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Trading rules and accounting checks foil buyer bribery at Ikea

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16th Oct 2007
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A small supplier, and the retail buyers who accepted his commissions, have paid a high price for giving privileged access to prized retail contracts.

Big store chains have long received ‘slotting fees’ from some suppliers for the privilege of premium shelf space. While the ethics of the practice have been questioned, its legality is not challenged. But when he paid additional fees in return for getting food and kitchen hardware items into retailer Ikea, Adam Hauxwell-Smith triggered an internal company investigation which led to a crown court prosecution. The Oxfordshire businessman’s conviction for corruption resulted in a three-year prison sentence, announced on Friday.
In contrast to slotting fees, Hauxwell-Smith’s payments for preferential treatment went to individuals. Two former buyers for Ikea were convicted alongside him. In return for private side-payments of more than £1m, they agreed to waive the company’s normal rule of not giving any one supplier more than 40% of its total business. In return, their trial heard, Hauxwell-Smith secured £26m in sales to Ikea in the two years to mid-2000; though some of this was achieved legitimately, before he started to pay the bribes.

Ikea’s internal controls detected the problem through a gap between money paid out from its wholesale account and goods received at its stores. The illegal payments took time to discover because Hauxwell-Smith had traded through a range of separate companies. But by 2002 the store chain had recovered over £10m of the illegally obtained order value. Even if he avoids the full three-year sentence, the formerly high-flying trader will be banned from holding company directorships for eight years.

Ikea’s “40% rule” is part of its risk control strategy, designed to avoid stock interruptions if a small supplier goes out of business, and to allow it to terminate contracts without being accused of causing a business to collapse. It also protects the retailer against a lock-in which might allow the supplier to push prices up. But most business advisers argue that such policies also serve the supplier’s interest, protecting them from dependence on one big customer whose order cancellation could ruin it – and whose threat of cancellation could therefore allow it to name its price.

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David Winch
By David Winch
27th Oct 2007 18:06

Additional background facts

Mr Hauxwell-Smith, Mr Brown and Mr Hoult ultimately pleaded guilty to corruption. This will have had an impact on the sentences which they received.

The corruption took place during 1999 and 2000, and a police investigation was launched in February 2001. The defendants were charged in July 2004 and pleaded guilty in September 2007. That gives some indication of how long these matters can take to get to trial.

Although the prison sentences may not seem harsh it should be borne in mind that IKEA recovered £12.6 million from the defendants in 2002.

If Mr Hauxwell-Smith has any assets left he will (probably) be obliged to make a contribution to prosecution costs and be subject to confiscation proceedings.

David
www.AccountingEvidence.com

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By FlatpackBart
05th Aug 2015 14:19

Hello there,

I am really peculiar what is the current status here. The whole story does indeed sound like a movie but for some reason I suspect neither of them 3 ever got to jail, have they? I work with a medium independent Ikea assembly service provider (Fantastic Furniture assembly) and I try to keep an close eye what happens around the swedish furnishing company. Not sure if you have heard but lately (July 2015), no more than a week ago there was a unfortunate case, where children lost their life "because" of Ikea furniture assembly not secured as it should be. It is not related to the furniture assembly service but nevertheless I could not find much info about IKEA cases and their actual outcome is. 

Kind regards,
Bart of fantasticfurnitureassembly.co.uk

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