CorruptionToday, I continue my exploration of the lessons to be learned from the VimpelCom Ltd. (VimpelCom) Foreign Corrupt Practices Act (FCPA) enforcement action. While it is clear that the company and its Uzbeki subsidiary, Unitel LLC (Unitel), engaged in an intentional bribery scheme and probably not even a best practices compliance program would have helped prevent the corrupt acts admitted by the company, there remain significant education to be mined from both VimpelCom’s and Unitel corrupt acts. Yesterday, I explored the role of VimpelCom’s Board of Directors and senior management in the failure, together with the fraudulent stock transfer. Today I want to look at the more mundane bribery schemes to instruct the Chief Compliance Officer (CCO) or compliance practitioner regarding what to look for going forward.

It must be emphasized, and even re-emphasized, that VimpelCom knew exactly what it was doing, worked very hard to hide it and lied internally about what it was doing. Of course it lied publicly as well via fraudulent books and records.

For review, Unitel funded its bribes to the Uzbeki government official through a variety of mechanism. The summary is as follows:

Bribery Scheme Amount of Bribe Paid Time Frame
Fraudulent Buy-Out $37.5MM March, 2007
Outright Cash bribe for 3G network $25MM November, 2011
False Consulting Invoices for 4G Network $2MM

$30MM

2008

2011

Corrupt Reseller Payments $10MM

$10MM

2011

2013

Total $114.5MM

Bribes Paid for 3G and 4G Networks

According to the Unitel Deferred Prosecution Agreement (DPA), the company paid bribes related to the acquisition of 3G frequencies in 2007. They were falsely recorded in VimpelCom’s consolidated books and records as the acquisition of an intangible asset, namely 3G frequencies, and as consulting expenses. In 2008 another bribe was falsely recorded in the consolidated books and records as “submission and support documentation packages seeking assignment of 24 channels to Unitel” and treated as an acquisition of an intangible asset and consulting services. Finally, the 2011 bribe related to consultancy services associated with the acquisition of 4G frequencies in 2011 was falsely recorded in their consolidated books and recorded as “consulting services” and treated as consulting services and as an acquisition of an intangible asset, namely 4G frequencies.

All of these bribes were paid to a shell company that was controlled by a daughter of a foreign official. The $2MM bribe paid, according to the DPA, was an additional obligation incurred “from the moment of payment for the acquisition of Unitel.” There was a vague attempt to hide this bribe for services but the in-house counsel involved noted that the “payout term of the amount was not specified” and the in-house attorney did “not know if all the services listed in the presentation [had] to be fulfilled as a condition for the payment.” There was a later attempt to create a sham contract for these services and backdate the contract to cover this bribe payment.

The payment of $30MM in 2011 was equally fraudulent on the company’s books and records. While it was allegedly for help in procuring some 4G licenses from the Uzbeki government, the company neither needed nor wanted these 4G licenses. The whole deal smelled so bad that one witness said, “I cannot see how I can be able to sign off on this…unless the legal FCPA analysis can clarify this and settle my concerns.”

So VimpelCom moved forward to obtain an opinion from an outside counsel. However it did so without providing outside counsel its own knowledge that a foreign official owned the shell company, through which the payments were directed, and did not provide information on the nature of the transaction or its high dollar value. It was so bad that the same witness cited above asked if “VimpelCom had received any official ‘ok’ from US Governmental body/SEC”? Unfortunately VimpelCom’s in-house counsel did not bother to provide accurate information for outside counsel to review and opine upon; coupled with an outside counsel who did not appear to know to ask the basic questions about the ownership structure or to investigate on its own. Finally, VimpelCom’s in-house counsel viewed its sham due diligence report as a legal defense if a FCPA allegation arose.

False Reseller Payments

After the previously noted payments, the corrupt foreign official was paid another $20MM in 2011 and 2013. This is far past conduct in 2005 and is much nearer in time to the present. This clearly demonstrates a company’s commitment to continued bribery and corruption. However, “Because of significant currency conversion restrictions in Uzbekistan and the inability to use Uzbek som (the Uzbek unit of currency) to obtain necessary foreign goods, UNITEL frequently entered into non-transparent transactions with purported “reseller” companies to pay foreign vendors in hard currency for the provision of goods in Uzbekistan. Typically, UNITEL would contract with a local Uzbek company in Uzbek som, and that Uzbek company’s related companies located outside of Uzbekistan would agree to pay an end supplier using the hard currency (usually, U.S. dollars).”

To pay these bribes Unitel entered into contracts for services with certain resellers that were neither necessary or where payments were made at highly inflated prices. Additionally, these contracts were made through contravention of the company’s internal controls as they “were approved without sufficient justification and bypassed the normal competitive tender processes. How fraudulent were these resellers? It was noted, “the office was “located in an old run-down house [building], without any signage” and “[t]here were no specialists [or technicians] there.” The employee recommended against using the reseller company as a contractor for UNITEL, as it was “not qualified and there are big risks . . . .” The employee who reported this was forced to “voluntarily resign”. Finally, when there was an attempt to audit these fake resellers, executives at Unitel stalled their own internal auditors and, when finally forced to present them for audit, claimed the “transaction was “not a reselling operation,” which resulted in the purported reseller company contract being removed from the audit.”

Failures

The failures up and down the VimpelCom and Unitel chain are simply mindboggling. Even when confronted with an employee who clearly understood and articulated that the transactions at issue were potential FCPA violations, senior management engaged in conscious avoidance to the violation. VimpelCom’s in-house counsel most likely committed criminal acts by limiting the information presented to outside counsel to fraudulently obtain a favorable opinion of counsel that the transaction passed muster. Basic internal controls were lacking or were completely over-ridden in selecting and using the resellers for services the company did not need or want.

Further, the company did not have any system for conducting, recording or verifying due diligence on third parties. The company did not require that consulting agreements or other contracts with third parties be for actual services or have any way to verify services were performed. There was a lack of appropriate controls around payments to single sourced vendors and a failure to audit third parties.

The VimpelCom case will be studied for some time for the failure of an entire compliance system.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2016

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