the United States and Canada. In the wheat deal, Mr. Sharif ’s government paid prices far above market value to a private company owned by a close associate of his in Washington, the records show. Falsely inflated invoices for the wheat generated tens of millions of dollars in cash."

Baker mentions the use of several offshore entities in British Virgin Islands and Channel Islands controlled by the family of Prime Minister Nawaz Sharif to launder billions of dollars received in bribes.

Similar details are offered in the book that explain how Bhutto-Zardari family have siphoned off money from deals made by Pakistan government. Here's a more extensive excerpt from Baker's book:

Upon taking office in 1988, Bhutto reportedly appointed 26,000 party hacks to state jobs, including positions in state-owned banks. An orgy of lending without proper collateral followed. Allegedly, Bhutto and Zardari “gave instructions for billions of rupees of unsecured government loans to be given to 50 large projects. The loans were sanctioned in the names of ‘front men’ but went to the ‘Bhutto-Zardari combine.’ ” Zardari suggested that such loans are “normal in the Third World to encourage industrialisation.” He used 421 million rupees (about £10 million) to acquire a major interest in three new sugar mills, all done through nominees acting on his behalf. In another deal he allegedly received a 40 million rupee kickback on a contract involving the Pakistan Steel Mill, handled by two of his cronies. Along the way Zardari acquired a succession of nicknames: Mr. 5 Percent, Mr. 10 Percent, Mr. 20 Percent, Mr. 30 Percent, and finally, in Bhutto’s second term when he was appointed “minister of investments,” Mr. 100 Percent. The Pakistan government’s largest source of revenues is customs duties, and therefore evasion of duties is a national pastime. Isn’t there some way to tap into this major income stream, pretending to fight customs corruption and getting rich at the same time? Of course; we can hire a reputable (or disreputable, as the case may be) inspection company, have the government pay the company about a one percent fee to do price checking on imports, and get multimillion-dollar bribes paid to us upon award of the contracts. Société Générale de Surveillance (SGS), headquartered in Switzerland, and its then subsidiary Cotecna, the biggest group in the inspection business, readily agreed to this subterfuge. Letters in 1994 promised “consultancy fees,” meaning kickbacks, of 6 percent and 3 percent to two British Virgin Island (BVI) companies, Bomer Finances Inc. and Nassam Overseas Inc., controlled by Bhutto and Zardari. Payments of $12 million were made to Swiss bank accountsof the BVI companies. SGS allegedly has paid kickbacks on other inspection contracts around the world. Upon being accused in the inspection kickback scheme, Bhutto sniffed, “I ran the government to the best of my honest ability. And I did it for nothing but acknowledgment and love.” Then there was the 1994 deal to import $83 million worth of tractors from Poland. Ursus Tractors allegedly paid a 7 percent commission to another of Zardari’s Caribbean companies, Dargal Associated. Bhutto waived import duties on the tractors, costing the Pakistani government some 1.7 billion rupees in lost revenues. Upon discovery of this scheme the Poles hastened to turn over 500 pages of documentation confirming the kickback. The Polish tractor deal was just a warm-up for the French fighter jet deal. After the U.S. government cancelled a sale of two squadrons of F-16s, Bhutto dangled a $4 billion contract for Mirages in front of the French—Dassault Aviation; Snecma, the engine manufacturer; and Thomson-CSF, producer of aviation electronics. Without missing a beat they allegedly agreed to pay a “remuneration” of 5 percent to Marleton Business S.A., yet another of Zardari’s British Virgin Island companies. This would have generated a tidy $200 million for the Bhutto-Zardari couple, but unfortunately for them she was driven from office before they could collect. Ah, but the gold deal gave some comfort to these aspiring kleptocrats. Gold is culturally important in the Asian subcontinent, in particular as a way for women to accumulate wealth. Upwards of $100 billion is invested in this unproductive asset in Pakistan, India, and surrounding countries. Smuggling is big business. Ostensibly to regulate the trade, a Pakistani bullion dealer in Dubai, Abdul Razzak Yaqub, asked Bhutto for an exclusive import license. In 1994, yet another Zardari offshore company, M.S. Capricorn Trading, was created in the British Virgin Islands. Later in the year, Jens Schlegelmilch, “a Swiss lawyer who was the Bhutto family’s attorney in Europe and close personal friend for more than 20 years,” opened an account for Capricorn Trading at the Dubai branch of Citibank. According to a 1999 U.S. Senate report: “Mr. Schlegelmilch did not reveal to the Dubai banker that Mr. Zardari was the beneficial owner of the PIC [private investment company], and the account manager never asked him the identity of the beneficial owner of the account. . . . Shortly after opening the account in Dubai, Mr. Schlegelmilch signed a standard referral agreement with Citibank Switzerland private bank guaranteeing him 20 percent of the first three years of client net revenues earned by the bank from each client he referred to the private bank.” In other words, Citibank was contracting to pay a finder’s fee for millions brought in from dubious sources. Citibank went on to open three accounts in Switzerland for Zardari, with Schlegelmilch as the signatory. In October 1994, Citibank records show that $10 million was deposited into Capricorn’s Dubai account by Razzak Yaqub’s company, A.R.Y. International Exchange. In December, Razzak Yaqub received an exclusive import license and proceeded over the next three years to ship more than $500 million in gold to Pakistan. Additional deposits flowed into the Dubai and Swiss Citibank accounts, and funds also were shifted to Citibank Channel Island subsidiaries. The original ceiling on the accounts of $40 million was reached quickly.

