26 Comments

Summary:

[qi:011] It’s been a bad day for telecom equipment vendors. Cisco Systems’ (CSCO) Brazilian office was raided by that country’s authorities for undisclosed reasons. Local media is suggesting there are “tax issues,” including a potential tax liability (and penalties) of up to $830 million. (If you […]

[qi:011] It’s been a bad day for telecom equipment vendors. Cisco Systems’ (CSCO) Brazilian office was raided by that country’s authorities for undisclosed reasons. Local media is suggesting there are “tax issues,” including a potential tax liability (and penalties) of up to $830 million. (If you are from Brazil, please send us some links and translations.) This is the first time the company has been snared in such a snafu. (via Nikos Theodosopoulos of UBS Research.)

In another other piece of dismal news, Ericsson (ERICY), one of the beneficiaries of the 3G boom, was grounded today. It is going to miss its revenue and earnings estimates, reports the WSJ. Too few carriers, too many equipment makers — this is exactly what I was talking about yesterday. Slower spending by Cingular and other Western mobile operators is behind the slowdown, analysts postulate.

Both in North America and in Western Europe, particularly the UK and Italy, we have situations where operators have late entered into consolidation talks and network sharing talks, and such discussions that typically hold back short-term orders

Given their 3G exposure, it wouldn’t surprise me if Alcatel-Lucent (ALA) adds to the drumbeat of bad news.

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  1. The Cisco in USA seems to be involved. 5 persons in America has their prision request submited to US Dptmt of Justice. Aparently one of the tricks they used was overprice the softwares/firmwares to compensate the underprice of hardware negotiations.

  2. WOW!! What the heck happened to Cisco in Brasil?

    I will ping a friend of mine who is a telco executive in Brasil to get details.
    What is interesting – I was doing a JV in Brasil recently and decided to pull the plug due to the complexity if the tax laws or lack of clarity.

    This is one area that could keep Brasil from innovation. If there were tax laws that were favorable for investing then you would see many VC’s heading there. There are many great telecom and open source engineers in Brasil.

    Food for thought!

  3. http://portalexame.abril.com.br/economia/m0141046.html

    Main points:

    • Federal Police raided the offices, in a operation called “Operation Persona”. 650 agents were deployed.
    • 44 arrest warrants and 93 search warrants were issued for this operation.
    • 5 main executives of Cisco Brazil were arrested, including the president, Pedro Ripper, and a former president (probably Rafael Steinhauser?).
    • The accusations are of tax and customs fraud.
    • Federal Police requested the arrest of 5 US nationals in the USA.
    • The alleged scheme involved using fake companies to import Cisco products through tax havens and the usage of fake invoices to fool Brazilian customs and tax authorities.
    • Cisco Brazil may have imported up to USD 500 million in goods through this scheme.
  4. http://www1.folha.uol.com.br/folha/dinheiro/ult91u337062.shtml

    The link above is from one of Brasil’s biggest journals. It states that there was fraud while importing equipments to Brasil that led to no import tax or even a 100% discount of those taxes.

    The value that they cite on this news is around US$ 500 million.

    The investigation has been going on for the last two years, so it is hard to believe that Cisco will escape that or is innocent.

    You can get an English version here: http://translate.google.com/translate?u=http%3A%2F%2Fwww1.folha.uol.com.br%2Ffolha%2Fdinheiro%2Fult91u337062.shtml&langpair=pt%7Cen&hl=pt-BR&safe=off&ie=UTF-8&oe=UTF-8&prev=%2Flanguage_tools
    The translation is not so bad… Where it says “Revenue” you can think of something like the US IRS.

    It is a shame that such a big company uses those methods to get better “revenue”…

  5. I think Cisco uses third-party distributor model for sales in Brazil — in fact they do not have any direct sales channel in Brazil (like they do to ATT, Financial companies here in US) and hence all the wrong-doing, if any, should really be on the part of the distributor importing Cisco equipment. Time and investigation will tell!

    I, for one, cannot digest that Cisco would have any wrongdoing, IMHO.

  6. Joe,
    Cisco may not have direct sales in Brazil (which I do not know), but they do have presence there. Therefore, it is through Cisco that the resellers and partners import equipments and Cisco is very aware of the transactions, since it is the revenue from these partners that make Cisco’s sales quota.
    Whether Cisco in the US was aware of the wrongdoings or not is a separate issue that investigation will tell.

  7. After getting some information from a friend in Brasil it looks like “Joe” (previous post) is on the right track.
    This “may” have been an issue with the VAR channel and NOT Cisco directly.

  8. Julio Vasconcellos Tuesday, October 16, 2007

    I just personally translated an article from one of Brazil’s biggest papers. You can see it here:

    http://vasconcj.blogs.experienceproject.com/10055.html

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