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Next Up – MTS Resolves $850 Million FCPA Enforcement Action


First it was Netherlands-based VimpelCom which resolved a net $398 million FCPA enforcement action in February 2016 for bribing an alleged Uzbekistan telecom official (see here and here for prior posts).

Then it was Sweden-based Telia which resolved a net $483 million FCPA enforcement action in September 2017 based on the same alleged core conduct. (see here and here for prior posts).

Recently, the SEC and DOJ announced (see here and here) that Russia-based Mobile TeleSystems PJSC (MTS) agreed to resolve an $850 million DOJ/SEC FCPA enforcement action based on the same alleged core conduct. This is the largest settlement amount in an FCPA enforcement action in history. (See here for a list of the top ten corporate enforcement actions).

The SEC portion of the settlement consists of a $100 million civil penalty.

In summary fashion, the SEC’s order states:

“From 2004 to at least 2012, MTS offered and paid bribes in violation of [the anti-bribery provisions] to a government official in Uzbekistan in connection with its Uzbek operations. The improper payments enabled MTS to enter the Uzbek market, to operate as a telecommunications provider, and to receive commercial benefits to its operations. Those benefits continued until 2012, when the Uzbek government expropriated MTS’s Uzbek operations. During the course of the scheme, MTS made at least $420 million in illicit payments for the purpose of obtaining and retaining business, and those payments generated more than $2.4 billion in revenues. These illicit payments were made through a variety of means, including equity transactions with the government official, sham contracts, and in the form of charitable contributions or sponsorships at the direction of the government official. These payments were improperly characterized as legitimate expenses in MTS’s books and records. MTS filed its financial statements, incorporating the falsely recorded payments, with the Commission throughout the relevant period.

As a result of the scheme, MTS violated [the anti-bribery provisions] by agreeing to make corrupt payments to a government official in Uzbekistan for the purpose of obtaining or retaining business. MTS also violated [the books and records and internal controls provisions] by improperly recording the payments as legitimate expenses in its books and records and by failing to devise and maintain a reasonable system of internal accounting controls.

The Uzbek official is described as “a family member of the former President of Uzbekistan and was herself an Uzbek government official. She had influence over decisions made by UzACI, the regulatory authority governing telecommunications in Uzbekistan and held an ownership interest in Uzdunrobita through Swisdorn Ltd.” This person is Gulnara Karimova.

The order mentions the following improper payments among others:

“MTS also made payments to charities supported by, and a sponsorship payment to a company connected to, Government Official A. The payments were made in the expectation that they were necessary to ensure Government Official A’s continued support for … business. The payments were falsely recorded in … books and records as advertising and non-operating expenses, rather than as charitable expenses. The payments also failed to comply with appropriate internal controls. The payments were not approved until after payment was made and were not memorialized in agreements with anti-corruption representations.”

The order has a separate section titled “Currency Conversion Transactions” and states:

“Between 2005 and 2012, Uzdunrobita [an MTS subsidiary] entered into equipment purchase contracts denominated in U.S. dollars. Due to restrictions on the conversion of Uzbek soums into U.S. dollars, Uzdunrobita was unable to convert enough currency to pay its equipment vendors. In order to make its payments under the contracts, Uzdunrobita entered into debt reassignment and equipment purchase agreements with third party companies who agreed to pay the required amounts of U.S. dollars to pay Uzdunrobita’s vendors.

During the 2009-11 period, Uzdunrobita paid approximately $461.5 million to third party companies to effectuate purchases of network equipment in Uzbekistan. Of this total, approximately $142.7 million represented the difference between the Uzbek Central Bank exchange rate and the exchange rate agreed to by the parties and other markups. Approximately $92.6 million represented taxes and customs costs.

Uzdunrobita’s books and records, which were consolidated into MTS’s books and records, did not reflect, in an appropriate level of detail and support, the $142.7 million in currency rate differentials and markups. These transactions had a material effect on the financial statements of Uzdunrobita. In addition, Uzdunrobita failed to conduct appropriate due diligence on the third party intermediaries to determine whether they were under the ownership or control of Government Official A or other Uzbek government officials.”

