Cisco was just caught in a tax sting and a large number of executives, with little or no warning, were tossed in jail.
( Bloomberg reports the federal police Web site alleges the U.S. company and its Brazilian partners used offshore companies to evade import duties on networking hardware, evading roughly $824 million in taxes over five years.)
This may not be because Cisco did anything wrong but because the company didn’t give in to extortion, and we need to wait until all the facts are in. This serves as a reminder that having relatively uncorrupt law enforcement is one of the benefits of living in the United States that we probably take way too much for granted.
South America is known for having a heavy bribery and corruption problem, and even there Brazil stands out. I was an internal auditor for IBM when we had a problem there where an executive — and IBM had hard rules against this — was caught in a bribery scandal. It was clear at the time the executive was put in an unwinnable position and made a bad decision largely because he wasn’t given a good choice.
As a result, when I see something like the Cisco problem, I want to understand both sides of the story before I form an opinion. In areas where there is lots of corruption, not going to jail may have more to do with whom you bribe than anything you did or didn’t do. So we need to take a breath and hold for the facts.
U.S. Companies At Disadvantage
The problem is, U.S. companies are between a rock and a hard place in countries where bribery is common. If they don’t bribe, they get nailed to the wall by the local government, and if they do bribe, they get nailed to the wall by our government, making doing business in these countries incredibly risky.
For Cisco, even telling the whole story could be difficult because, in doing business in South America, it may have done some things unacceptable to U.S. law enforcement, making it incredibly hard to defend itself now.
Personally, I think it is probably better not to do business in countries that have this problem, or to work through independent third parties and not establish a presence there, rather than take this risk. In the end, this may be a cautionary tale for any company doing business in South America: The risks may exceed the benefits.
So to understand this, watch what happens next. If Cisco pays a large sum of money, then exits this market without criminal charges, chances are this was a failed attempt at extortion with a rather solid “or else.” If people go to jail and the U.S. Justice Department takes action, then Cisco has a more serious problem.
Wrapping Up
In the end though, I still believe we need a better way to deal with foreign corruption. Either we accept it as a price of doing business, which it is, or we don’t allow U.S. companies to enter these regions without much more U.S. protection.
Upsetting a U.S. multi-national during an election year could be a mistake for Brazil as well and give the Republicans a way to divert at least some attention from Iraq and Iran and onto something else, such as Cisco’s defense. Cisco is one of the most powerful companies in what is still a Super Power and if this doesn’t piss off the Cisco CEO, I’m not sure what will.
This isn’t to say Cisco didn’t do something wrong, but it is are entitled to the benefit of the doubt. And given it is Brazil, I have a lot of doubt.
Cisco has a reputation for being an honest company and this one event, given where it is, shouldn’t tarnish that before the facts are in. Let’s watch this one closely but not jump to conclusions before it is clear, if it ever is clear, who is truly in the wrong here.
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Henry Blodget made his name by predicting outlandish price increases for Internet stocks in the late nineties. A lot of people lost a lot of money (or, all their money) by 
