First it was Netherlands-based VimpelCom which resolved a net $398 million FCPA enforcement action in February 2016 for bribing alleged Uzbekistan telecom officials (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).
Yesterday, the SEC announced (see 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. The SEC portion of the settlement consists of a $100 million civil penalty. [This post will be updated when original source documents from the DOJ become available].
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:
“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.”
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.”