 Related Links:

Haq's Musings


Avery Acknowledges Bribing Pakistani Officials

FCPA Violations Involving Indian Entities

The Story of Graft

Anti-Corruption Day, Blagojevich and Zardari

Bhutto Convicted in Switzerland

Corruption in Pakistan

Transparency International Survey 2007

Is Siemens Guilty?

Zardari Corruption Probe


Shams said...

Not condoning bribes per se, this airfare & hotel things is very, very ordinary. When I worked for PIA, we got tons of facilities from Boeing, Airbus, and McDonald Douglas --- free cars, sightseeing trips, etc. PIA gave free first class tickets to Boeing employees. My company routinely pays for airfare and hotel for Pakistani DOD officials who come here for equipment inspections before we could ship them.

Riaz Haq said...

Shams: " this airfare & hotel things is very, very ordinary."

I see it as only the tip of an iceberg...serious investigation,if undertaken, will reveal's a 9 million dollar deal.

Shams said...

$9 million deal is peanuts, even for Pakistan. Nawaz Shariff gave away $640 million to LM/GD and never got the airplanes; the US sent them rotten wheat that the US cows had refused to eat. Nawaz and the generals kept their kickbacks nonetheless.

Riaz Haq said...

Shams: "$9 million deal is peanuts, even for Pakistan"

Peanuts add up to a big heap with all the deals done by govt ministers...sharifs get their cut from each.

Anonymous said...

not one executive in the BFSI sector was found guily for the biggest financial crisis since the great depression(See Inside Job)

Putting people disproportionally non white in jail for relatively much minor offences(Rajat Gupta etc) does not really increase credibily of the US institutions..

Hopewins said...

^^Anon: "Putting people disproportionally non white in jail for relatively much minor offences(Rajat Gupta etc) does not really increase credibily of the US institutions"

Before you scream "racism", take another look at the facts.

Rajat Gupta was convicted of insider trading, which IS a crime. Yes, it may not have hurt too many people, but it was a crime. Similarly, Madoff was also convicted for running a Ponzi scheme and he was a White Jew. Where is the "unfairness" that tests the credibility of US institutions?

The banking crisis was caused by stupid people (CEOs) taking on risks they did not really understand. While this was indeed very foolish, and did great damage everywhere, it was NOT criminal.

You cannot throw people in jail for their foolishness, regardless of how much economic damage said foolishness may have caused. The Law requires a specific criminal offense to have occurred.

This is the way the world works. Let us stop whining and accept the realities.

Anonymous said...

The financial crisis was not triggered by 'foolishness'.

It was triggered by a hijacking of political forces and systematically dismantling the institutions that had kept finance stable with a view to make super normal profits in the short term with which bonuses were linked knowing full well that they would be bailed out by politicians whose campains the BFSI industry contributes to if things went wrong.

This is not foolishness it is a completely unethical criminal genius in action.

Actions that would be illegal in most countries such as bllatant lobbying for self interest were made legal often with retrospective effect the citibank and travellers merger was illegal then clinton changed the law post fact to retrospectvely make it legal!

watch Inside Job.Brilliant doumentary!

Hopewins said...

^^Anon: "Actions that would be illegal in most countries such as bllatant lobbying for self interest..."

This is TRUE is all democracies. The corporations do it, the unions do it. The religious groups do it, the atheists do it. The heterosexuals do it, the homosexuals do it. Everyone does it and it is part of the democratic process in developed countries.

Take for example, India's RTE Act-- this is obviously a piece of legislation lobbied and passed by the powerful Teachers' Unions. And they did it not do it for "our children and our society" as they disingenuously claimed, but for their own self-interest (jobs for life, no competition, above-market wages, no accountability etc).

