Wall Street Journal (4.15.10)

H-P Executives Face Bribery Probes

By DAVID CRAWFORD

German and Russian authorities are investigating whether Hewlett-Packard Co. executives paid millions of dollars in bribes to win a contract in Russia, according to people familiar with the matter.

German prosecutors are looking into the possibility that H-P executives paid about €8 million ($10.9 million) in bribes to win a €35 million contract under which the U.S. company sold computer gear, through a German subsidiary, to the office of the prosecutor general of the Russian Federation. The office handles criminal prosecutions in Russia, including many corruption cases.

Russian investigators raided H-P's Moscow offices Wednesday in connection with the probe, the people familiar with the matter said. The search was requested by German authorities, according to a statement posted on the Russian prosecutor's Web site.

An H-P spokesperson said, "This is an investigation of alleged conduct that occurred almost seven years ago, largely by employees no longer with HP. We are cooperating fully with the German and Russian authorities and will continue to conduct our own internal investigation."

German prosecutors are looking into whether H-P executives funneled the suspected bribes through a network of shell companies and accounts in places including Britain, Austria, Switzerland, the British Virgin Islands, Belize, New Zealand, the Baltic nations of Latvia and Lithuania, and the states of Delaware and Wyoming, according to investigation-related documents submitted to a German court and reviewed by The Wall Street Journal.

H-P's contract with the Russian prosecutor general's office involved supplying what people close to the probe describe as a state-of-the-art computer system designed to provide secure communications for prosecutors throughout Russia. The order included an array of hardware such as notebook computers, workstations and servers.

A spokesman for the prosecutors office in Dresden, which is leading the German probe, said authorities are investigating allegations of breach of trust, tax evasion and money-laundering and whether money was funneled out of H-P accounts to create a slush fund.

The German probe could lead to a parallel investigation by the U.S. Securities and Exchange Commission, regulators said. The Foreign Corrupt Practice Act prohibits U.S. companies from paying bribes to foreign officials. The SEC also requires public companies to disclose important investigations in their filings with the agency.

H-P hasn't reported the German probe in its SEC filings. In its most recent such filing, dated March 11, it gave a non-specific warning to its investors that "in many foreign countries" illegal business practices are "common." Such actions, undertaken "in violation of our policies…could have a material adverse effect on our business and reputation."

The SEC declined to comment.

H-P said it submits filings to the SEC in accordance with U.S. law. It said it is monitoring the investigation and will tell the agency of any developments it considers material.

H-P learned details of the probe in December when police in Germany and Switzerland presented search warrants detailing allegations against 10 suspects, according to two people familiar with the investigation. H-P has appointed a law firm to assist prosecutors in their investigation, according to an H-P spokeswoman and the prosecutors.

German authorities have requested and received international legal assistance to trace the flow of about €8 million throughout Europe, but have yet to identify the recipients of the funds, according to people familiar with the probe.

In December, German authorities traced funds to accounts in Delaware and Britain. Earlier this year, prosecutors filed a new round of legal-assistance requests in Wyoming, New Zealand and the British Virgin Islands, hoping to trace the flow of funds to new sets of accounts.

The German prosecution spokesman said that under German law criminal charges can't be filed against a corporation such as H-P, only against living people. A court can, however, order the seizure of illicit profits if a corporation is found to be the beneficiary of a crime, he said.

Investigators are sifting through more than 3,000 emails and thousands of pages of additional evidence in an attempt to identify of any potential beneficiaries of the suspicious transactions. Prosecutors haven't determined if any of the 10 H-P suspects identified in the search warrants were acting for their own benefit, the prosecution spokesman said.

The Russian equipment deal dates back to Aug. 1, 2003, when an H-P executive signed a contract with an as-yet unidentified official acting for the Russian prosecutor general, German court records show. Part of the problem is that the Russian signature on the contract is illegible, and the individual who signed on behalf of H-P has stayed silent on the issue, said a person with knowledge of the matter.