IT outsourcing firm Cognizant announced last week that it was under criminal investigation in the United States following suspicious financial transactions with India. There is still little to no information about who Cognizant made the payment to and why.
Analysts predict that Cognizant will face harsh consequences if proven guilty. “This is a serious allegation and the implications could approach Satyam proportions if it is determined that this was a “normal” way of doing business for Cognizant,” commented David Rutchik, Executive Managing Director of Pace Harmon.
Investigators are still attempting to determine whether certain payments violate the the U.S. Foreign Corrupt Practices Act (FCPA).
While Cognizant stock has somewhat recovered this week, the company fell sharply on Nasdaq following the news, wiping out a staggering US$4.5 billion in market value in a matter of hours. President Gordon Coburn, who was the company’s chief financial officer until 2012, resigned following the announcement.
“This appears to be a straightforward FCPA issue, where someone or some group within Cognizant may have provided some sort of pay off or kick-back in order to obtain or retain business,” Rutchik added.
“In all of our dealings with them, they’ve maintained a solid reputation in the industry,” Rutchik said. “We sincerely hope, if there is any wrongdoing, that it is determined to be isolated to a small number of bad actors acting individually, and not with the direct or tacit approval of Cognizant management.”
Unfortunately for Cognizant, the allegation comes during election year in the United States. “This will certainly fuel the flames of the anti-outsourcing coalition – painting a picture of unethical companies doing whatever they can to drive growth, lower costs, and unfairly compete with local workers,” Rutchik said.
If proved guilty, the company could be exposed to significant financial penalties and injunctions, leading to the prosecution of some of its executives. Worst still, the company could even be disqualified from bidding for government contracts, and contracts in sensitive sectors such as financial services.
But it is too early predict the consequences, because Cognizant is not the first IT company to be investigated under FCPA. Siemens and IBM were also accused of violating this act, neither of which have suffered any serious consequences.