Without admitting or denying the SEC’s findings, MTS consented to the order finding that it violated the FCPA’s anti-bribery, books and records and internal controls provisions and agreed to pay a $100 million civil penalty.

In the SEC’s release, Charles Cain (Chief of the SEC’s FCPA Unit) stated:

“The company engaged in egregious misconduct for nearly a decade, secretly funneling hundreds of millions of dollars to a corrupt official.  Building business on a foundation of bribery leaves the business and American investor interests at the mercy of corrupt officials.”

The SEC release further states:

“In a related matter, MTS has entered into a deferred prosecution agreement with the U.S. Department of Justice and its subsidiary has pleaded guilty in federal court, and has agreed to pay a criminal fine and forfeiture in the amount of $850 million.  The Department is crediting the $100 million penalty that MTS is paying to the SEC.  The company must also retain an independent compliance monitor for at least three years.”

The DOJ portion of the settlement consists of a $750 million criminal fine. The settlement consisted of this criminal information against Kolorit Dizayn Ink LLC (described as an advertising company organized under the laws of Uzbekistan that was acquired in 2009 by Uzdunrobita LLC – a subsidiary of MTS) charging conspiracy to violate the FCPA’s anti-bribery and books and records provisions. Under the heading “Overview of the Corruption Scheme” the information alleges:

“From in or around 2004 to 2012, MTS, Uzdunrobita, Executive 1 [described as a high-ranking executive of MTS who had authority over MTS’s foreign subsidiaries, including Uzdunrobita and Kolorit, from in or around 2007 to 2013] and Executive 2 [described as a high-ranking executive of Uzdunrobita from in or around 2002 to 2012 who reported to Executive 1 during portions of the relevant time period] conspired with others to pay bribes in violation of U.S. law totaling at least $420,825,848 for the benefit of Foreign Official in order to enter and continue to operate in the Uzbek telecommunications market. Executive 1 and certain other management and employees of MTS and affiliated entities and Executive 2 and certain management and employees of Uzdunrobita (hereinafter referred to singularly and collectively as “certain MTS management”) and certain management of Kolorit understood that they had to make payments to benefit Foreign Official in order to continue to do business in Uzbekistan. During the scheme, conspirators, including Associate A, Associate B, [together described as close associates of the Foreign Official] and certain MTS management, used U.S.-based email accounts to communicate with each other and other individuals about the scheme. In addition, MTS and Uzdunrobita made and caused to be made numerous corrupt payments that were routed through transactions into and out of correspondent bank accounts at financial institutions in New York, New York.

Kolorit joined the conspiracy in or around 2009 when MTS and Uzdunrobita acquired Kolorit. Executive 1, Executive 2, and certain MTS management knew that the price paid by MTS and Uzdunrobita for Kolorit was inflated to $39.6 million in order to compensate Foreign Official in exchange for Uzdunrobita continuing to operate in Uzbekistan.

In or around 2012, Uzdunrobita paid approximately $1.1 million in bribes in violation of U.S. law to entities related to Foreign Official for purported charities or sponsorships.

The last corrupt payment in violation of U.S. law for the benefit of Foreign Official was made no later than in or around May 2012. After that time, MTS, Uzdunrobita, and Kolorit did not satisfy Foreign Official’s demands for additional payments. In retaliation, Foreign Official used her influence with the Uzbek government to expropriate Uzdunrobita.”

Under the heading “Scheme to Falsify Books and Records,” the information alleges:

“As a result of MTS’s failure to implement effective internal accounting controls, MTS, acting through its executives and others, disguised on its books and records over $420 million in bribe payments made for the benefit of Foreign Official in exchange for MTS’s and Uzdunrobita’s ability to enter and continue to operate in the Uzbek telecommunications sector.

In relation to the above-described payments, certain MTS management and others used a variety of non-transparent transactions with different false purported business purposes, described above, so that the payments would be inaccurately recorded in MTS’s consolidated books and records as legitimate transactions.

