MTS FCPA Settlement and Karimova Indictment: Lessons for Compliance Practitioners

Thomas Fox
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Thomas Fox - Compliance Evangelist

In a stunning resolution to one of the longest running bribery, corruption and money-laundering sagas on the international stage, the Department of Justice (DOJ) and Securities Exchange Commission (SEC) both announced settlement of a Foreign Corrupt Practices Act (FCPA) enforcement action against the Russian telecom company, Mobile TeleSystems PJSC (MTS). (See both the DOJ Press Release and SEC Press Release.)

The FCPA enforcement action came in at $850 million which makes it Number 3 in the Top 10 of all-time FCPA settlements. This white paper will examine the background facts of the case, provide a detailed review of the bribery schemes involved, the compliance failures of MTS and its actions during the investigation which contributed to the size of the penalty, the individual criminal prosecutions brought as a part of this action and the key lessons learned by the compliance practitioner.

Part I-Introduction

The enforcement action was the third involving the same individual from the same country. That individual was Gulnara Karimova, the daughter of the former President of Uzbekistan. If that name sounds familiar to compliance professionals it is because she was also involved in the receipt of bribes paid in two other Top 10 FCPA enforcement actions; VimpelCom (now VEON Ltd.) and Telia Company AB. Contemporaneously with FCPA enforcement action involving MTS, there was a criminal indictment filed against Karimova and Bekhzod Akhmedov, a former MTS executive based in Uzbekistan. Akhmedov was charged with violating the FCPA for paying bribes to or for the benefit of Karimova and he was charge with laundering the money received as bribes. 

This case is so massive you need a playbill to follow the entities and players, which are:

  1. MTS Deferred Prosecution Agreement (DPA);
  2. MTS Criminal Information (MTS Information);
  3. SEC Cease and Desist Order (Order);
  4. Karimova and Akhmedov Indictment (Indictment);
  5. Kolorit Dizayn Ink LLC Plea Agreement (Plea Agreement); and
  6. Kolorit Dizayn Ink Information (Kolorit Information)

In addition to MTS, the business entities involve Uzdunrobita FE LLC (Uzdunrobita) which became a subsidiary of MTS in 2004 and operated as such until 2012; Swisdorn Ltd. and Takilant Ltd. both shell companies owned or controlled by Karimova. Korolit was a Uzbeki entity acquired by Uzdunrobita in 2009.

MTS desired to enter the Uzbeki telecom market, which it did in 2004 though the purchase of 74% of Uzbeki entity Uzdunrobita; which was 41% owned by a US company and 33% owned by Karimova. The remaining 26% was owned by Swisdorn. MTS paid $100 million for Swisdorn’s interest and only $12 million for the US entity’s interest. This was the beginning of a long line of bribes paid by MTS to Karimova or companies she owned or controlled. According to the Order, “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.” 

A couple of years later Swisdorn exercised a put call to mandate MTS pay Swisdorn for its remaining 26% interest. The amount for this put call was inflated to $250 million. MTS continued making bribery payments to Karimova through donations to charities controlled by her. Uzdunrobita made a fraudulent payment of $30 million to Takilant, allegedly for 3G licenses. Finally, Uzdunrobita acquired 100% of the Uzbek advertising company Kolorit, which was controlled by Karimova for $40 million. 

The SEC assessed a civil penalty of $100 million. In applying the FCPA Corporate Enforcement Policy factors, MTS did not voluntarily disclose the matter to the DOJ; MTS’s cooperation and remediation was lacking because it was slow to provide information and evidence in response to DOJ requests and MTS failed to discipline senior executives involved in the conduct. The DOJ also noted a mitigating factor included the fact that the Uzbek government expropriated MTS’s telecommunications assets in Uzbekistan, resulting in no realized pecuniary gain to the companies’ telecommunications assets in Uzbekistan. As a result, the DOJ and MTS agreed that MTS would pay a total fine equal to 25% above the bottom of the US Federal Sentencing Guidelines range.

According to the DPA, MTS “agrees to pay total monetary penalties in the amount of $850,000,000 (the “Total Criminal Penalty”), $40,000,000 of which will be paid as forfeiture by the Company on behalf of Kolorit, and $500,000 of which will be paid as a criminal fine by the Company on behalf of Kolorit, as part of its guilty plea. The Total Criminal Penalty will be offset by up to $100,000,000 for any civil penalties paid by the Company to the SEC in connection with this matter.” This amount also included a 25% discount from the range found under the Sentencing Guidelines. 

Under both the DPA and the Order, MTS agreed to a corporate monitor. According to the Order, the Monitor is to be selected within 60 days and the Monitor shall be “not unacceptable” to the SEC. Under the DPA the Monitor’s “primary responsibility is to assess and monitor the Company’s compliance with the terms of the Agreement,”. According to the Order, the Monitor is to “review and evaluate the effectiveness of the Respondent’s policies, procedures, practices, internal accounting controls, recordkeeping, and financial reporting as they relate to Respondent’s current and ongoing compliance with the anti-bribery, books and records, and internal accounting controls provisions of the FCPA and other applicable anti-corruption laws, and make recommendations reasonably designed to improve the effectiveness of Respondent’s internal accounting controls and FCPA corporate compliance program”.

