Keith EmersonWelcome back my friend; To the show that never ends.

Except it did last week, when Keith Emerson died. He was the Emerson in Emerson, Lake & Palmer aka ELP. Emerson was one of the greatest keyboardists of his or any other generation. David Kreps, writing in Rolling Stone, said, “After discovering the Hammond and Moog in his teenage years, Emerson grew into one of the greatest keyboardists of his generation, first as a member of the Nice before founding the prog rock supergroup Emerson, Lake and Palmer. ELP formed in 1970 after Emerson, guitarist Greg Lake (formerly of King Crimson) and drummer Carl Palmer… joined together for a project that would better showcase their musicianship.” In the space of less than two months, rock and roll has now lost David Bowie, Paul Kantner and now Keith Emerson.

Bob Lefsetz spoke for many of us when he wrote, “The act was so successful that it was rewarded with its own label, Manticore, with its own colorful majordomo, Mario Medius. We knew all this, because the musicians were our heroes, and we followed them, knew everything about them, they were testing limits, challenging precepts, making it up as they went along. Imagine if Jeff Bezos were cool. Mark Zuckerberg too…whoever played, whoever channeled the gods, whoever dominated our consciousness, was revered. Music was our religion. And Keith Emerson was one of the deities.”

Emerson was one of the few rock music stars who was not the lead singer or the lead guitarist. He slogged away leading the technological revolution in rock and roll. Emerson gave the following explanation for his views on what constituted Progressive Rock, “Pop songs are about repetition and riffs and simplicity,” Emerson explained to one interviewer. “Progressive music takes a riff, turns it inside out, plays it upside down [and] the other way around, and explores its potential.” In other words, it was about expanding not only the boundaries but also even the possibilities.

This expansion seems to be an appropriate place to consider our old friends at Volkswagen (VW). There has certainly been a complete lack of any good news for the company over the past several weeks. The expansion of the multiple and international investigations is widening and the US government has opened up a front which, down the line, may be something that even the Foreign Corrupt Practices Act (FCPA) practitioner will need to consider.

On the international front, French prosecutors have opened a formal probe into the carmaker’s actions. As reported by Peter Campbell and Michael Stothard in a Financial Times (FT) article, entitled “Prosecutors widen probes into VW”, France was looking into the “aggravated fraud” at the company after it had tested some 100 cars in October 2014. The piece quoted Nathalie Homobono, the head of the French national agency that looks at fraud. She said that it has been determined that the company cheated “with intent”.

As bad as it might seem to have the French national prosecutor in charge of corporate fraud breathing down your corporate neck, there was a development reported in a Wall Street Journal (WSJ) article, entitled “U.S. Expands VW Probe with Novel Tack” by Devlin Barrett and Aruna Viswanatha, that may be the more ominous for the anti-corruption practitioner going forward.

The article stated the Department of Justice (DOJ) recently “issued a subpoena under the Financial Institutions Reform, Recovery and Enforcement Act, or Firrea, to pursue possible wrongdoing at Volkswagen.” The article went on to explain that this is “a novel use of the civil financial fraud law that the Obama administration deployed to extract record-setting multibillion-dollar settlements from big banks in the wake of the 2008 financial crisis. It suggests the car maker faces another potential source of penalties after admitting it used illegal software that allowed diesel-powered vehicles to pollute more on the road than during government emissions tests.”

The article reported, “the Volkswagen subpoena marks the first known instance of the government using a banking law to pursue potential wrongdoing that is not directly linked to financial misconduct.” The article quoted John Coffee, a law professor at Columbia University who studies white-collar prosecutions, who said that the use of the law “is pushing the legal theory to its outermost limits, against a defendant that is not particularly sympathetic.”

In addition to simply putting more pressure on VW, the use of the law offers tactical considerations for the DOJ. As noted, “A Firrea-based investigation adds a front that could pose new issues because the statute allows the Justice Department’s civil division lawyers to look back at conduct over 10 years, twice as far as many fraud statutes allow.” It also allows the DOJ to consider whether lenders were harmed by financing VW cars that had fraudulently listed values because the company lied when it said those cars met diesel emissions-testing standards.