Certain Kolorit management, acting with certain MTS management, caused the following payments to be inaccurately recorded in MTS’s consolidated books and records:

Payments on or about September 22, 2009 for a total of approximately $39,636,711 equivalent in Uzbek som to the shareholders of Kolorit

A payment on or about September 29, 2009 for approximately $17,000 to a shareholder of Kolorit’s account in Uzbekistan.

MTS also created, and caused to be created, false records further to conceal these improper payments. The bribe payments were concealed by fake contracts that were intended to create the appearance of legitimacy and were falsely described in Board materials.”

In this plea agreement, Kolorit pleaded guilty.  The plea agreement states:

“[T]he appropriate resolution of this case is a guilty plea by the Defendant, a $500,000 fine, forfeiture of $40,000,000, a DPA with MTS that includes a financial penalty that is approximately 25% above the low-end of MTS’s Sentencing Guidelines fine range, and the imposition of an independent compliance monitor; and, consistent with JM 1-12.100 (Coordination of Corporate Resolution Penalties in Parallel and/or Joint Investigations and 6 Proceedings Arising from the Same Misconduct), the Fraud Section and the Office will credit the $100 million civil penalty imposed by the SEC as part of its resolution of this matter.”

This criminal information against MTS is based on the same core allegations and charges the company with one count of conspiracy to violate the anti-bribery and books and records provisions of the FCPA and one count of violating the internal controls provisions of the FCPA. MTS agreed to resolve the criminal charges through this three year deferred prosecution agreement.

Among the allegations included in the information (which at its core concerns MTS purchasing at inflated prices entities associated with Karimova) are the following:

“[A] new MTS executive learned of the relationship between MTS and Shell Company A [associated with Karimova]. In or around February 2007, the new executive began to raise concerns, including the FCPA risk MTS faced if Shell Company A was, in fact, beneficially owned by Foreign Official.

On or about February 7, 2007, the new executive emailed certain MTS management concerning the risk of doing business with Shell Company A because “in the open sources, there are speculations as to the connections of this company and the current [Uzbek] regime.” The new executive called for a “confidential investigation of the beneficiary owners” of Shell Company A.

On or about February 12, 2007, the new executive emailed certain members of MTS’s management concerning new information the new executive had learned through an investigation of public sources and the new executive’s consequent heightened concerns. The new executive explained, “[w]e need to ensure, by obtaining a third party opinion . . . that Shell Company A and its beneficiaries and officers do not have any connections to [a high-ranking Uzbek government official’s] family or to government officials of Uzbekistan.” The new executive continued, “We need to re-check the previous transaction for acquisition of Uzdunrobita to make sure there are no risks of potential persecution for the purchase of shares from [Foreign Official] (if they were actually purchased from [Foreign Official]).” The new executive emphasized, “From the reputational point of view, we should exclude any association between MTS and [Foreign Official] – [a] profile is attached.”

The new executive attached to the February 12, 2007 email a series of articles about Foreign Official from internet sources, which included that: Foreign Official had set up Shell Company A, which “received” 20% of Uzdunrobita from American Company and 31.4% from the Uzbek government; Foreign Official had an official role in the Uzbek government and influence with a high-ranking Uzbek government officials; Foreign Official had amassed a “large business empire” through “corrupt means” and that part of Foreign Official’s holdings was “the 11 largest wireless telephone operator in Uzbekistan,” which, at the time, was Uzdunrobita; and Foreign Official had substantial influence in the Uzbek government, including in the telecommunications sector.

In addition to the articles above, the new executive also attached a memo to his February 12, 2007 email, which stated that MTS faced FCPA risks because “[i]n public sources, including transcripts of court proceedings, it was stated that in 2004, [MTS] acquired a majority stake in ‘Uzdunrobita’ in the transaction, where one of the selling shareholders was [Foreign Official].” The memo further noted that the high-ranking Uzbek government official related to Foreign Official “held office at the time of the transaction.” The memo ended with a list of risks that included, “1) Reputational risk — [Foreign Official],” “2) FCPA risk,” and “3) the risk of a regime change and of the revision of the privatization/acquisition of licenses.”