If the Monitor uncovers ongoing FCPA violations or other criminal conduct, the Monitor is to report DOJ if the findings “(1) poses a risk to public health or safety or the environment; (2) involves senior management of the Company; (3) involves obstruction of justice; or (4) otherwise poses a substantial risk of harm.” Finally, the Monitor is to certify compliance with the DOJ and SEC resolutions annually over the three-year term. 

Part II - The Bribery Schemes

The bribery schemed used by MTS showed both creativity and standard techniques. Every compliance professional should study them to understand how the corruption was facilitated.  

Bribery Through Purchase of Entities Controlled by Karimova

A. Uzdunrobita

MTS desired to enter the Uzbeki telecom market, which it did in 2004 though the purchase of 74% of Uzbeki entity Uzdunrobita; which was 41% owned by a US company and 33% owned by Karimova. The remaining 26% was owned by Swisdorn. MTS paid $100 million for Swisdorn’s interest and only $12 million for the US entity’s interest. This was the beginning of a long line of bribes paid by MTS to Karimova or companies she owned or controlled. A couple of years later Swisdorn exercised a put call to mandate MTS pay Swisdorn for its remaining 26% interest. The amount for this put call was inflated to $250 million.

B. Kolorit

In September 2009, Uzdunrobita entered into an acquisition that would satisfy a portion of MTS’s obligation to confer a $40 million benefit to Karimova. Uzdunrobita acquired 100% of the Uzbek advertising company Kolorit which Karimova indirectly controlled. There was no business justification for the acquisition as a non-core transaction for either Uzdunrobita or MTS because Kolorit had no telecommunications operations and MTS was not in the advertising business.

Moreover, this transaction not only had no business purpose, it was even antithetical to MTS. The Deferred Prosecution Agreement (DPA) stated, “On or about April 9, 2009, certain MTS management wrote Executive 1, stating that the KOLORIT “transaction is a toxic one” and that “I think that we need to get the transaction to [MTS’s Investment Committee]. Let [certain MTS management] and the [Investment Committee] members share liability.” To top this off, the Order stated, “$40 million for Kolorit, substantially more than the $23 million valuation of the company that JPMorgan had prepared at MTS’s request.”

Bribes Paid to Obtain 4G Licenses

Apparently, the monies paid by MTS for Karimova’s interests in Uzdunrobita was not enough. She thereafter began demanding additional payments or the entities license to do business in Uzbekistan would be withdrawn or revoked. According to the DPA, “Executive 1 suggested “direct bargaining with [Foreign Official]” for telecommunications licenses, construction and operation permits, and currency conversion and that there be an “amount of annual subscription fee for ‘happiness,’ but under our management.” To accomplish this, Akhmedov “suggested a “direct meeting with [Foreign Official] and [a high-ranking MTS executive]””. Thereafter, Akhmedov advised that failure to make a $50 million bribe payment demanded by Karimova “could lead to potential consequences, including “the Third Party [i.e., Foreign Official] creating difficulties (of various kinds)” for Uzdunrobita’s business, “suspension” of Uzdunrobita’s operations, or the forced sale of Uzdunrobita.”

According to the Order, to facilitate this bribe, another Karimova shell company, “Takilant and an MTS subsidiary executed an agreement under which Takilant’s subsidiary would waive its rights to the 800 MHz frequencies and return them to the Uzbek telecommunications regulator. On August 25, Government Official A exercised her control over the Uzbek telecommunications regulator to ensure that the 800 MHz frequency rights were assigned to Uzdunrobita”. Payment of the $50 million demand was to be made as follows: “$30 million through the purchase of CDMA frequencies, prior to 01/11/08 and $20 million in an agreed form, prior to 01/01/09, tied to the growth of the subscriber base.” This first $30 million payment was made in “six installments of $5 million each, beginning in October 2008 and ending in July 2009.”

Bribery Through Charitable Entities Controlled by Karimova

MTS continued making bribery payments to Karimova through donations to charities controlled by her. According to the Order, MTS also made payments to charities controlled by Karimova. These “payments were made in the expectation that they were necessary to ensure Government Official A’s continued support for Uzdunrobita’s business. The payments were falsely recorded in Uzdunrobita’s books and records as advertising and non-operating expenses, rather than as charitable expenses.” The payments also failed to comply with appropriate internal controls as they were not approved internally by either Uzdunrobita or MTS until after payments were made. Finally, the donations “were not memorialized in agreements with anti-corruption representations.” To demonstrate the clear improper motive behind the charitable, see the below Charitable Donation Box Score, which clearly demonstrates the Red Flags in the dates and amounts.

Date 

Payment Amount 

Charity Name 

3/27/2012 

$135,612 

Center for Youth Initiatives “Kelajak ovozi” 

3/27/2012 

$135,612 

Fund for Support of Social Initiatives 

3/27/2012 

$135,612 

Republic Social Association “Zhenskoye Sobraniye” 

3/27/2012 

$135,611 

Public Fund “Mehr Nuri” 

3/27/2012

$189,865

Fund Forum

3/27/2012

$162,734

Fund Forum

3/27/2012

$189,865

Fund Form

3/27/2012

$52,244

Terra Group

Total

$1,139,137

 


Part III – Missed Red Flags and Overridden Controls

Next, we consider the MTS compliance program response, focusing on the failures in the MTS compliance regime, the override of internal controls and local business unit management which facilitated the bribery schemes.  

