Sunday, December 03, 2006

U.S. Authorities Probe How Smartmatic Won Venezuela Election Pact

From the WS-Jrnl.

WASHINGTON -- Federal investigators are looking into whether Smartmatic Corp., a voting-machine company whose equipment is used widely in the U.S. and abroad, paid bribes to win a Venezuela election contract in 2004.
Smartmatic's actions already are under a separate investigation by the Committee on Foreign Investment in the U.S., which reviews foreign acquisitions to see if they pose national-security concerns.
In 2005, Smartmatic, which is owned by Venezuelan investors who split their time between Caracas and Boca Raton, Fla., purchased a U.S. voting-machine company, Sequoia Voting Systems Inc.
Cfius is looking at whether that acquisition should be reversed on national-security grounds.
At the same time, the Justice Department has been conducting a probe of Smartmatic for possible violations of the Foreign Corrupt Practices Act and recently started looking at possible tax evasion as well, said two individuals familiar with the case. The Justice Department has informed Cfius representatives from U.S. agencies about their inquiry, these people said. Jeffrey Bialos, an attorney for Smartmatic, said yesterday the Justice Department told the company it was looking into its actions, but that Smartmatic wasn't a target of an investigation.
Smartmatic employees haven't been subpoenaed in the inquiry, Mr. Bialos added. That suggests that the probe is at an early stage. "The company believes it conducted itself properly and within the law," Mr. Bialos said.
A Justice Department spokeswoman declined to comment. Smartmatic has drawn attention because of concerns that the government of Venezuelan President Hugo Chavez, an opponent of U.S. policies, has a stake in the company.
That is a focus of the Cfius review. In 2004, Smartmatic's machines were used in an election to recall President Chavez, which Mr. Chavez won handily -- and which members of the Venezuelan opposition say was riddled with fraud. Smartmatic machines will be used Sunday in Venezuela's presidential election.
The company said it is the victim of false allegations made by two former executives, whom the company declined to name. Smartmatic said it would shortly send the two former employees a letter to "cease and desist their activities," which Smartmatic said violated agreements they made with the company. News of the Justice Department probe was reported earlier by el Nuevo Herald, a Spanish-language newspaper in Miami.
Essentially, the Justice Department is looking into whether Smartmatic got its start in Venezuela by bribing officials and then improperly avoiding its tax liability in the U.S. The company says it paid $1.5 million to a Venezuelan consultant who is close to the Chavez government and helped to win Smartmatic business.
The allegation being investigated is that Smartmatic actually paid as much as $4 million to the consultant, then deleted a substantial portion of those payments from its corporate records to hide the extent of its payments to a friend of the Chavez regime.
Antonio Mugica, Smartmatic's chief executive, said the company had budgeted a larger amount for the consultant than it ended up paying him, thus explaining the difference between the two amounts. The tax question dates to late 2004 when Smartmatic scrapped a simple corporate structure, under which it was based in the U.S. with a Venezuelan subsidiary.
It adopted a complex offshore structure, with headquarters in the Netherlands Antilles; a main subsidiary in the Netherlands; and a variety of subsidiaries in the U.S., Barbados, Venezuela and Mexico. That raised the question of where to pay taxes on $25 million in revenue from a contract to supply voting machines for Venezuelan regional elections: the U.S. or a lower-tax jurisdiction.
Smartmatic paid taxes in Barbados, which the company said was proper because one of its international companies signed the deal.
"The taxes due and owed are to Barbados authorities," said Mr. Mugica, who added that the company had consulted legal counsel and accounting firms on the issue.
Mr. Mugica said the company hasn't thus far been harmed by publicity about the probes. Customers "welcome the fact" that the company is trying to clear up allegations concerning its actions, he said.