In response to the new executive’s emails, certain MTS management took steps to restrict further dissemination of the new executive’s concerns about the Foreign Official.

Because the new executive insisted that MTS conduct additional due diligence, MTS hired a U.S. law firm to conduct due diligence on Shell Company A. In an effort to ensure that the legal opinion would be favorable, certain MTS management did not disclose certain relevant information to the law firm, including the crucial fact that certain MTS management knew that Foreign Official was the beneficial owner of Shell Company A.”

Regarding the acquisition of Kolorit, the information alleges:

“On or about August 7, 2009, certain MTS management received a memo from MTS’s Department of Strategic Planning for the August 10, 2009 MTS Investment Committee meeting, recommending rejection of the Kolorit acquisition because the acquisition was not part of MTS’s “core business” and the estimate for advertising market development was “not realistic.” The memo explained, “Within [the] framework of qualitative analysis, it’s hard to imagine—within [the] framework of this poor country (171st rank in GDP – per capita (PPP) and 20 185th rank in inflation rate), just one outdoor local advertising company could cost 40 MUSD. This is a pure fairy tale!” Certain internal and external valuations of Kolorit were significantly less than the recommended purchase price.

On or about August 14, 2009, certain MTS management received a report from the due diligence firm explaining that Uzbek corporate records indicated that Associate B and another individual were the shareholders of Kolorit. The report further noted that Foreign Official and Associate B had various connections, but “[s]ources are unaware if [Associate B] represents the interests of [Foreign Official] at [Kolorit].” Although certain MTS management received the report, which stated that rumors that Kolorit might be beneficially owned by Foreign Official were not considered credible, certain MTS management in fact knew that Foreign Official was the beneficial owner of Kolorit.

On or about September 16, 2009, Executive 1 presented the Kolorit transaction to MTS’s Board of Directors, which approved it. The Board materials for the meeting included the inflated valuation for Kolorit and did not disclose that Foreign Official would benefit from the transaction.”

Under the heading “Relevant Considerations,” the DPA states:

“The Fraud Section and the Office enter into this Agreement based on the individual facts and circumstances presented by this case and the Company, including:

a. the Company did not receive voluntary disclosure credit pursuant to the FCPA Corporate Enforcement Policy in the Department of Justice Manual (“JM”) 9-47.120, or pursuant to the United States Sentencing Guidelines (“USSG” or “Sentencing Guidelines”) because it did not voluntarily and timely self-disclose to the Fraud Section and the Office the conduct described in the Statement of Facts;

b. the Company ultimately provided to the Fraud Section and the Office all relevant facts known to it, including information about the individuals involved in the conduct described in the Statement of Facts and fully cooperated as that term is used in the Sentencing Guidelines, including by voluntarily providing documents located outside the United States, providing summaries of the Company’s internal investigation, translating foreign-language documents, and providing counsel for certain witnesses;

c. the Company did not receive additional credit for cooperation and remediation pursuant to the FCPA Corporate Enforcement Policy, JM 9-47.120, because it significantly delayed production of certain relevant materials, refused to support interviews with current employees during certain periods of the investigation, and did not appropriately remediate, including by failing to take adequate disciplinary measures with respect to executives and other employees involved in the misconduct;

d. although the Company had inadequate anti-corruption controls and an inadequate program during the period of the conduct described in the Statement of Facts, the Company has been enhancing and has committed to continuing to enhance its compliance program and internal accounting controls, including ensuring that its compliance program satisfies the minimum elements set forth in Attachment C to this Agreement (“Corporate Compliance Program”);

e. because the Company has not yet fully implemented or tested its compliance program, the Company has agreed to the imposition of an independent compliance monitor to reduce the risk of misconduct;

f. the nature and seriousness of the offense conduct, including the payment of over $420 million in bribes in violation of U.S. law to a high-level government official in Uzbekistan over nine years in furtherance of a scheme that was carried out with the involvement of high-level executives at the Company;

