Software giant Oracle has reached a $2 million settlement with the Securities and Exchange Commission over charges that it violated the Foreign Corrupt Practices Act.

According to the SEC, Oracle failed to prevent its India subsidiary from secretly setting aside money off the company's books that was eventually used to make unauthorized payments to phony vendors in India.

"Through its subsidiary's use of secret cash cushions, Oracle exposed itself to the risk that these hidden funds would be put to illegal use," Marc Fagel, director of the SEC's San Francisco Regional Office, said in a prepared statement. "It is important for U.S. companies to proactively establish policies and procedures to minimize the potential for payments to foreign officials or other unauthorized uses of company funds."

The SEC charges, settled Aug. 16, stemmed from allegations that certain employees of Oracle's India subsidiary structured transactions with India's government on more than a dozen occasions in a way that enabled Oracle India's distributors to hold approximately $2.2 million of the proceeds in unauthorized side funds. Those Oracle India employees then directed the distributors to make payments out of these side funds to purported local vendors.

The SEC's complaint alleged that Oracle violated the FCPA's books and records provisions and internal controls provisions by failing to record accurately the side funds that Oracle India maintained with its distributors. Oracle failed to devise and maintain a system of effective internal controls that would have prevented the improper use of company funds.

The charges against Oracle signal a whole “new level” of FCPA enforcement, according Mike Koehler, professor at Southern Illinois University and well-known online as "the FCPA professor." Multinational companies often have hundreds—if not thousands—of distributors. “[A]udits Oracle was held liable for not conducting are not practical or cost-effective absent red flags suggesting improper conduct,” Koehler wrote in his blog. In this case, however, Oracle's Indian subsidiary “concealed” and kept “secret” such conduct from Oracle, according to the SEC.

“Following a thorough investigation, the employees involved were terminated,” Oracle spokesperson Deborah Hellinger tells Compliance Week. She says that Oracle disclosed the matter to the government and has cooperated with the SEC in its investigation, culminating in the recent settlement. 

"Oracle has established policies, programs and controls to deter and detect inappropriate conduct that have been recognized among the best in our industry,” Hellinger adds.  “We will continue to maintain a high standard of compliance and accountability for our business around the world.”