Purchase of Uzdunrobita

MTS desired to enter the Uzbeki telecom market, which it did in 2004 though the purchase of 74% of Uzbeki entity Uzdunrobita; which was 41% owned by a US company and 33% owned by Karimova. The remaining 26% was owned by Swisdorn, which was another shell company controlled by Karimova. MTS paid $100 million for Swisdorn’s interest and only $12 million for the US entity’s interest. In addition to this fraudulent payment to Karimova, there were mutual put/call options agreed to by the parties. 

However, within two years the MTS call purchase option disappeared through negotiation and it became a unilateral put call for the sole benefit of Karimova through her shell company Swisdorn. This action was done fraudulently at MTS as the Information stated, “Certain MTS management did not obtain the approval of MTS’s Investment Committee or MTS’s Board of Directors for the amendment and only informed MTS’s Investment Committee after the amendment agreement had been executed.”

Conversely, MTS executives were becoming aware that Karimova owned or controlled Swisdorn and in “February 2007, the new executive began to raise concerns, including the FCPA risk MTS faced if Shell Company A was” beneficially owned by Karimova. His own open source investigation indicated that MTS could risk FCPA exposure through these arrangements with Karimova. He asked that a law firm perform a full due diligence investigation on Swisdorn. Moreover, “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 response from senior MTS management was to sideline this executive. The Information stated, “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.” Further, as 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.”

Because of these misrepresentations, the due diligence came back in a manner such that the transaction went forward. However, even in this step MTS was made aware of red flags. According to the Order, the original put option was “set at 26% of $145,000,000, or $37.7 million, plus five percent interest per annum for each year after the signing of the agreement until the put or call option was exercised.” Yet, this price was inflated up to $250 million by Karimova at the time the put call was exercised. 

Purchase of Kolorit

In September 2009, Uzdunrobita entered into an acquisition that would satisfy a portion of MTS’s obligation to confer a $40 million benefit to Karimova. Uzdunrobita acquired 100% of the Uzbek advertising company Kolorit which Karimova indirectly controlled. There was no business justification for the acquisition as a non-core transaction for either Uzdunrobita or MTS because Kolorit had no telecommunications operations and MTS was not in the advertising business. Indeed, according to the Information, one MTS executive, “emailed certain MTS management a memo stating that “[t]he Third Party [Foreign Official] is making a demand that [MTS] pay $50 mln . . . .” “by acquiring an asset” whose value was “overstated,” which was “unattractive” to MTS’s “development strategy” and whose size would be “impossible to explain to the investment community.”

Moreover, this transaction not only had no business purpose, it was even antithetical to MTS. The Deferred Prosecution Agreement (DPA) stated, “On or about April 9, 2009, certain MTS management wrote Executive 1, stating that the KOLORIT “transaction is a toxic one” and that “I think that we need to get the transaction to [MTS’s Investment Committee]. Let [certain MTS management] and the [Investment Committee] members share liability.” To top this off, the Order stated, “$40 million for Kolorit, substantially more than the $23 million valuation of the company that JPMorgan had prepared at MTS’s request.” 

Finally, the Information pointed out, “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 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.”

Purchase of 4G Licenses

To obtain these licenses MTS engaged a due diligence investigator to look into their holder Takilant. The investigator fairly easily discovered that “Takilant's nominal owner had no telecommunications background and was a known proxy for Government Official A [Karimova], MTS ignored the information.” Additionally, “On August 29, 2008, the investigative firm reported to MTS that “Uzbek sources regard Takilant Ltd as being beneficially owned by the family of the Uzbek president. . . . Confidential sources close to, and knowledgeable about, Uzbek business and political circles, regard [the director of Takilant] as being a trustee of [Government Official A], a [relative] of the Uzbek president. Sources believe that [the director of Takilant] works for [Government Official A], being in charge of the latter’s fashion business and PR matters.” Additionally, “After receiving the firm’s findings, MTS conducted no further investigation and proceeded with the transaction.””

To fund the monies, it required MTS Board approval for the loan from the parent to the Uzbeki subsidiary to make the payment. Apparently, the Board was never informed about Karimova’s involvement or hidden interest in Takilant. 

Charitable Donations

MTS continued making bribery payments to Karimova through donations to charities controlled by her. According to the Order, MTS also made payments to charities controlled by Karimova. These “payments were falsely recorded in Uzdunrobita’s books and records as advertising and non-operating expenses, rather than as charitable expenses.” The payments also failed to comply with appropriate internal controls as they were not approved internally by either Uzdunrobita or MTS until after payments were made. Finally, the donations “were not memorialized in agreements with anti-corruption representations.” 

Part IV – the Individual Indictments

Next we look at the individual indictments, which charged Gulnara Karimova, daughter of the former President of Uzbekistan, with one count of conspiracy to commit money laundering and Bekhzod Akhmedov, a former MTS executive based in Uzbekistan with FCPA violations of one count of conspiracy to violate the FCPA, two counts of violating the FCPA, and one count of conspiracy to commit money laundering.  

