Senior executives of Cisco were reportedly arrested in Brazil this week in a tax fraud investigation of the company.
(Read an update on this story.)
Citing information from police and tax authorities, Reuters reported that Cisco's Brazilian unit had imported $500 million worth of telecommunications and network equipment over the last five years without properly paying import duties. In all, the company owes an estimated $826.4 million in taxes, fines and interest, Reuters reported.
Senior company executives in Brazil were among those arrested, according to the Reuters report, citing information from local law enforcement agents. Brazilian authorities also asked U.S. police to issue arrest warrants for five more suspects in the United States, according to the report.
Cisco says the situation involves a group of Brazilian companies, at least one of which is a Cisco reseller. Nonetheless, Cisco says it is cooperating with Brazilian authorities
"According to Brazilian authorities, numerous raids were conducted today in Brazil in connection with an alleged scheme to evade payment of taxes," Cisco said in a statement. "According to official reports, the issue pertains to a group of Brazilian companies, at least one of which is a Cisco reseller in Brazil. As part of this effort, Brazilian authorities visited and temporarily closed Cisco's offices in Sao Paulo and Rio de Janiero. We understand that a small number of employees have been detained. No formal charges have been brought against these employees.
"Cisco's core principles include compliance with the laws and regulations of all the countries in which it does business," the company stated. "We are currently in the process of establishing what exactly has happened in Brazil and determining how this investigation pertains to Cisco."
AP reported that Brazilian authorities staged raids around the country in an effort to break up the tax evasion ring.
In raids that began Tuesday, 650 police and tax agents executed 93 search warrants and arrested 40 people involved in the alleged scheme set up by Brazilian businessmen to benefit the U.S. company, the AP reported, citing a statement from Brazil’s federal police.
Goods were shipped from tax havens like Panama, the Bahamas and the British Virgin islands to Brazilian clients to avoid local taxes, and the value of the products was underestimated, the AP report said.
The investigation by Brazilian authorities began two years ago, according to the AP report.
Analysts said this could be Cisco’s first blemish on an otherwise flawless record of establishing operations in countries the company identifies as high-growth emerging markets.
“Cisco has a rather solid record in terms of its successful emerging market growth being achieved without any material fraud, bribery, tax evasion issues, etc.,” states UBS Warburg analyst Nikos Theodosopoulos in a bulletin to investors on the Brazilian raids. “This potential investigation may be the first blemish for Cisco in this regard, but we believe it's premature to reach any conclusions at this early stage of the investigation.”
Emerging Markets represent 10% of Cisco's overall business, and Brazil represents 1% of Cisco's overall business. Cisco says it does not have a direct sales operation in Brazil but sells its products through multiple partners. Business continues in the region through these partners, the company says.
Cisco started operations in Brazil in 1994 and has sites in Sao Paulo, Rio de Janeiro and Brasilia.