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.
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.”
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.