US Attorney Geoffrey S. Berman of the Southern District of New York, said in the DOJ Press Release, “This is the third installment in a trilogy of cases arising from an almost $1 billion bribery scheme that reached the highest echelons of the Uzbekistan government and was orchestrated by some of the largest telecommunications companies in the world. By funneling multimillion-dollar bribe payments through the U.S. financial system, the companies and individual defendants corruptly tried to tip the global economy in their favor and line their own pockets. But they are now paying the price. Today, my Office and our law enforcement partners are sending a bold, unequivocal message that the U.S. financial system is not in business to enable foreign bribery or money laundering. This Office stands ready to prevent, prosecute, and penalize foreign corrupt practices wherever in the world we find them.”

The indictment discussed the three companies who paid bribes to Karimova, who then laundered the money on the international stage. They were VimpelCom Ltd. (now VEON Ltd.), Telia Company AB (formerly TeliaSonera AB) (Telia) and MTS. The schemes Karimova used were so similar as to be almost identical. The only thing that changed was the name of the company she was shaking down money from in her march towards receiving over $1 billion in ill-gotten payments. 

VimpelCom

In the VimpelCom matter, Karimova held in interest in an Uzbeki company Buztel GSM. VimpelCom purchased Buztel and another Uzbeki company Unitel LLC to enter the Uzbeki telecom market. After payments of some $260 million for these two companies, Karimova received a 7% interest in the new company for which she sold the shares back to VimpelCom to for another $60 million. In addition to these initial amounts VimpelCom paid out over another $100 million in bribes to Karimova for 3G and 4G licenses, for bogus claims of consulting, through resellers and through currency exchange mechanisms. 

Telia

According to the Indictment, Telia paid over $331 million to Karimova over just three years. It began with the purchase of a US company which held licenses to do telecom business in Uzbekistan. The purchase was of an entity called Coscom LLC and Telia paid $30 million to Karimova, with Karimova retaining a 26% interest in Coscom. Karimova kept an exclusive put option to sell this interest back to Telia, which she later exercised to the tune of $220 million. The remaining monies were paid for 3G licenses, sham consulting contracts and just plain old unattached bribe payments which Karimova extorted out of Telia by threatening to pull their license to do business in Uzbekistan. 

MTS

Karimova used the same bribery schemes to shake down MTS. She extorted monies when MTS entered the Uzbeki market by receiving some 6X the amount paid by the US entity which held the telecom license to do business in Uzbekistan. She retained an interest in the company and held a unilateral put call which she exercised for an amount far above the fair market value of the company. Yet Karimova did not sit still with her schemes as she required MTS to purchase another Uzbeki entity which was not in the telecom space to secure another bribe of $40 million.

There was another scheme present in the MTS matter which was present in the VimpelCom matter, but not the Telia matter. The Order characterized it as “Currency Conversion Transactions” and in the FCPA enforcement action brought by the SEC it was characterized as ‘books and records’ violation. However, it was more fully fleshed out in the VimpelCom enforcement action. The scheme went like this: the local Uzbeki telecom entity subsidiary would enter into equipment purchase contracts denominated in US dollars. Due to restrictions on the conversion of Uzbek soums into US dollars, the local Uzbeki telecom entity could not convert enough currency to pay its equipment vendors. In order to make its payments under the contracts, the local Uzbeki telecom entity would enter into debt reassignment and equipment purchase agreements with 3rd-party companies who agreed to pay the required amounts of US dollars to pay the local Uzbeki telecom entity’s vendors. These companies were either controlled by or made the payments to Karimova. 

Akhmedov was the facilitator through all of these bribery schemes, acting as the representative of Karimova and at least in the case of MTS, serving as an executive of the Uzbeki subsidiary of MTS. There was nothing to indicate that Akhmedov held any government position, so he was charged with both money laundering and FCPA violations. Rather amazingly and conveniently for US jurisdictional questions, he routed bribe payments through the US banking system. 

Why are these indictments so significant? Assistant Attorney General Benczkowski summarized the actions of Karimova in the DOJ Press Release, stating, “Gulnara Karimova stands accused of exploiting her official position to solicit and accept more than $865 million in bribes from three publicly traded telecom companies, and then laundering those bribes through the U.S. financial system. The indictment and corporate resolution announced today, together with two prior corporate resolutions involving bribes allegedly paid to Karimova, demonstrate the Department’s comprehensive approach to foreign corruption: we will aggressively pursue both corrupt foreign officials and the companies and individuals who bribe them in order to gain unfair business advantages, and we will do everything we can to keep the proceeds of that corruption out of the U.S. financial system.” Additionally, the DOJ has brought civil forfeiture actions under the Kleptocracy Asset Recovery Initiative for over $850 million of Karimova’s ill-gotten gains. 

But more than bringing Karimova and Akhmedov to justice, it once again demonstrates the US leadership in the fight against international bribery and corruption. Swedish courts could not or would not convict Telia Company executives who either paid the bribes to Karimova, facilitated the payments to her or overrode internal controls to make the payments. Do you really think the Russian government would prosecute a company for engaging in bribery and corruption? It is only the US government, in the form of the DOJ, which has both the will and cache to bring such individual prosecutions on the international stage. 

