Over the next few blog posts, I will be exploring the resolution and what lessons the compliance practitioner can draw from the Telia Company Foreign Corrupt Practices Act, (FCPA) enforcement action, the parallel actions and what it may portend for FCPA enforcement going forward under the Department of Justice (DOJ). Today I will consider the bribery schemes involved in the matter as they will provide a compliance practitioner a guide of some things to watch out for going forward. The resolution documents included a Securities and Exchange Commission (SEC) Cease and Desist Order (SEC Order), with the DOJ issuing an Information (Telia Information) and a Deferred Prosecution Agreement (DPA) for Telia Company (Telia), an Information (Coscom Information) and a Plea Agreement for Coscom LLC (Coscom).
The breadth and scope of Telia’s illegal conduct was about as far-ranging as one could imagine. It went right up to the top of the organization as the SEC Order noted involvement from the former Chief Executive Officer (CEO) of the company, former senior executives and the former Board of Directors. There were various un-named parties involved including US based consultants.
2007 Cooperation Agreement
The Telia Information explains that in July 2007, Telia began steps to enter the Uzbek telecom market. At this initial juncture, Telia understood that they had to regularly pay Gulnara Karimova, the eldest daughter of the late Uzbek President Islam Karimov, “millions of dollars in order to enter the Uzbek telecommunications market and continue to operate there.” This Uzbek government official was later identified as Ganara. This requirement to engage in corruption was explained to Telia management. In August 2007, a Cooperation Agreement was signed by a representative of Karimova and Telia. The Cooperation Agreement set forth basic terms that later would be formalized as part of a later Shareholders Agreement, including that Karimova would contribute $30MM and telecom licenses, frequencies and number blocks. She would have a put option at an uplift, with the original uplift was to be $85MM. This was significantly increased for reasons not explained in the settlement documents. [A put option is a device which gives the owner of a put the right, but not the obligation, to sell an asset, at a specified price, by a predetermined date to a given party. The term “put” comes from the fact that the owner has the right to “put up for sale” of the interest]. Here Karimova was given the right to sell her 26% ownership in Coscom back to Telia, which was part of the bribe payment.
2007 Shareholders Agreement
The Cooperation Agreement was transformed into a Shareholders Agreement in December 2007. This Shareholders Agreement formalized the Cooperation Agreement. Telia received a license to operate a 3G network. The transfer of this license was fraudulent as the company which held the license repudiated it in favor of the Telia subsidiary Coscom. According to the SEC Order “At the time, COSCOM did not have the necessary licenses and permission from ACI to operate a 3G network, Government Official A and Telia agreed that ACI would issue the 3G licenses to a Takilant subsidiary, which then would repudiate the licenses so they would instead be issued to COSCOM. This repudiation of the 3G licenses was done to circumvent the prohibition under Uzbek law on private parties directly buying and selling telecommunications licenses, and should have raised red flags at Telia.”
The SEC Order noted additional red flags including, “the fact that (i) Government Official A’s company should not have received a 3G license from ACI since it was not a telecommunications operator; (ii) the timing of the award of licenses to Takilant only months in advance of Takilant repudiating the licenses in favor of COSCOM; (iii) the participation of the country manager of COSCOM’s primary competitor in the transaction; (iv) and the fact that the company should not have had to pay to obtain a 3G license from the government.”
For these actions, Telia made a bribe payment of $30MM to Karimova, transferred an indirect 26% ownership in Coscom, along with the put option to her as well. All of these actions were approved by the highest level of Telia management.
2008 Bribe Payment for Additional Lines
In 2008 Coscom’s growth was such that it needed additional telephone numbers to expand its subscriber network. Karimova caused additional number blocks to be granted to Coscom. Telia paid an additional $9.2MM in bribes to obtain these additional phone numbers. The company also received a “number series and network codes, as well as to continue to conduct business in Uzbekistan.”
Put Option Exercise
In January 2010, the shell company which held the put option, Takilant, controlled by Karimova, exercised that option. It sold back its 26% interest to Telia, for “$220 million for this interest, a 340 percent increase over the approximately $50 million Government Official A paid through Takilant to acquire the interest in 2007 and far more than the minimum $85 million option exercise price in December 2007. Telia also agreed to adjust the put option for Takilant’s remaining 6 percent interest in COSCOM to a minimum price of $50 million, which was later increased to $75 million.”
Sham Consulting Contract
In 2010, Telia desired to expand its Uzbek operations through 4G services. However rather than making a bribe payment through the shell corporation as before, Telia entered into a sham Consulting Contract with a third-party vendor for the benefit of companies controlled by Karimova, who assisted Coscom in acquiring certain 4G/LTE licenses/frequencies in the 2500-2700 MHz bandwidths. There were multiple red flags raised in this Consulting Contract but the SEC Order specifically noted “the 4G license that COSCOM was issued was repudiated by Telia’s primary competitor in Uzbekistan and whose Uzbek country manager again negotiated for Government Official A.” There was never any evidence of services provided under this sham Consulting Contract. Telia paid $55MM under this Consulting Contract for the 4G licenses and later added another $15MM for the acquisition of a fiber-optic lease agreement.
Box Score of Bribery Payments and Benefits Received
|Date||Payment Amount||Payment Vehicle||Benefit Received|
|August 2007||$2MM||Associate of Karimova||Cooperation Agreement|
|December 2007||$30MM||Shell company controlled by Karimova||Shareholder Agreement including transfer of 3G licenses, 50 1800 MHz frequencies, an internet services license, and number blocks|
|September 2008||$9.2MM||Shell company controlled by Karimova||Phone number series and network codes, as well as to continue to conduct business in Uzbekistan|
|January 2010||$220MM||Shell company controlled by Karimova||Put option exercise on Karimova interest in Coscom|
|January 2010||$75MM||Shell company controlled by Karimova||Purchase of additional interest in Coscom held be Karimova not transferred by put call|
|April 2010||Assumption of $55MM in debt||Sham Consulting Contract||4G licenses|
|May 2010||$15MM||Sham Consulting Contract||Fiber-optic lease agreement|
The bribery schemes used in by Telia were varied and should be studied by the compliance professional.Click to tweet
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© Thomas R. Fox, 2017