Cisco in Deep Crisco: The GZ’s Take


“Without it, life would be hell on earth.” Microtec advertisement, Veja magazine, issue 87. File under “the rhetoric of the technological sublime (RTS) in postmodern technology PR, Velvet Elvis tendency.”

The Gazeta Mercantil (Brazil) confirms it: The multinational tech giant whose Brazilian chief executive has been perp-walked for engaging in Sino-Paraguayan “quaint customs” — along with a number of federal tax authority officials who were bought off to let the scheme operate — is Cisco Systems.

Next task here: Evaluating Cisco’s crisis communications on the episode. And exploring the Cisco-MUDE “business ecosystem” to see what other fallout might be expected.

(October 20: Updated spot news on the case, in draft-quality translation:

In a paid ad in the Estado de S. Paulo yesterday, Cisco pointed out that only four of the 40 arrested in the case were Cisco employees, characterizing the case as mainly a “problem in our distribution channels.” Which is acctually not a completely absurd interpretation of the facts as we know them.)

The illegal import scheme described here, by the way, resembles the scheme of which the “Monkeyman” — primatologist van Roosmalen, the “martyr to science” — was accused: Importing video production equipment under the guise of a “donation” to a federal environmental agency, then reselling it to a Brazilian production company and passing the profits back to the foreign seller, avoiding import duties. See

The incident also reminds me of that interview that Roberto Civita gave to Knowledge@Wharton about a year ago in which, asked why Brazilian “investigative journalism” focuses exclusively on political corruption and rarely, if ever, on business corruption, replied that, in Brazil at least — “we are not yet as sophisticated here as you are in the United States” — corporate corruption in Brazil simply does not exist.

It is not primarily a matter of business corruption; it’s mainly a matter of corrupt public-private relationships. As far as I can recall, we have never had any exclusively corporate scandals.

This is a bit like saying that, in a case of a man who beats the snot out of his wife every night — or vice versa — that the problem here is “a dysfunctional relationship.”

Avoiding the question of agency. Whose fist connects with whose nose? The man’s consistent talking point on other occasions: It is government that corrupts the private sector, not the other way around.

You know the type: “All taxation is a form of government corruption!” In which case evading taxation — with representation or not — is a sacred duty of all true sons of liberty! The corrupt government will only waste it!

Not that these people do not have plenty of representation themselves, mind you … See

17 de Outubro de 2007 – Um mega-esquema de fraude na importação e distribuição de equipamentos de alta tecnologia para redes corporativas de internet e telecomunicações operado por uma multinacional líder no segmento no mercado mundial, a Cisco System, dos Estados Unidos, foi desarticulado ontem pela Polícia Federal (PF) e Receita Federal. Segundo estimativa dos órgãos, nos últimos cinco anos a Cisco e outra multinacional, a Mude, comandaram esquema que sonegou mais de R$ 1,5 bilhão em multa e tributos de importação que deveriam ter sido recolhidos aos cofres públicos.

A massive fraud scheme in the importation and distribution of high-tech equipment for corporate data and telecommunications networks, operated by Cisco Systems, was broken up yesterday by the feds and the tax authority. According to estimates from those two agenices, in the last five years, Cisco and another multinational, MUDE, commanded a scheme that avoided paying $1.5 billion in taxes and penalties into the public coffers.

Skipping some details we already have on file.

A PF pediu também o apoio da polícia americana para localizar e prender outros cinco executivos das duas empresas, que trabalham nos Estados Unidos. Foram aprendidos US$ 10 milhões em mercadorias nos endereços da Cisco e outros R$ 45 milhões de mercadorias junto à Mude – maior distribuidora dos produtos importados ilegalmente -, US$ 290 mil, R$ 240 mil em espécie e 18 automóveis de luxo.

The Brazilian feds also asked for support from American police in locating another five executives of the two firms, who work in the United States. Seized in the raids were US$10 million in merchandise from Cisco offices and another $45 million in merchandise from MUDE — the largest distributor of illegally imported products — along with US$290,00 and R$240,000 in cash and 18 luxury automobiles.

Segundo organograma montado pela PF, a Cisco e a Mude ocupavam o topo da organização, tanto no esquema de importação dos produtos nos EUA quanto na distribuição das mercadorias – hardware e software – em São Paulo, Rio e Bahia. Os nomes das empresas não apareciam porque trabalhavam fraudando documentos ou arregimentando laranjas em cujos nomes eram montadas as operações de empresas offshore sediadas em paraísos fiscais como Bahamas, Ilhas Virgens Britânicas e Panamá.

According to on organizational chart drawn up by the PF, Cisco and MUDE are at the top of the chart, both in the importantion of the products from the USA and in the distribution of hardware and software in São Paulo, Rio and Bahia.

The AP story on this incident mentioned Rio, Sampa and Brasília. I think they misinformed on that point, but I will have to check.

The names of those two firms did not appear (on the paperwork) because they used fraudulent documents or lined up offshore shell corporations incorporated in the Bahamas, British Virgins and Panama, in whose names the transactions were conducted,

Uma das táticas era arregimentar pessoas de baixa renda no Brasil, que apareciam como importadores, para reduzir impostos ou multas. Assim que a mercadoria chegava ao Brasil, elas mudavam de dono e, no final, os lucros voltavam para a Cisco e Mude. Uma dessas empresas, segundo a polícia, é a Ingram Micro, cujo presidente, Carlos Negri Ferreira, também foi preso ontem.