Finally, it provides the government greater flexibility as it allows sharing of information by criminal and civil prosecutors. Most generally, information obtained by prosecutors through grand jury subpoenas cannot be shared with “their civil counterparts.” This use of this law unties those knots.

How does all of this relate to a FCPA enforcement action? Consider the now standard Securities and Exchange Commission (SEC) remedy of profit disgorgement. You do not find this listed as available to the SEC as a remedy under the text of the FCPA, however it is listed as a remedy according to the FCPA Guidance, “under Section 21B of the Exchange Act”. To finally link all this together, it was not an amendment to the FCPA which added this remedy to the SEC’s arsenal but the amendment came through the passage of a law called The Penny Stock Reform Act of 1990, which amended the Securities Exchange Act of 1934 to: allow the SEC to …(2) enter an order requiring an accounting and disgorgement;”.

It is axiomatic that bad facts make bad law. The WSJ quote from Coffee reminds us that pushing laws to their unintended uses against a defendant, who on the one hand admits the conduct occurred but then continually backs off these admissions, can also lead to the expansive use of a law to bring such a recalcitrant corporation to heel.

What happens if the DOJ or SEC decides to consider the effect of bribery and corruption in connection with bank loans or other financing a corporation may have secured? How about if a company’s loan covenants require it to not only not break the law but also have an effective compliance program in place? What if a bank provides project financing for a multi-billion dollar natural gas plant in Nigeria or gas platforms offshore Brazil for Petrobras?

While you are considering all of above, go check out the first hit from ELP, Lucky Man, from the album entitled Emerson Lake & Palmer in this YouTube clip.

 

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

Head ScratchingLast week the Securities and Exchange Commission (SEC) concluded a Foreign Corrupt Practices Act (FPCA) enforcement action against Qualcomm Inc. for violations on the Accounting Provisions of the FCPA, including both the books and records and internal controls provisions. The enforcement action presented an interesting mix of clear FPCA violations of not having proper internal controls in place, a demonstration of the growing trend towards strict liability for violations of the Accounting Provisions and, finally, one head scratcher which would seem to point towards internal controls which did work. Taken together there are several important lessons to be learned for the compliance practitioner.

Hiring and Internal Controls Violations

In the Princeling enforcement category, first seen the Bank of New York Mellon FCPA enforcement action from 2014, we see how widely Qualcomm varied from its standard hiring protocols to hire the sons and daughters of officials of a state owned enterprise in China. Consider these business justifications for hiring a daughter of an official, as set out in the SEC Cease and Desist Order (Order):

  • “We received a request from the GM of [the telecom company’s subsidiary] to help find an internship position for her daughter (currently studying in the U.S.) within QC. I discussed this with [high level official] and determined that it would be important for us to support given our cooperation with [the subsidiary].”
  • Qualcomm employees understood that the daughter’s “parents are [SOE 2 subsidiary] Dept. GM level and gave us great help for Q.C. new business development.” Because “[the regional branch] is our strategic partner in China and plays an important role in leading all [the telecom company] adopting Qualcomm’s technologies,”
  • Qualcomm employees believed that the internship “would be important for us to support given our cooperation with [the subsidiary].” Specifically, the internship “would be good because we are doing quite a bit with [the subsidiary]”.

In another instance, the company provided the following for a son of an official:

  • support from a $75,000 research grant to an American university where he was studying, allowing him to retain his position in a PhD program and renew his student visa;
  • a Qualcomm internship;
  • subsequent permanent employment despite interviewers concluding that he did not meet Qualcomm’s hiring standards for the position; and
  • a business trip to China followed by leave to visit his parents over the Chinese New Year, despite other employees expressing concern regarding his qualifications for the assignment. The EVP also personally provided this employee with a $70,000 loan to buy a home.

What is even more amazing about the hiring of the son is that after the initial hiring interview he was rated as a “No Hire” because not only was he not a “skill match” for the company but he did not even “meet the minimum requirements for moving forward with an offer”. Finally, among the Qualcomm team involved in the interview process, “there was an agreement that he would be a drain (not even neutral) on teams he would join.” Yet he was offered a job as a “special favor”. [Emphasis supplied]. If someone is so unqualified that employing them will negatively impact the company, there must be another very good reason to hire them, such as providing a benefit to their father, who is an official under the FCPA.