g. the Company has no prior criminal history;

h. the Company has agreed to continue to cooperate with the Fraud Section and the Office in any ongoing investigation …;

i. the Company has resolved with the U.S. Securities and Exchange Commission (“SEC”) through a cease-and-desist proceeding, relating to the conduct described in the Statement of Facts; and

j. the mitigating factors present in this case, including that the Uzbek government expropriated the Company’s telecommunications assets in Uzbekistan, resulting in no realized pecuniary gain to the Company as a result of the misconduct described in the Statement of Facts;

k. accordingly, after considering (a) through (j) above, the Fraud Section and the Office believe that the appropriate resolution of this case is a deferred prosecution agreement with the Company, a guilty plea by its Uzbek subsidiary, Kolorit, a financial penalty that is approximately 25% above the low-end of the Sentencing Guidelines fine range, and the imposition of an independent compliance monitor; and, consistent with JM 1-12.100 (Coordination of Corporate Resolution Penalties in Parallel and/or Joint Investigations and Proceedings Arising from the Same Misconduct), the Fraud Section and the Office will credit the $100 million civil penalty imposed by the SEC as part of its resolution of this matter.”

The DOJ’s release states: “the combined total amount of criminal and regulatory penalties paid by MTS and Kolorit to U.S. authorities will be $850 million.”

In this release, Alexey Kornya, MTS’ President and Chief Executive Officer, stated:

“Obtaining a resolution of the Uzbek investigations was in the Company’s best interests. The resolution and settlement allow MTS to focus fully on the implementation of MTS’ business strategy to be a first-in-class digital telecom company. MTS’ balance sheet remains strong and the current ratio of the Company’s debt to OIBDA remains well below most of our Russian and international peers. We remain committed to investing in business development consistent with our planned capital expenditures while providing attractive shareholder returns.

MTS has systematically and pro-actively developed its current anti-corruption compliance framework in line with international best practices within a dedicated compliance division since 2012. Our compliance function continues to undergo testing and we are committed to developing and implementing high professional standards of corporate policies, processes and procedures at MTS. I am confident that MTS’ commitment to adhering to the highest standards of business ethics will strengthen and protect the Company’s position as a leader in all our markets of operation.”

The release further states:

“Current MTS’ compliance program, instituted and continuously reviewed since 2012, has been designed to ensure compliance with applicable anti-corruption legislation by actively identifying, analyzing and minimizing risks of corruption. The program incorporates the most current international compliance standards and guidance, including those appearing in the Department of Labour of the Russian Federation’s ‘Methodological Recommendations for Devising and Initiation of Organisational Measures for Prevention and Fight against Corruption,’ the U.S. ‘Federal Sentencing Guidelines for Organizations,’ the DOJ and SEC’s ‘A Resource Guide to the U.S. Foreign Corrupt Practices Act,’ the United Kingdom’s ‘The Bribery Act 2010 Guidance’, and the guidelines offered by internationally recognized organizations such as the OECD and Transparency International. In 2015-2016, a representative from MTS’ compliance unit served as a member of the International Organisation for Standardisation (“ISO”) project team (ISO/PT 278) that created anticorruption management system standard ISO 37001 and represented the Russian Federation at meetings of the international committee preparing the text of that standard. In 2018, after extensive audits, the Company was awarded certifications under two ISO standards that measure the effectiveness of an organizational compliance program, ISO 19600: ‘Compliance management system,’ and ISO 37001: ‘Anticorruption management system’. Under the agreements with DOJ and SEC, an independent compliance monitor will be appointed for a period of three years to assess and monitor the operation of MTS’ compliance program. MTS will work with the monitor to ensure that its compliance program is reasonably designed and implemented to prevent and detect anti-corruption violations.”

Gary DiBianco, Mitchell Ettinger, and Kara Roseen (all of Skadden, Arps) and Lanny Breuer and Benjamin Haley (both of Covington & Burling) represented the corporate entities.

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