One of the tactics used was to enlist low-income persons in Brazil to serve as the importing parties, in order to reduce taxes and fines. As soon as the merchandise arrived in Brazil, they would change owners, and in the end, the revenue returned to Cisco and Mude. One of these firms, according to police, was Ingram Micro, whose president, Carlos Negri Ferreira, was also arrested yesterday.

Ingram Micro is one of the suppliers on Mexico’s Enciclomedia educational tech project, as I recall. Brazilians should study that case hard, I think, before sinking heavy dough into the magic of educational technology.

Os mandados foram de prisão, busca e apreensão foram cumpridos simultaneamente nos três estados. As importações que deveriam ser encaminhadas para o pólo tecnológico de Ilhéus (BA), chegavam ao porto da capital baiana e eram encaminhados diretamente para os pólos de São Paulo. De acordo com a delegada Érika Tatiana Nogueira, responsável pelas investigações, o esquema envolvia mais de 30 empresas e pelo menos 15 atuavam simplesmente como fachada na emissão de notas fiscais falsas ou na elaboração de pedidos de importação irregular.

The arrest and search warrants were served simultaneously in three states. The imports were destined for the technology center in Ilhéus (Bahia), but arrived through the port of Salvador in the capital of Bahia and sent straight to technology centers in São Paulo. According to federal police official Nogueira, who ran the investigation, the scheme involved more than 30 firms, at least 15 of which were mere facades that emitted false documents or irregular applications for import permits.

Segundo a polícia, as investigações iniciaram há cerca de dois anos e surgiram com a denúncia de um ex-funcionário da filial da empresa norte-americana no Brasil. Ainda está sendo apurada a participação de outras empresas suspeitas de comprar os produtos que entravam com preços subfaturados no mercado nacional. Também correrá investigação em parceria com a polícia americana para chegar aos dirigentes da multinacional naquele país. “Já pedimos colaboração dos Estados Unidos para dar continuidade às nossas investigações”, disse Érika.

Police say the investigations began nearly two years ago and were based on information from a former employees of Cisco’s Brazilian subsidiary. Still to be looked into is the role, if any, of other companies suspected of buying products that entered the national market with an understated declared value. Also to come is a joint investigation with U.S. police to reach executives of the multinational there. “We have asked for cooperation from the United State in order to continue our investigations,” Erika says.

Segundo o coordenador de inteligência da Receita, Gerson Schaan, o esquema consistia basicamente em operações simuladas de compra e venda para blindar as duas multinacionais, cujos nomes passavam ao lago dos controles americanos e brasileiros. Schaan explica que as empresas brasileiras faziam contato direto com a multinacional. O pedido era realizado junto ao escritório importador da multinacional que ficava no Brasil e empresa americana enviava as mercadorias com descontos que variavam entre 40% e 70% do valor final. “O que impressionou foi o envolvimento de multinacional que é a beneficiária final do esquema. Ela conseguiu colocar no mercado brasileiro produtos a um preço muito inferior do que deveria ser praticado”.

According to the federal tax authority’s chief of intelligence, Mr. Schaan, the scheme basically consisted of simulated purchase and sale transactions in order to shield the two multinationals, who remained off the radar of U.S. and Brazilian regulators. Schaan explains that the Brazilian firms were in direct contact with the multinational. The request was made directly to the import-export office of the multinational in Brazil, and the U.S. firm sent the merchandise with discounts that ranged from 40% to 70% of the final value. “What was impressive was the involvement of the multinational that was the final beneficiary of the scheme. It managed to place merchandise on the Brazilian market at a much lower price than was proper.”

That is, they reported lower values for tax purposes to maintain their profit margins. End consumers presumably did not see the savings passed along, in other words.

Allegedly.

Além da multinacional, o escritório importador da empresa no Brasil e as compradoras agiam sabendo que tudo era fraudulento. As compras eram feitas junto à multinacional e repassadas para outros dois entrepostos que realizam o procedimento aduaneiro e o último emitia notas de venda dos produtos para o verdadeiro importador, que era o escritório da empresa no Brasil. A PF listou pelo menos oito crimes: fraude, ocultação de patrimônio, descaminho, sonegação fiscal, falsidade ideológica, uso de documento falso, evasão de divisas e corrupção.

Besides the multinational, its import office in Brazil and its buyers knew that it was all a fraud. The orders were placed with the multinational and then passed along to another two offices that did the import work, the last of which issued the bills of sale to the real importer, which was Cisco’s Brazilian subsdiary. The feds found at least eight crimes: fraud, failure to declare assets, [irregular diversion of merchandise from its stated destination], tax evasion, making false statements, use of falsified documents, evasion of customs duties, and corruption.

Corruption of federal tax agents, reported, eight of whom were also arrested.

Stay tuned. The Gazeta seems to be hitting heavily on the note that “the multinational knew,” but on the other hand it is still only its Brazilian executives and Brazilian subsidiary that have been targeted.

The position of the parent seems to be that its tropical distribution network got out of hand without the knowledge of the head office, from what I am gathering from their press release.

One of those things where you want to put up big numbers to impress the home office — what was their executive incentive plan like, I wonder? — and so you cut a few corners.

I actually heard the federal fuzz lady in charge emphasize that the feds are interested in the executives as individuals, for the purpose of criminal charges, not the firm. The firm would presumably be on the hook with the tax and Customs guys — who are not in a laughing mood these days — for the tax evasion done on its behalf.

If your chauffeur bribes a cop to keep your car from getting a ticket, without your knowledge, you are probably not guilty of bribery. But it is only fair that you pay the original ticket. That sort of argument. And you might really want to fire that chauffeur. Docking his final paycheck for the ticket, of course.

These are preliminary impressions, however, so do not bet the farm on it.

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