Both of these instances demonstrate clear violations of internal controls around the company’s hiring process. If a candidate does not make it out of the initial interview with anything more that a “No Hire” rating that should be the end of the decision making process around compliance, full stop. Do not pass Go, do not Collect $200. As the Order succinctly noted, “FCPA compliance, however, was not considered in Qualcomm’s hiring process.” A fine and penalty for this transgression was clearly warranted, as it was a clear violation of internal controls around the company’s hiring process.

Books and Records and Strict Liability

In summary fashion, the Order states “when it provided things of value and engaged in transactions that caused the company to fail to make and keep books, records, and accounts, which, in reasonable detail accurately and fairly reflected the transactions and disposition of assets of the company.” The recordation was done in a “generic and non-descript manner that obscured their purpose.” The items and other things of value included un-named and undesignated gifts, travel and entertainment, with the specific notation that “meals, gifts and entertainments were repeatedly noted as missing from Qualcomm’s gift logs.”

This portion of the Qualcomm enforcement action points towards a growing trend of a strict liability standard in FCPA enforcement under the Accounting Provisions. While there may well be wide disagreement as to whether such a standard is warranted under the FCPA, I think it is coming and it is something every Chief Compliance Officer (CCO) and compliance practitioner needs to be ready to address if and when the day comes that your company is under the shadow of a FCPA investigation.

This means if your books and records comes under investigation, you will have to demonstrate that it meets some minimum standard that satisfies the SEC. The FCPA Guidance states, “under the “books and records” pro­vision, issuers must make and keep books, records, and accounts that, in reasonable detail, accurately and fairly reflect an issuer’s transactions and dispositions of an issu­er’s assets.” Moreover, “the accounting provisions ensure that all public companies account for all of their assets and liabilities accurately and in reasonable detail”. Obviously, the question is what is ‘reasonable detail’? This enforcement action does not provide much guidance.

The Head-Scratcher

There was one instance of the alleged failure of internal controls that seems so anomalous that it needs to be explored. I quote in full from the Order:

  1. For example, Qualcomm offered at least 15 foreign officials lavish hospitality packages worth approximately $95,000 per couple for the 2008 Beijing Olympics. Then, in mid to late-July 2008, a member of Qualcomm’s finance department raised FCPA issues related to the Olympics with Qualcomm counsel. In August 2008, just days before the Olympics began, Qualcomm rescinded the five hospitality invitations that had been accepted due to Qualcomm’s FCPA-related concerns. The disinvited guests were from three Chinese state-owned enterprises.

 Why does this seem so anomalous? It is because the company’s internal controls stopped this seeming violation. The internal controls did what they were supposed to do, detect a potential violation and even prevent it before it happened. Even if the local business folks started down this road, it is clear that the corporate office stopped it. If a compliance program is now going to be criticized in the form of an enforcement action for doing what it is supposed to do, detecting and then preventing FCPA violations, it may be will nigh impossible for any company to be in compliance with the FCPA.

Of course, this Order was the product of negotiations between the SEC and Qualcomm so there may be additional facts around this, questionable at best, hospitality play by Qualcomm. However, if there was more to this story, the SEC needs to use those facts to educate and inform companies on their obligations and not hold them liable for actually stopping bribery and corruption.

The Qualcomm FCPA enforcement action reinforces the need for robust internal controls around the hiring process. It should be studied by both the compliance function and your company’s Human Resources (HR) function. The lessons you can learn from this enforcement action can help you to forestall a similar fate for your company.

 

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

Final ThoughtsToday, I conclude my exploration of the VimpelCom Foreign Corrupt Practices Act (FCPA) enforcement action. As I said yesterday, this case will be studied for some time as a textbook example of bribery schemes used intentionally by a company to defraud its shareholders and circumvent the law. Indeed with the conduct seemingly going high up into the senior management ranks both with VimpelCom and its Uzbeki subsidiary Unitel LLC (Unitel) one might rightly ask how the company was able to secure such a favorable deal and why no individuals were prosecuted?

