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 Releaseand 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 blog post opens a multi-part 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 open with a review of the background facts, the parties and players and the fine and penalty.

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. I begin with the documents which are the subject of this blog series 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.

Tomorrow, I will consider the bribery schemes involved.

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

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© Thomas R. Fox, 2019