We are on in the final post of the five-part exploration of the recent 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 has examined the background facts of the case and provided 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. Today I want to focus 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.

To recap, the companies and players are as follows:

  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.

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 Korolit 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.

Mike Volkov and myself did a special FCPA Compliance Report bonus episode on the MTS settlement and Karimova indictment. Check it out for a full discussion of the matter.

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. TheDOJ Press Release;and
  8. TheSEC 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