It would certainly seem that if Frederic Bourke was prosecuted and went to jail for conscious avoidance, the Board of Directors of VimpelCom engaged in similarly serious conduct. I suppose you might argue that they were deceived just like everyone else by the bribery schemes but given the higher duty of a Board member, one might think that would lead to higher scrutiny of transactions the Board itself recognized as high risk. The same would be true for all the other individuals identified in the resolution documents. VimpelCom may well be thanking their lucky stars that this case did not arise after the implementation of the Yates Memo, when the company would have been required to turn over all investigative materials on all Board members, executives, senior managers and others who were involved in the various bribery schemes.

The next issue is the amount of the overall penalty assessed against the company. VimpelCom itself received a Deferred Prosecution Agreement (DPA). Its subsidiary Unitel did plead guilty to one criminal count and for both parties conduct. The DPA noted that VimpelCom “received full cooperation and remediation credit of 25% for its substantial cooperation with the [DOJ]” and “received additional credit of 20% for its prompt acknowledgement of wrongdoing by Company personnel after being informed by the Offices of their criminal investigation, and the Company’s willingness to resolve promptly its criminal liability on an expedited basis”. Finally, VimpelCom did engage in extensive remediation so perhaps the answer is simply staring us in the face that even if you do not self-report a FCPA violation, the Department of Justice (DOJ) will give a significant discount if you immediately accept your criminal guilt and aggressively move towards remediation. Here I can only say kudos to the counsel involved in both the investigation and remediation. Perhaps it should be double kudos.

In addition to the other systemic issues I have discussed in previous posts, there is the issue of opinion of counsel letter, which VimpelCom both strategically used internally to justify its bribery schemes and then tried to use with the government as a defense to its bribery scheme. Generally put, if you have an opinion of counsel letter saying something is not a violation of the law, it should help to defeat any claim of intent, as required for a criminal FCPA finding. However, if your company hides facts it knows from your counsel that is prima facie case of intent and indeed may actually be proof of your criminal intent.

Even if you are not concerned about the criminal intent element, if you seek an opinion of counsel letter to demonstrate you have engaged in requisite due diligence, this is also sadly lacking. The management of third parties, such as the agents and resellers used by Unitel in this case, requires a full five-step process. It begins with a business justification, then questionnaires accurately and fully completed by the third party. Further, it must specifically identify both owners and beneficial owners. Next you must engage in an appropriate level of due diligence for the risk ranking and this due diligence must be evaluated. Thereafter a contract must be put in place with full compliance terms and conditions, specifically including audit rights. Finally, you have to manage the contract after it is executed. That means you must wed the contract requirements to the services delivered. None of these five steps were present in Unitel’s relationship with the foreign official

The other thing about an opinion of counsel letter is that it is no good if it is just plain wrong. BNP Paribas tried to rely on an opinion counsel letter to defend its money laundering operations in negotiation with the government. The company paid a $8.9 bn fine for its illegal acts which had been blessed in an opinion of counsel letter. Simply put, if the outside counsel gets it wrong; either because you failed to provide the facts known to your company or if the lawyers are simply negligent in rendering an opinion, the opinion of counsel letter is not worth the price of the paper it is written on.

Finally, for any outside counsel who might be reading this blog post, your obligation is to do more than simply take the facts presented by you as the gospel truth. If you do accept the facts presented, such as there are no government officials as owners or beneficial owners of a proposed third party partner, without performing some modicum of appropriate level of due diligence, you may open yourself up to a malpractice claim.

While I am on the subject of lawyers, a word about the VimpelCom in-house counsel who 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 FCPA muster. This is one of very few FCPA enforcement actions where company counsel was an active part of the bribery scheme. Assuming this lawyer is not located in the United States does not in any way ameliorate this conduct. I hope the appropriate bar organization or legal society where that lawyer practices is looking quite closely at his or her conduct.

Having questioned the final resolution and bashed the lawyers involved; let me end with a few words about how the system worked. This case was a stunning development in the area of multi-jurisdictional cooperation and investigation. The DOJ Press Release publicly thanked, “law enforcement colleagues within the PPS [Public Prosecution Service of the Netherlands], the Swedish Prosecution Authority, the Office of the Attorney General in Switzerland and the Corruption Prevention and Combating Bureau in Latvia, as well as Belgium, France, Ireland, Luxembourg, Norway and the United Kingdom.”