The same is true for the massive resistance by organized trades unions to labor-law reform in India. All these unions have a strangle-hold on the Indian government. They are clearly acting in their own self interest (jobs for life, guaranteed promotion, no output targets, extorting above-market wages etc), while acting against the interest of millions of job-seekers who cannot get jobs because of lack of investment arising from the same excessively rigid labor laws.

Is all of this also "unethical"? Should these powerful unions with their own version of "criminal genius" be allowed to lobby at all?

Khalid said...


Syed said...


There should be no surprise. This is a common incident in Pakistan. Authroties who can manage indulge in such sort of corrupt practices. In fact only that man is honest who has no opportunity or approach to indulge in corrupt practices. If a Punjab minister has done it, this is tradition. Shame on our people who dishonor the nation.

Riaz Haq said...

Pakistani tax officials said they arrested two executives employed by a local arm of computer giant Hewlett-Packard Co. HPQ -1.09% on suspicion of corporate tax evasion.

Arrests are a preliminary step in Pakistani legal proceedings. The two were detained following a raid on offices of a large Pakistani computer seller that found records that allegedly indicated equipment wasn't properly taxed.

The officials indicated the tax evasion accusations could be expanded after further investigation. They said many of the allegedly untaxed goods could not have been brought into Pakistan without the knowledge of customs authorities.

Tanveer Malik, director of intelligence and investigation for the country's Federal Board of Revenue, said Shahid Ali Khan, H-P Pakistan's country general manager for printing and personal systems, and country controller Salim Rawjani were arrested in Karachi after the agency received "overwhelming evidence" of wrongdoing.

Efforts to reach Messrs. Khan and Rawjani were unsuccessful.

Mr. Malik said the government agency "found no evidence" of the U.S.-based company's involvement in the alleged wrongdoing.

"We have no comment at this time, other than to say that H-P adheres to the highest ethical standards," a spokeswoman for H-P in California said.

Mr. Malik said the arrests were tied to an investigation that began with a February raid on the warehouse of Advance Business Systems Pvt Ltd., one of Pakistan's largest computer systems distributors. ABS could not be reached for comment.

Records seized during the raid eventually led to charges being filed against ABS management for sales tax evasion, he said. "The evasion was done by under-invoicing the products," Mr Malik said.

He said the probe led to Dell Inc. and H-P's Pakistani units, which were asked to provide records and details of their transactions with ABS.

"Dell replied promptly and gave us full compliance," Mr. Malik said. H-P Pakistan managers declined to share information, he said.

A Dell spokesman said it complies with laws and regulations in all jurisdictions and cooperates with law enforcement when necessary.

Riaz Haq said...

Grave financial irregularities, undue favouritism, misuse of official authority and corruption to the tune of billions of rupees have surfaced in the Punjab government’s laptop scheme launched in their previous term, Pakistan Today has learnt.

The Punjab government distributed 110,000 laptops to university students across the province allegedly to counter the rising popularity of Pakistan Tehreek-e-Insaf (PTI) Chairman Imran Khan among the youth just one year before the 2013 General Elections.

However, a special audit conducted by the government’s own wing – the Auditor General’s Office – pointed out serious corruption in the scheme.

The laptop distribution scheme was themed as, “Advancement of information technology amongst students through provision of laptop computers,” for the year 2011-12.

Documents available with Pakistan Today reveal that the price of one laptop was shown as Rs 20,000 as approved by the Provincial Development Working Party (PDWP) in October 2011 for a dual-core Dell machine. However, two months later, the PC-I of that scheme was revised and the laptop price was increased from Rs 20,000 to Rs 37,950 per piece without changing the original specifications.

Hence, the prices were jacked up without any justification, causing a direct loss of Rs 2 billion to the public exchequer.

Moreover, the project to enhance IT labs in Punjab schools – a project of the School Education Department – was rolled up and Rs 2 billion finances were diverted to the Higher Education Department (HED) for the laptop scheme without any provision under the rules.

Riaz Haq said...

#Aid in reverse: Net flow of $2 trillion from poor to rich nations recorded in 2012. #Trade #Investment #Interest

...for every $1 of aid that developing countries receive, they lose $24 in net outflows. These outflows strip developing countries of an important source of revenue and finance for development. The GFI report finds that increasingly large net outflows have caused economic growth rates in developing countries to decline, and are directly responsible for falling living standards.

In 2012, the last year of recorded data, developing countries received a total of $1.3tn, including all aid, investment, and income from abroad. But that same year some $3.3tn flowed out of them. In other words, developing countries sent $2tn more to the rest of the world than they received. If we look at all years since 1980, these net outflows add up to an eye-popping total of $16.3tn – that’s how much money has been drained out of the global south over the past few decades. To get a sense for the scale of this, $16.3tn is roughly the GDP of the United States

What this means is that the usual development narrative has it backwards. Aid is effectively flowing in reverse. Rich countries aren’t developing poor countries; poor countries are developing rich ones.

