What are slush funds? How do they work for governments and companies?

The US stock market regulator has fined tech giant Oracle for using slush funds to pay bribes. But what exactly are slush funds and how do they work in real life?

So, Oracle was recently ordered to pay $23 million (ie. Rs 188 crore) by the US Securities and Exchange Commission (SEC).

• As per the US SEC, Oracle has to pay the fine because its entities in India, Turkey, and the United Arab Emirates (UAE) used ''slush funds'' to bribe certain officials to conduct business between 2016 and 2019, thus violating the Foreign Corrupt Practices Act (FCPA). 

So, first, what is a slush fund? A slush fund is a fund or an account that is generally maintained by companies, governments, political parties (or even individuals) that is not properly accounted for, so that money from this account can be used for corrupt or illegal purposes without being tracked. Such funds are generally hidden and maintained separately from any money that is used for legitimate purposes. 

Here's an example to better understand slush funds: Say a politician receives Rs 5,00,000 for his election campaign through public donations. Now, this politician hires employees on paper and pays them salaries into fake bank accounts using these ''campaign funds''.

• BUT in reality, the jobs don't exist,
• and the "salaries" are deposited into slush funds which don't get tracked.

How do slush funds work? 

1. Managing the creation / cash inflow: Companies, governments, and even political parties generally receive a lot of cash from various sources like their day-to-day business operations, donations, grants, and other official or unofficial funding.

• Once the cash is received, these institutions usually park some of this cash into specific reserves and funds like ''capital reserve'', or ''general reserve'', or ''a certain xyz fund''. (You can find these reserves in a company's Balance Sheet.) 

• These institutions are officially required to comply with certain reporting requirements and have to keep a track of all incomes, assets, expenses, and liabilities. 
• Genuine expenses are generally paid out of cash generated from their everyday operations, or these ''official'' reserves, or from loans. 

2. Creating an outlet from the system: But what happens when companies or governments have to shell out money for illegal activities? What if they want to bribe someone or shut someone up?

• Shelling out money for these purposes out of the ''official general reserve'' becomes quite risky in this case, because the company's reserves, expenses, cash, and bank balances are generally scrutinised by auditors. 
• Since distributing this money 'officially' becomes a problem, companies create unofficial reserves by either:
  • taking money out of the books officially under ''a disguise'' (ie. fake employees, fake payments etc) and transferring it to the unofficial reserves or 
  • never recording cash inflows into the books and directly transferring it into the unofficial reserves

Since slush funds are accounts that are hidden from the general public, money is transferred into accounts under someone else's name and hidden in places where they wouldn't be easily found. (If you have watched Maharani on SonyLiv, you might remember how Bihar's Governor masterminded the fodder scam by diverting official funds into fake firms and indirectly receiving the money).

Many slush funds are also held secretly in foreign banks (ie Swiss banks), where they are protected under 'legal' facades like confidentiality laws.

• In the case of Oracle, employees created fake marketing reimbursement payments and discount schemes on paper worth Rs 3.92 crore to let money out of the official system and into slush funds. 

3. Paying for the illegal expense: The money for the illegal activities is then paid out of these unofficial reserves so that both the source and the expense remain untraceable. 

• Slush funds have been historically used to influence people to satisfy their political ambitions, acquire sensitive materials, sponsor vacations, and donate to charity.
• Businesses also use slush funds to settle unofficial bills like paying for parties and entertaining workers, purchasing cars for company executives, employee bonuses, gifts, workers' lunches and outings. 

In the case of Oracle, once the money was out of the system, the employees used these funds to bribe foreign officials or provide benefits such as paying for these officials to attend tech conferences around the world.

And now, their little secret is out.