Part V – Lessons Learned

I conclude by focusing on the key lessons learned for the compliance practitioner. While it may seem that the MTS enforcement action has little relevance to the compliance professional working in America or Europe or indeed any company which has a best practices compliance program, there are several key points that bear consideration and exploration.  

Due Diligence

This case emphasized once again the importance and significance of due diligence. In each of the transactions involved there was clear evidence of the involvement directly or indirectly by Karimova. The bribes paid for the acquisition of and for the put call to Karimova were through her company Swisdorn. The Deferred Prosecution Agreement (DPA) revealed that one MTS executive, working on his own, dug up open source information that Karimova “had set up Shell Company A [Swisdorn], which “received” 20% of Uzdunrobita from American Company and 31.4% from the Uzbek government; [Karimova] had an official role in the Uzbek government and influence with a high-ranking Uzbek government officials; [Karimova] had amassed a “large business empire” through “corrupt means” and that part of [Karimova’s] holdings was “the largest wireless telephone operator in Uzbekistan,” which, at the time, was Uzdunrobita; and [Karimova] had substantial influence in the Uzbek government, including in the telecommunications sector.”

Regarding Takilant, due diligence found the company was “beneficially owned by the family of [a high-ranking Uzbek government official],” and that [Akhmedov] was “a trustee of [Karimova]” and worked for [Karimova]. The report further documented international press articles that also reported that [Takilant] was beneficially owned by the family of a high-ranking Uzbek government official [Karimova].” To top it off, the due diligence also revealed that “[Takilant] was a minority owner of both of Uzdunrobita’s competitors in Uzbekistan, Unitel and Coscom.”

The matter drives home the point, yet again, that not only must due diligence be performed but if red flags appear, they must be cleared. The MTS executive who did his own open source investigation demonstrated not only how clear this requirement is but the business reason to do so. He recognized the potential FCPA violations or at least issues with what he found. He was dead right that the company would pay for doing business with such persons. 

Business Justification

Another bribery scheme involved the purchase of Kolorit, which was unrelated to any business which MTS was doing in Uzbekistan as it was an advertising company. Even MTS executives noted there was no business reason to purchase the company. It stated in the DPA, “that “[t]he Third Party [Foreign Official] is making a demand that [MTS] pay $50 mln . . . .” “by acquiring an asset” whose value was “overstated,” which was “unattractive” to MTS’s “development strategy” and whose size would be “impossible to explain to the investment community.”” The DPA later stated, Kolorit “was created by the same shareholders as Uzdunrobita before it.” It went on to note, “[i]n my opinion, the main reason [for the acquisition] is the interest of the founders on the Uzbekistani side and certain internal agreements. [KOLORIT] was created and developed exclusively as a result of activities of the founders of Uzdunrobita; a clear connection is maintained today as well.” 

The report further noted, ““the reason for the sale of KOLORIT for [KOLORIT]’s ownership is unclear,” that KOLORIT did not need the sale for its development, and that “maybe, there are hidden economic factors that will not be disclosed to an external expert.”” But it got even worse from there as, “On or about April 9, 2009, certain MTS management wrote Executive 1, stating that the KOLORIT “transaction is a toxic one” and that “I think that we need to get the transaction to [MTS’s Investment Committee]. Let [certain MTS management] and the [Investment Committee] members share liability.” 

All of this cited conversation drives home the fact that there must always be a business justification articulated to engage in the purchase of another entity. If there is not or indeed one cannot be articulated, it always means there is another reason. Put another way, if your business folks cannot explain why you should be doing business with someone, you should not be doing business with them. 

Business Valuation

To add to the litany of reasons that the Kolorit transaction was littered with red flags was the purchase price paid by MTS for the company. The Order stated, “$40 million for Kolorit, substantially more than the $23 million valuation of the company that JPMorgan had prepared at MTS’s request.” MTS’s own Department of Strategic Planning put it equally as bluntly in an internal memo, cited in the DPA, stating, “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 185th rank in inflation rate), just one outdoor local advertising company could cost 40 MUSD. This is a pure fairy tale!”

Most compliance practitioners do not think of a purchase price as indicia of corruption. However, the MTS matter drives home the requirement that a reasonable price be paid for an acquisition. If not, what is the reason for the excess value? It could well be the basis for a corrupt payment. The same logic also mandates corporate compliance program visibility into the corporate mergers and acquisition (M&A) process. While compliance might have some input regarding the compliance aspects of an acquisition target, it rarely has such oversight of the business valuation or purchase price. 

Once you pay a bribe…

Finally, the MTS enforcement action demonstrates as plainly as can be shown, what happens to a company once it starts down the road of bribery and corruption. For just as there is no honor among thieves, once you start paying corrupt officials the demands for additional bribe payments will never end. The DPA is replete with examples where Karimova continually threatened MTS unless additional bribe payments were made. 

It began literally within a year of MTS purchasing the assets which would become Uzdunrobita, in April 2008, when the company received an email from the Uzbeki regulators “concerning purportedly bad connection quality for local and inter-city calling in violation of Uzdunrobita’s license. The notice stated that if those violations were not corrected within one month, Uzdunrobita’s license could be suspended or revoked. Later that day, Executive 1 forwarded the email to certain MTS management, stating that Executive 2 “had warned us that [Foreign Official] will be taking revenge” for MTS’s decision to decline to engage in another transaction for the benefit of Foreign Official.”

