MTS FCPA Settlement and Karimova Indictment: Lessons for Compliance Practitioners

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.

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.