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IKEA’s charitable giving in Russia and the FCPA (Part Three)

I discussed in Part 2 how a donation in line with the interests of deputy governor of Moscow Region, Mikhail Men’, helped IKEA resolve its problems relating to construction of its second store in the Moscow Region. This time we look at IKEA’s efforts to build a distribution center.

In his memoir about his time in the late 1990s and early 2000s as IKEA’s CEO in Russia, Lennart Dahlgren said:

“In order to supply our stores with goods, we needed a distribution center . . . Mikhail Men’ promised to help us obtain the necessary permits and infrastructural prerequisites. The full amount of our investment, including the real estate and infrastructure, as well as the donation to children’s sports programs, added up to $5 million. When we undertake large projects that affect the lives of those who live near us, IKEA, as a rule, invests in the development of the locale. We want to be a good neighbor.”

IKEA’s investment plan was undermined by the unexpected removal of Men’ from his post. The officials who inherited oversight of the project began to create many obstacles for IKEA. The company was losing $80,000 daily.

Dahlgren continues: “After five days of unsuccessful attempts [to meet with relevant officials], we finally managed to schedule a meeting, where, without any discussion, we were presented with an offer to transfer [around $265,000] into the city budget. Our counteroffer demanded that these funds be allocated toward the provision of needs for the elderly . . . in a couple of days we received another counteroffer that we could not accept . . . The third time [the official stated that] he agrees to our demand that these funds be allocated to the needs of the elderly, but under the condition that this sum would increase to [around $800,000].”

After unsuccessfully appealing to higher authorities, IKEA acquiesced to the demands and paid the $800,000 requested by the local government. “The sole thing in this situation that seemed right was that the money would be spent on the needs of the elderly,” Dahlgren writes.

Dahlgren describes negotiations with foreign officials in which the size of the donation is used as a bargaining chip. While IKEA objected to the authorities’ actions, this dissent was based more on the amount of the donation rather than the principle that the contribution was inappropriate. IKEA refused to transfer funds directly into the city budget — something it viewed as unethical — but the company still counteroffered a charitable contribution in an attempt to resolve its problem.

With this particular example, we’re given a glimpse into something new: the nature of IKEA’s internal policies on charitable giving. There are several points to make here.

First, Dahlgren states that it’s IKEA’s policy to be a “good neighbor” by investing in local social projects. Second, IKEA felt comfortable rejecting a blatant demand for a bribe only to counter with a charitable contribution, which indicates that IKEA may have considered it an accepted practice. On the other hand, the end result was probably inconsistent with IKEA’s guidelines, considering that Dahlgren stated that nothing seemed right about the situation, other than the benefit to a good cause.

We’re not assuming IKEA Russia was ever subject to the FCPA during the time we’re talking about or that any FCPA violations ever occurred. 

But in this example of the company’s practices, we end up with more evidence of a potential FCPA violation.

The next post will continue the exercise.

Part One of the series is here and Part Two is here.

Note: Dahlgren wrote his book in Swedish, which was officially translated into Russian. I am basing my English translations on the authorized Russian translation.

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Ilya Zlatkin is a Chicago attorney focusing on business planning, intellectual property, and international entrepreneurship. Having passed the CFE exam, he is on track to become a Certified Fraud Examiner in early 2015. He can be contacted here.

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