What do these large outflows consist of? Well, some of it is payments on debt. Developing countries have forked out over $4.2tn in interest payments alone since 1980 – a direct cash transfer to big banks in New York and London, on a scale that dwarfs the aid that they received during the same period. Another big contributor is the income that foreigners make on their investments in developing countries and then repatriate back home. Think of all the profits that BP extracts from Nigeria’s oil reserves, for example, or that Anglo-American pulls out of South Africa’s gold mines.

But by far the biggest chunk of outflows has to do with unrecorded – and usually illicit – capital flight. GFI calculates that developing countries have lost a total of $13.4tn through unrecorded capital flight since 1980.

Most of these unrecorded outflows take place through the international trade system. Basically, corporations – foreign and domestic alike – report false prices on their trade invoices in order to spirit money out of developing countries directly into tax havens and secrecy jurisdictions, a practice known as “trade misinvoicing”. Usually the goal is to evade taxes, but sometimes this practice is used to launder money or circumvent capital controls. In 2012, developing countries lost $700bn through trade misinvoicing, which outstripped aid receipts that year by a factor of five.

Multinational companies also steal money from developing countries through “same-invoice faking”, shifting profits illegally between their own subsidiaries by mutually faking trade invoice prices on both sides. For example, a subsidiary in Nigeria might dodge local taxes by shifting money to a related subsidiary in the British Virgin Islands, where the tax rate is effectively zero and where stolen funds can’t be traced.

GFI doesn’t include same-invoice faking in its headline figures because it is very difficult to detect, but they estimate that it amounts to another $700bn per year. And these figures only cover theft through trade in goods. If we add theft through trade in services to the mix, it brings total net resource outflows to about $3tn per year.

That’s 24 times more than the aid budget. In other words, for every $1 of aid that developing countries receive, they lose $24 in net outflows. These outflows strip developing countries of an important source of revenue and finance for development. The GFI report finds that increasingly large net outflows have caused economic growth rates in developing countries to decline, and are directly responsible for falling living standards.

Riaz Haq said...

#US government fines #Boston firm $4 million for bribing #NHAI officials in #India. The FCPA Blog - The FCPA Blog
Privately held CDM Smith Inc. entered into a declination with disgorgement Thursday with the Justice Department to resolve FCPA offenses in India.

The DOJ said employees and agents of CDM Smith and a wholly owned subsidiary in India paid $1.18 million in bribes to government officials. In return, the company won highway construction supervision and design contracts and a water project contract.

The Boston-based company made profits of $4 million from the tainted contracts.

The enforcement action is the seventh under the FCPA Pilot Program since the DOJ adopted it in April 2016. The program gives companies incentives to self-disclose, cooperate, and remediate FCPA violations.

Companies that qualify can receive a 50 percent discount on fines they might face under the U.S. Sentencing Guidelines.

CDM Smith has about 5,000 employees worldwide. Revenues were $1.2 billion in 2015. It provides engineering and construction services.

The DOJ said the bribery in India occurred from 2011 until 2015.

The illegal payments for the highway contracts were generally 2 percent to 4 percent of the contract price. The bribes were paid through "fraudulent subcontractors who provided no actual services and understood that payments were meant to solely benefit the officials," the DOJ said.

The company also paid $25,000 to local officials in the Indian state of Goa for a water project contract.

"All senior management at CDM India . . . were aware of the bribes . . . and approved or participated in the misconduct," the DOJ said.

CDM Smith agreed to disgorge $4.03 million. It "acknowledged" that it can't take a tax deduction for the disgorged funds.

The DOJ said it closed the investigation under the Pilot Program because CDM Smith disgorged its profits, made a timely voluntary self disclosure, did a comprehensive investigation, gave full cooperation, enhanced its compliance program, and fired all executives and employees involved in the FCPA offenses.

The declination with disgorgement from the DOJ to CDM Smith Inc. is here (pdf).

Riaz Haq said...

Benazir Bhutto's interview with Alice Winkler in year 2000 (at 22:52):

"Now I say that when there were these demands, why didn't I have the — I did say make an information act but didn't follow it through, so I wish I had given more freedom of information. I wish I had tackled the so-called corruption issues more deeply. It was a precedent, you know. We all knew
kickbacks must be taken. Not personally, but on the level that, "Well, these things happen." And it wasn't like, "Well, we're here to change it." It was like, "This is how business is done.""