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Magyar Telekom and Deutsche Telekom Resolve $95 Million FCPA Enforcement Action – SEC Also Charges Former Magyar Executives

Hold the phone on the 2011 FCPA enforcement statistics. 

Once again, the end of the year sees a telecom company resolving an FCPA enforcement action.  In 2007, it was Lucent Technologies (see here and here);  in 2009 it was UTStarcom (see here for the prior post); in 2010 it was Alcatel-Lucent (see here for the prior post); and in 2011 it is Magyar Telekom and Deutsche Telekom.

Earlier today, the DOJ and SEC announced (see here and here) parallel FCPA enforcement actions against Magyar Telekom (a Hungarian telecommunications company) and Deutsche Telekom (a German telecommunications company that is the majority owner of Magyar).  Fines and penalties in the DOJ and SEC enforcement actions is approximately $95 million.

DOJ

The DOJ release states that the companies agreed to pay a combined $63.9 million criminal penalty to resolve an FCPA investigation into activities by Magyar Telekom and its subsidiaries in Macedonia and Montenegro. 

The DOJ filed a three-count information (see here) against Magyar Telekom charging it with one count of violating the FCPA’s  anti-bribery provision and  two counts of violating the FCPA’s  books and records provisions.  The DOJ release notes that at the time of the charged conduct, Magyar Telekom’s American Depository Receipts (ADRs) traded on the New York Stock Exchange. 

The DOJ’s release states as follows.  “Magyar Telekom’s scheme in Macedonia stemmed from potential legal changes being made to the telecommunications market in that country.    In early 2005, the Macedonian government tried to liberalize the Macedonian telecommunications market in a way that Magyar Telekom deemed detrimental to its Macedonian subsidiary, Makedonski Telekommunikacii AD Skopje (MakTel).   Throughout the late winter and spring of 2005, Magyar Telekom executives, with the help of Greek intermediaries, lobbied Macedonian government officials to prevent the implementation of the new telecommunications laws and regulations.  Magyar Telekom eventually entered into an agreement with certain high-ranking Macedonian government officials to resolve its concerns about the legal changes.   In the secret agreement, a so-called “protocol of cooperation,” Macedonian government officials agreed to delay the entrance of a third mobile license into the Macedonian telecommunications market, as well as other regulatory benefits.   Magyar Telekom executives signed two copies of the protocol of cooperation, each with high-ranking officials of the different ruling parties of Macedonia.   The Magyar Telekom executives then kept the only executed copies outside of Magyar Telekom’s company records.   According to court documents, in order to secure the benefits in the protocol of cooperation, the Magyar Telekom executives engaged in a course of conduct with consultants, intermediaries and other third parties, including through sham consultancy contracts with entities owned and controlled by a Greek intermediary, to pay €4.875 (approximately $6 million) under circumstances in which they knew, or were aware of a high probability that circumstances existed in which, all or part of such payment would be passed on to Macedonian officials.   The sham contracts were recorded as legitimate on MakTel’s books and records, which were consolidated into Magyar Telekom’s financials.   Deustche Telekom, which owned approximately 60 percent of Magyar Telekom, reported the results of Magyar Telekom’s operations in its consolidated financial statements.  Additionally, the criminal information charges Magyar Telekom with falsifying its books and records in regard to its activity in Montenegro.   According to the court filing, Magyar Telekom made improper payments in connection with its acquisition of a state-owned telecommunications company in Montenegro.   These payments were documented on Magyar Telekom’s books and records through the execution of four bogus contracts.   For example, two of the contracts were backdated and concealed the true counterparties, and no legitimate services were provided under the contracts even though the contracts were for €4.47 million.”

The criminal charges against Magyar Telekom were resolved via a deferred prosecution agreement (see here).  Pursuant to the DPA, Magyar Telekom agreed to pay a $59.6 million penalty for its illegal activity, implement an enhanced compliance program and submit annual reports regarding its efforts in implementing the enhanced compliance measures and remediating past problems.

