We are in a five-part exploration of the recent the Department of Justice (DOJ) and Securities Exchange Commission (SEC) resolution of a Foreign Corrupt Practices Act (FCPA) enforcement action against the Russian telecom company, Mobile TeleSystems PJSC (MTS). The FCPA enforcement action came in at $850 million which makes it Number 3 in the Top 10 of all-time FCPA settlements. This series 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, the asset forfeiture actions filed by the DOJ by persons involved in this case and the key lessons learned by the compliance practitioner. Today I will discuss the bribery schemes used.

The companies and players:

  1. MTS;
  2. Uzdunrobita FE LLC (Uzdunrobita) which became a subsidiary of MTS in 2004;
  3. Gulnara Karimova, daughter of the former President of Uzbekistan and Bekhzod Akhmedov, a former MTS executive based in Uzbekistan
  4. Kolorit Dizayn Ink, (Kolorit) a Uzbeki advertising agency bought by Uzdunrobita;
  5. Swisdorn Ltd. and Takilant Ltd., both shell companies owned or controlled by Karimova.

Bribery Through Purchase of Entities Controlled by Karimova

  1. 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.

  1. 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

Tomorrow, I will consider the failures in and overrides of internal controls by MTS.

Mike Volkov and myself did a special FCPA Compliance Report bonus episode on the MTS settlement and Karimova indictment. Check it out here.

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.

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, 2019