In the summer of 2008, MTS executives were still trying to address Karimova’s “demands for addition payments”.  She was taking away broadcast frequencies from MTS and reassigning them to MTS competitors. One MTS executive even suggested that there be a bribe payment made as “an amount of annual subscription fee for ‘happiness’”. All of this led to the bribe payment which was made, allegedly for the 4G licenses but, in reality, it was just another Karimova shakedown. 

The Kolorit purchase was a continued part of the shakedown. One MTS executive termed the $50 million payment as being made as our “obligation”. However, he also wrote that unless the bribe payments continued “Uzdunrobita could lose its “existing currency exchange opportunities” and “the acquired frequencies,” or even face the “[r]ecall of the license in some of the regions.”

The bottom line is that once you start paying bribes you are always subject to additional extortion. The MTS officials who paid the bribes broke Uzbeki law as even in Uzbekistan it is illegal to bribe its government officials. Just as the GlaxoSmithKline PLC Chinese business unit executives were prosecuted in China under domestic Chinese anti-bribery laws, MTS executives in Uzbekistan run that risk every day.

Part VI - Denouement – Leveling the Playing Field

In this denouement, I want to address why it is incumbent on both the DOJ and Commission SEC to continue to lead the international fight against bribery and corruption. It is leveling the playing field.

There are commentators who say that the US has no business bringing a FCPA enforcement action against a foreign company which engages in bribery and corruption in yet another foreign country. They fail to understand why such bribery and corruption committed in a far-off land facilitates the continuation of such business tactics but also continues to directly and negatively impact US companies which play by the rules and do not engage in such illegal actions. The enforcement actions brought by the US not only work to protect US companies abroad but also work to level the international playing field for US businesses who want to engage in international commerce. 

One of the key reasons for the passage of the FCPA back in 1977, was to level the playing field so that US companies could compete on a business basis with companies from other countries. Simply put, US companies can often go “further, faster and higher” than companies from other countries because of technological innovation but more importantly the quality of their products and services. 

Writing back in 2001, the US State Department said, “Business thrives on competition. U.S. companies and workers can compete with the best in the global marketplace because of their drive, innovation, and quality products and services. However, their success depends heavily on their ability to compete on a level playing field. Bribery and corruption tilt the playing field and create unfair advantages for those willing to engage in unethical or illegal behavior. Corrupt practices penalize companies that play fair and seek to win contracts through the quality and price of their products and services. In 1977, the United States enacted the Foreign Corrupt Practices Act (FCPA), effectively outlawing offers, promises, and payments by U.S. firms to foreign officials, political parties, party officials and candidates to secure business advantage. Since then, the United States has been trying to level the playing field by encouraging other industrialized countries to take similar steps - and these efforts are finally paying off. There has been real progress in building an international coalition to fight bribery and public corruption so that all businesses may fairly compete in the global market place.”

Dick Cassin, writing in the FCPA Blog in 2008 said that the playing field was continuing to be leveled by the 1998 amendments to the FCPA, which noted that even in 1998, US businesses were losing over $30 billion annually to non-US companies engaged in bribery and corruption. With the increased enforcement of the FCPA in the first decade of this century, Cassin wrote, “The level playing field is still a work in progress, but at least there’s progress to measure.”

Fast forward to 2017, when, in a MLex article, Mark Bocchetti noted that then Attorney General Jeff Sessions, “signaled that he would be more than willing to go after foreign companies that may be issuing bribes to undermine US competitors.” He quotes Sessions for the following, “Our department wants to create an even playing field for law-abiding companies. We will continue to enforce the FCPA and other anti-corruption laws. Companies should succeed because they provide superior products and services, not because they have paid off the right people.” Bocchetti also wrote that Sessions, “returned to the theme of unfair competition again during a question-and-answer period, even asking companies to volunteer ideas for how the Department of Justice could do a better job of ensuring that their competitors are not gaining an advantage.”

While there are multiple other reasons for robust FCPA enforcement, including (1) US security interests; (2) US foreign policy interests; (3) US business interests; (4) US economic interests; and (5) US legal interests as reflected in compliance with the Foreign Corrupt Practices Act (FCPA); leveling the playing field is equally high on the list. There are yet many other reasons for robust FCPA enforcement that relate to the damages to the countries where bribes are paid and the impact of crime and terrorism. Yet it is directly in the interest of the US to prosecute companies such as MTS (and VimpelCom Ltd. and Telia Company AB as well) for their payment of bribes in Uzbekistan. When foreign companies voluntarily subject themselves to US jurisdiction by seeking investment in US capital markets, it is incumbent that US prosecutors and regulators make certain those foreign companies play by the US regulations they agreed to be covered under when they accessed such markets. Of course, if these companies run some, all or indeed any part of their bribery schemes through the US or its banking systems, there is another clear reason to protect US interests; the integrity of the US banking system. 

The MTS FCPA enforcement action provides a prime example of how robust enforcement of the FCPA against foreign bribe payors positively impacts law-abiding US businesses. Such continued robust enforcement is clearly in the interest of many players, including law-abiding US businesses. 