The DOJ also entered into a two-year non-prosecution agreement (see here)  with Deutsche Telekom for its failure to keep books and records that accurately detailed the activities of Magyar Telekom.   At the time of the conduct at issue, Deutsche Telekom’s ADRs traded on the NYSE.  The NPA requires Deutsche Telekom to pay a $4.36 million penalty and to enhance its compliance program.

The DOJ release states as follows.  “Both agreements acknowledge Magyar Telekom and Deutsche Telekom’s voluntary disclosure of the FCPA violations to the department and the leadership of Magyar Telekom’s audit committee in pursuing a ‘thorough global internal investigation concerning bribery and related misconduct.’   In addition, the agreements highlight that the companies have already undertaken remedial measures and have committed to further remedial steps through the implementation of an enhanced compliance program.”

SEC

Based on the same core conduct, the SEC also charged (see here for the complaint) Magyar Telekom and Deutsche Telekom.  Magyar Telekom is charged with FCPA anti-bribery violations as well as books and records and internal controls violations.   Deutsche Telekom is charged with FCPA books and records and internal controls violations.

Without admitting or denying the SEC’s allegations, Magyar Telekom and Deutsche Telekom consented to the entry of final judgments.  Magyar Telekom agreed to settle the SEC’s charges by paying $31.2 million in disgorgement and pre-judgment interest.

The SEC also alleged in a separate complaint (see here) that the three former top executives at Magyar Telekom “orchestrated, approved, and executed”  the Macedonia and Montenegro bribery schemes.  Charged in the complaint are:  Elek Straub (former Chairman and CEO); Andras Balogh (former Director of Central Strategic Organization); and Tamas Morvai (former Director of Business Development and Acquisitions). 

The complaint alleges that the individuals violated or aided and abetted violations of the FCPA’s anti-bribery, books and records, and internal controls provisions; knowingly circumvented internal controls and falsified books and records; and made false statements to the company’s auditor.  Kara Brockmeyer (Chief of the SEC’s FCPA Unit) stated as follows.  “Magyar Telekom’s senior executives used sham contracts to funnel millions of dollars in corrupt payments to foreign officials who could help them keep competitors out and win business.  They purposely structured the sham contracts to circumvent internal review, and when questions were eventually raised about their use of ‘consulting’ contracts, they reconfigured them as ‘marketing’ contracts to avoid scrutiny and prolong their scheme.”  The SEC seeks disgorgement and penalties and the imposition of permanent injunctions against the individuals.

Stay tuned for additional analysis of the enforcement actions.

Schumer Calls For BP Investigation

Senator Charles Schumer (D-NY) has requested a Department of Justice investigation of BP.

It has nothing to do with the Gulf of Mexico, but rather the Foreign Corrupt Practices Act.

BP is British company, but its ADR shares trade on the New York Stock Exchange and BP is thus subject to the FCPA.

In a letter to Attorney General Eric Holder (see here) Schumer requests that the DOJ investigate whether BP violated any of the provisions of the Foreign Corrupt Practices Act (“FCPA”) in connection with the August 2009 release of Abdel Baset al-Megrahi, the Libyan terrorist convicted of the 1988 bombing of Pan-Am flight 103 that killed 270 people, including 189 Americans. [This post is limited to a discussion of the FCPA, and not the above referenced release.]

Why does Schumer think BP may have violated the FCPA?

Because, according to Schumer’s letter – “BP has admitted that it lobbied United Kingdom government officials to wrap up a proposed prisoner transfer agreement (PTA) with the Libyan government amid concerns that a delay in reaching this agreement would harm a deal BP had signed with Libya’s National Oil Company to explore for oil and gas in the Gulf of Sidra and in parts of Libya’s western desert—an agreement which BP estimated could lead to eventual earnings of up to $20 billion.”

Hold the phone and stop the presses … a large corporation has admitted that it lobbied its own government in connection with a business purpose.

