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Microsoft Hit With U.S. Bribery Probe Over Deals in Hungary

Drew Hinshaw
FILE PHOTO: A Microsoft logo is seen in Los Angeles, California U.S. November 7, 2017. REUTERS/Lucy Nicholson/File Photo

Microsoft Corp. is being investigated by U.S. authorities over potential bribery and corruption related to software sales in Hungary, according to people familiar with the matter.

The investigation follows a series of similar probes into Microsoft business partners that surfaced in 2013 in five other countries. Microsoft made a push earlier this decade to expand in emerging markets, as well as smaller, middle-income countries like Hungary. In some cases, those bets have turned into legal and reputational challenges.

The U.S. Justice Department and the Securities and Exchange Commission are probing how Microsoft sold software such as Word and Excel to middleman firms in Hungary that then sold those products to government agencies there in 2013 and 2014, according to these people.

Microsoft sold some of its products to these intermediaries at steep discounts, and then these firms sold the products to the Hungarian government at closer to full price, these people said. Investigators are probing whether the middleman companies used the difference to pay bribes and kickbacks to government officials, the people said.

Microsoft said it moved quickly to investigate itself after it became aware of “potential wrongdoing” at its Hungarian operations in 2014, according to a statement to The Wall Street Journal by the company’s deputy general counsel, David Howard. The company said it is cooperating with the Justice Department and SEC.

“We’re committed to ethical business practices and won’t compromise these standards,” said Mr. Howard in the statement. Microsoft said it fired four employees related to its probe in Hungary, including its country manager, Istvan Papp. The company also said that last year it terminated business relationships with four partners in Hungary, saying they violated its policies. The company said it has also bolstered efforts to increase transparency about discounting.

Mr. Papp, in a WhatsApp message to the Journal, said he was a “respected member” of the Microsoft “family.” He said he “received only positive feedback from the management.” He declined to comment further. Representatives from the Hungarian government didn’t respond to repeated requests for comment.

U.S. authorities have a wide remit to investigate and prosecute allegations of corporate bribery and corruption overseas under the U.S. Foreign Corrupt Practices Act. The law prohibits businesses from paying bribes to win or maintain business.

Many big companies, including Microsoft, have processes in place to solicit internal whistleblower complaints and report possible violations to federal agencies. In many instances, federal investigators don’t find anything wrong after they start to scrutinize an allegation.

Seven of the 10 biggest fines in the FCPA’s 41-year-existence have been imposed in the last five years, according to the specialist website FCPA Blog. Since 2010, the SEC has rewarded whistleblowers with up to 30% of any fine imposed, encouraging a rise in employee reporting.

So far that hasn’t changed with the administration of President Trump, who called the FCPA a “horrible law.” Last year, the Justice Department and SEC imposed a $965 million settlement—their biggest ever—against Sweden’s Telia Co. AB for violations in Uzbekistan. Attorney General Jeff Sessions has said he wouldn’t relent on pursuing foreign-bribery cases.

The Wall Street Journal reported in 2013 that U.S. authorities had examined Microsoft’s relationship with business partners in China, Romania, Italy, Russia, and Pakistan amid allegations these partners may have bribed government buyers or provided kickbacks.

It couldn’t be determined if the U.S. is continuing to investigate Microsoft in any of those countries. Representatives from the Justice Department and the SEC declined to comment. Microsoft said it is cooperating with U.S. authorities related to corruption issues in “various countries,” according to the company’s annual filing with the SEC earlier this month.

The SEC separately scrutinized Microsoft deals in the Czech Republic, looking at allegations it may have fallen afoul of American antibribery laws there, according to people familiar with the matter. It couldn’t be determined if American authorities are continuing to look into those allegations. Authorities in the Czech Republic are investigating Microsoft over allegations of anticompetitive behavior, according to people familiar with the matter. Microsoft said it was aware of the probe by Czech authorities and was cooperating.

In Romania, Microsoft’s former country manager Călin Tatomir is scheduled for trial next month, charged with laundering money and complicity in the abuse of public office during his time as the company’s leader there. Prosecutors say he helped intermediaries selling Microsoft software to the government get an “undue advantage” through methods of corruption they haven’t specified. His lawyer declined to comment on the charges. Microsoft itself isn’t charged with any wrongdoing.

Microsoft in 2012 made an effort to dissuade the Hungarian government from using free word-processing and spreadsheet software from rivals. In November 2012, then-Chief Operating Officer Kevin Turner met with Hungarian Prime Minister Viktor Orban, who brought with him a group of small company owners, according to a government statement.

Over the next two years, Microsoft sold roughly $30 million annually in software to such companies, sometimes at discounts that could run as high as 30%, according to people familiar with the matter. It couldn’t be determined how much of those sales have been subject to scrutiny.

Microsoft sales employees based outside of Hungary signed off on the discounts, according to one of the people. Microsoft said those decisions were based on misrepresentations by the rogue Hungarian employees. Not all of those discounts were passed on to the government agencies that ultimately bought the software from the middlemen, the people said.

The deals helped boost sales, and they helped lift the profile of the local unit. In a press release in June 2015, Microsoft cited Hungary as its “best-performing…subsidiary, of its size, for two years running” over the previous five years.

Philip J. Heijmans in Prague contributed to this article.

Write to Drew Hinshaw at drew.hinshaw@wsj.com and Jay Greene at Jay.Greene@wsj.com



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