References and Resources:

  1. MTS Deferred Prosecution Agreement (DPA);
  2. MTS Criminal Information (MTS Information);
  3. SEC Cease and Desist Order (Order);
  4. Karimova and Akhmedov Indictment (Indictment);
  5. Kolorit Dizayn Ink LLC Plea Agreement (Plea Agreement); 
  6. Kolorit Dizayn Ink Information (Kolorit Information);
  7. The DOJ Press Release; and
  8. The SEC Press Release.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Thomas Fox, Compliance Evangelist | Attorney Advertising

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JD Supra Privacy Policy

Updated: May 25, 2018:

JD Supra is a legal publishing service that connects experts and their content with broader audiences of professionals, journalists and associations.

This Privacy Policy describes how JD Supra, LLC ("JD Supra" or "we," "us," or "our") collects, uses and shares personal data collected from visitors to our website (located at www.jdsupra.com) (our "Website") who view only publicly-available content as well as subscribers to our services (such as our email digests or author tools)(our "Services"). By using our Website and registering for one of our Services, you are agreeing to the terms of this Privacy Policy.

Please note that if you subscribe to one of our Services, you can make choices about how we collect, use and share your information through our Privacy Center under the "My Account" dashboard (available if you are logged into your JD Supra account).

Collection of Information

Registration Information. When you register with JD Supra for our Website and Services, either as an author or as a subscriber, you will be asked to provide identifying information to create your JD Supra account ("Registration Data"), such as your:

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Other Information: We also collect other information you may voluntarily provide. This may include content you provide for publication. We may also receive your communications with others through our Website and Services (such as contacting an author through our Website) or communications directly with us (such as through email, feedback or other forms or social media). If you are a subscribed user, we will also collect your user preferences, such as the types of articles you would like to read.

Information from third parties (such as, from your employer or LinkedIn): We may also receive information about you from third party sources. For example, your employer may provide your information to us, such as in connection with an article submitted by your employer for publication. If you choose to use LinkedIn to subscribe to our Website and Services, we also collect information related to your LinkedIn account and profile.

Your interactions with our Website and Services: As is true of most websites, we gather certain information automatically. This information includes IP addresses, browser type, Internet service provider (ISP), referring/exit pages, operating system, date/time stamp and clickstream data. We use this information to analyze trends, to administer the Website and our Services, to improve the content and performance of our Website and Services, and to track users' movements around the site. We may also link this automatically-collected data to personal information, for example, to inform authors about who has read their articles. Some of this data is collected through information sent by your web browser. We also use cookies and other tracking technologies to collect this information. To learn more about cookies and other tracking technologies that JD Supra may use on our Website and Services please see our "Cookies Guide" page.

How do we use this information?

We use the information and data we collect principally in order to provide our Website and Services. More specifically, we may use your personal information to:

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How is your information shared?

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How We Protect Your Information

JD Supra takes reasonable and appropriate precautions to insure that user information is protected from loss, misuse and unauthorized access, disclosure, alteration and destruction. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. You should keep in mind that no Internet transmission is ever 100% secure or error-free. Where you use log-in credentials (usernames, passwords) on our Website, please remember that it is your responsibility to safeguard them. If you believe that your log-in credentials have been compromised, please contact us at privacy@jdsupra.com.

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Our Website and Services are not directed at children under the age of 16 and we do not knowingly collect personal information from children under the age of 16 through our Website and/or Services. If you have reason to believe that a child under the age of 16 has provided personal information to us, please contact us, and we will endeavor to delete that information from our databases.

Links to Other Websites

Our Website and Services may contain links to other websites. The operators of such other websites may collect information about you, including through cookies or other technologies. If you are using our Website or Services and click a link to another site, you will leave our Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We are not responsible for the data collection and use practices of such other sites. This Policy applies solely to the information collected in connection with your use of our Website and Services and does not apply to any practices conducted offline or in connection with any other websites.

Information for EU and Swiss Residents

JD Supra's principal place of business is in the United States. By subscribing to our website, you expressly consent to your information being processed in the United States.

  • Our Legal Basis for Processing: Generally, we rely on our legitimate interests in order to process your personal information. For example, we rely on this legal ground if we use your personal information to manage your Registration Data and administer our relationship with you; to deliver our Website and Services; understand and improve our Website and Services; report reader analytics to our authors; to personalize your experience on our Website and Services; and where necessary to protect or defend our or another's rights or property, or to detect, prevent, or otherwise address fraud, security, safety or privacy issues. Please see Article 6(1)(f) of the E.U. General Data Protection Regulation ("GDPR") In addition, there may be other situations where other grounds for processing may exist, such as where processing is a result of legal requirements (GDPR Article 6(1)(c)) or for reasons of public interest (GDPR Article 6(1)(e)). Please see the "Your Rights" section of this Privacy Policy immediately below for more information about how you may request that we limit or refrain from processing your personal information.
  • Your Rights
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You can make a request to exercise any of these rights by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

You can also manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard.

We will make all practical efforts to respect your wishes. There may be times, however, where we are not able to fulfill your request, for example, if applicable law prohibits our compliance. Please note that JD Supra does not use "automatic decision making" or "profiling" as those terms are defined in the GDPR.