This would seem to be yet another example of the FCPA’s double standard in that what is routinely done at home suddenly becomes a potential criminal matter when done in connection with international business. For other examples of the double standard see here and here.

Unless there is a finding that something of value went to a foreign official, the FCPA is not implicated because the law does not apply to giving things of value to a foreign government itself. Strange you say, but that is how the FCPA is written – a fact even the DOJ recognizes. See here for DOJ Opinion Procedure Release 09-01 in which the DOJ states that the proposed course of conduct “fall[s] outside the scope of the FCPA in that the [thing of value] will be provided to the foreign government, as opposed to individual government officials …”

Schumer’s letter also states:

“If BP, or its officials, promised the Libyan Government that it would secure al-Megrahi’s release from detention in exchange for oil exploration rights—or even that it would provide lobbying services for such a release on the Libyan Government’s behalf—BP may have been unlawfully authorizing performance of valuable services to the Libyan Government in exchange for profitable oil exploration rights in express violation of the FCPA. Similarly, if BP promised anything of value to United Kingdom government officials to secure al-Megrahi’s release, this would also violate the FCPA.”

According to Schumer’s press release, he and “Senators Gillibrand, Menendez, and Lautenberg last week requested the British government investigate the circumstances surrounding al-Megrahi’s release and requested that BP and the British government turn over all documents related to the oil companies’ efforts lobbying for a prison-release agreement with Libya. They also called for the US State Department to press the British to investigate BP’s involvement in the incident.”

It is unusual for a U.S. politician to call upon DOJ to investigate a foreign-based company (or any company for that matter) for FCPA violations – particularly when the conduct at issue largely centers on conduct between the company and its own government officials.

Although the U.K. Bribery Act is not yet law (see yesterday’s post here), when enacted, it is expected to have a broad jurisdictional scope and apply to certain U.S. companies, just as the FCPA applies to certain U.K. companies.

Following Schumer’s lead will a British politician request that the U.K. Serious Fraud Office investigate a U.S. company because it lobbied its own government officials in connection with a business purpose? As John Gapper, the associate editor and chief business commentator of the U.K. based Financial Times, stated in an editorial on the subject, “the US has been no stranger to dubious deals with foreign governments that benefit both its strategic interests and US companies.”

For more, see here for Christopher Matthew’s Main Justice story on the topic.

Pfizer Under Scrutiny in the Philippines

A question often posed at FCPA conferences to U.S. enforcement attorneys is – “how do you find out about potential FCPA violations?” The usual answers are: a company self-reports, a competitor or disgruntled employee blows the whistle, or foreign law enforcement agencies contact the DOJ or SEC. I’ve never heard though of a foreign legislator issuing a press release and sending a letter to the DOJ and the Commerce Department accusing a U.S. company of violating the FCPA. That is until now.

Earlier this week, Senator Mar Roxas (Philippines) issued a press release (see here) demanding that Pfizer Inc. open its records to a congressional committee investigating Pfizer’s lobbying of the Philippine government in connection with the passage and implementation of the Cheaper Medicines Law (the “Law”). In addition, the release notes that Roxas also sent separate letters to the U.S. Department of Justice and the U.S. Commerce Department. According to the release, in the letters Roxas states his belief that Pfizer’s activities in connection with passage and implementation of the Law “are unethical and violate not only Philippine Anti-Corruption Laws, but also the U.S. Foreign Corrupt Practices Act” and he specifically requests “any assistance that [the DOJ] can extend in looking into allegations of bribery against Pfizer…”.

Time will tell whether a future FCPA enforcement action against Pfizer is on the horizon. If there is one, it will not be the first time a U.S. company is subjected to FCPA scrutiny for its efforts to influence foreign legislation impacting its business. In January 2005, Monsanto Co. agreed to pay $1.5 million to settle an FCPA enforcement action based on allegations that it made improper payments to a senior Indonesian environmental official to persuade the official to repeal an environmental impact study requirement that was making it difficult for the company to sell its genetically modified crops in that country. (See here, here and here).

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