  • Timeframe for retaining your personal information: We will retain your personal information in a form that identifies you only for as long as it serves the purpose(s) for which it was initially collected as stated in this Privacy Policy, or subsequently authorized. We may continue processing your personal information for longer periods, but only for the time and to the extent such processing reasonably serves the purposes of archiving in the public interest, journalism, literature and art, scientific or historical research and statistical analysis, and subject to the protection of this Privacy Policy. For example, if you are an author, your personal information may continue to be published in connection with your article indefinitely. When we have no ongoing legitimate business need to process your personal information, we will either delete or anonymize it, or, if this is not possible (for example, because your personal information has been stored in backup archives), then we will securely store your personal information and isolate it from any further processing until deletion is possible.
  • Onward Transfer to Third Parties: As noted in the "How We Share Your Data" Section above, JD Supra may share your information with third parties. When JD Supra discloses your personal information to third parties, we have ensured that such third parties have either certified under the EU-U.S. or Swiss Privacy Shield Framework and will process all personal data received from EU member states/Switzerland in reliance on the applicable Privacy Shield Framework or that they have been subjected to strict contractual provisions in their contract with us to guarantee an adequate level of data protection for your data.

California Privacy Rights

Pursuant to Section 1798.83 of the California Civil Code, our customers who are California residents have the right to request certain information regarding our disclosure of personal information to third parties for their direct marketing purposes.

You can make a request for this information by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

Some browsers have incorporated a Do Not Track (DNT) feature. These features, when turned on, send a signal that you prefer that the website you are visiting not collect and use data regarding your online searching and browsing activities. As there is not yet a common understanding on how to interpret the DNT signal, we currently do not respond to DNT signals on our site.

Access/Correct/Update/Delete Personal Information

For non-EU/Swiss residents, if you would like to know what personal information we have about you, you can send an e-mail to privacy@jdsupra.com. We will be in contact with you (by mail or otherwise) to verify your identity and provide you the information you request. We will respond within 30 days to your request for access to your personal information. In some cases, we may not be able to remove your personal information, in which case we will let you know if we are unable to do so and why. If you would like to correct or update your personal information, you can manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard. If you would like to delete your account or remove your information from our Website and Services, send an e-mail to privacy@jdsupra.com.

Changes in Our Privacy Policy

We reserve the right to change this Privacy Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our Privacy Policy will become effective upon posting of the revised policy on the Website. By continuing to use our Website and Services following such changes, you will be deemed to have agreed to such changes.

Contacting JD Supra

If you have any questions about this Privacy Policy, the practices of this site, your dealings with our Website or Services, or if you would like to change any of the information you have provided to us, please contact us at: privacy@jdsupra.com.

JD Supra Cookie Guide

As with many websites, JD Supra's website (located at www.jdsupra.com) (our "Website") and our services (such as our email article digests)(our "Services") use a standard technology called a "cookie" and other similar technologies (such as, pixels and web beacons), which are small data files that are transferred to your computer when you use our Website and Services. These technologies automatically identify your browser whenever you interact with our Website and Services.

How We Use Cookies and Other Tracking Technologies

We use cookies and other tracking technologies to:

  1. Improve the user experience on our Website and Services;
  2. Store the authorization token that users receive when they login to the private areas of our Website. This token is specific to a user's login session and requires a valid username and password to obtain. It is required to access the user's profile information, subscriptions, and analytics;
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There are different types of cookies and other technologies used our Website, notably:

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JD Supra Cookies. We place our own cookies on your computer to track certain information about you while you are using our Website and Services. For example, we place a session cookie on your computer each time you visit our Website. We use these cookies to allow you to log-in to your subscriber account. In addition, through these cookies we are able to collect information about how you use the Website, including what browser you may be using, your IP address, and the URL address you came from upon visiting our Website and the URL you next visit (even if those URLs are not on our Website). We also utilize email web beacons to monitor whether our emails are being delivered and read. We also use these tools to help deliver reader analytics to our authors to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

Analytics/Performance Cookies. JD Supra also uses the following analytic tools to help us analyze the performance of our Website and Services as well as how visitors use our Website and Services:

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Facebook, Twitter and other Social Network Cookies. Our content pages allow you to share content appearing on our Website and Services to your social media accounts through the "Like," "Tweet," or similar buttons displayed on such pages. To accomplish this Service, we embed code that such third party social networks provide and that we do not control. These buttons know that you are logged in to your social network account and therefore such social networks could also know that you are viewing the JD Supra Website.

Controlling and Deleting Cookies

If you would like to change how a browser uses cookies, including blocking or deleting cookies from the JD Supra Website and Services you can do so by changing the settings in your web browser. To control cookies, most browsers allow you to either accept or reject all cookies, only accept certain types of cookies, or prompt you every time a site wishes to save a cookie. It's also easy to delete cookies that are already saved on your device by a browser.

The processes for controlling and deleting cookies vary depending on which browser you use. To find out how to do so with a particular browser, you can use your browser's "Help" function or alternatively, you can visit http://www.aboutcookies.org which explains, step-by-step, how to control and delete cookies in most browsers.

Updates to This Policy

We may update this cookie policy and our Privacy Policy from time-to-time, particularly as technology changes. You can always check this page for the latest version. We may also notify you of changes to our privacy policy by email.

Contacting JD Supra

If you have any questions about how we use cookies and other tracking technologies, please contact us at: privacy@jdsupra.com.

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