There are still other companies, which may be prosecuted for the corruption in Uzbekistan telecom industry. Further, the ill-gotten gains for the foreign officials involved in the corruption is being sought out as well. The DOJ Press Release also noted, “seeking forfeiture of $550 million held in Swiss bank accounts which represent proceeds of illegal bribes paid, or property involved in the laundering of those payments, to the Uzbek official by VimpelCom and two other telecommunications companies operating in Uzbekistan.  A previous complaint filed by DOJ seeks $300 million in proceeds of illegal bribes paid, or property involved in the laundering of those payments, by these companies to the same Uzbek official.”

Both the DOJ and Securities and Exchange Commission (SEC) are to be commended for concluding this matter. There were several other US government agencies involved, including the Inland Revenue Service – Criminal Investigation (IRS-CI), the IRS Global Illicit Financial Team, and Homeland Security Investigations (HIS), who assisted in the investigation.

The ramification of what began in 2005 in Uzbekistan may be with us all for some time.

 

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

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

FCPA InvestigationsIn what can only be termed a stunning resolution, last week the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) announced a resolution of a long-standing Foreign Corrupt Practices Act (FCPA) probe into the Dutch telecom giant VimpelCom Ltd. (VimpelCom) for a spectacular, long-standing bribery scheme for the company to garner the rights to the mobile communications business in Uzbekistan. The multiple bribery schemes used appear to have been approved at the highest levels of the company and should provide a wealth of case studies on bribery schemes for the compliance professional going forward.

According to the DOJ Press Release, VimpelCom the world’s sixth-largest telecommunications company and its wholly owned Uzbek subsidiary, LLC Unitel (Unitel) conspired to violate the FCPA by paying more than $114 million in bribes to a government official in Uzbekistan. Unitel pled guilty today to one criminal count of conspiracy to violate the FCPA. The DOJ entered into a Deferred Prosecution Agreement (DPA) with VimpelCom, who agreed to pay a total criminal penalty of $230.1million, including $40 million in criminal forfeiture.  VimpelCom further agreed to implement rigorous internal controls, retain a compliance monitor for a term of three years, and cooperate fully with the Government.

The Press Release also stated, “In related proceedings, VimpelCom reached a settlement with the U.S. Securities and Exchange Commission (“SEC”) and the Public Prosecution Service of the Netherlands (“PPS”). Under the terms of its resolution with the SEC, VimpelCom agreed to pay $375 million in disgorgement of profits and prejudgment interest. VimpelCom agreed to pay the PPS a criminal penalty of $230,163,199.20, yielding a total criminal penalty of $460,326,398.40, and a global resolution amount of more than $835 million. SDNY and the DOJ agreed under the DPA to credit the criminal penalty paid to PPS, and the SEC separately agreed to credit the forfeiture amount paid to the United States. Thus, the total of U.S. criminal and regulatory penalties paid by VimpelCom is $795,326,398.40.”

In addition to the large fine and cooperation between multiple US government enforcement and investigatory bodies, there was significant involvement from overseas anti-corruption units, regulatory bodies and enforcement agencies. Preet Bharara, the US Attorney for the Southern District of New York (SDNY), and Leslie R. Caldwell, the Assistant Attorney General for the Criminal Division of the DOJ, both thanked the efforts of the US and International agencies for their assistance “in concluding the matter.”

The overall bribery scheme involved VimpelCom purchasing Unitel as an entrée into the Uzbekistan market. Contemporaneously with the acquisition of Unitel, which did have a legitimate business purpose, VimpelCom acquired another Uzbeki entitiy LLC Barkie Uzbekistan Telecom (Butzel) that was at least partially owned by an Uzbeki government official who had control or influence upon telecom regulation in the county. This foreign official hid their interest through a shell company that was known to VimpelCom. VimpelCom did not articulate a legitimate business reason for the Butzel deal.

After the acquisitions, Unitel funded its bribes to the Uzbeki government official through a variety of mechanisms, which I will explore more in upcoming blog posts. The Box Score summary (in honor of pitchers and catchers reporting to Spring Training last week) is as follows:

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

$30MM

2008

2011

Fake Reseller Payments $10MM

$10MM

2011

2013

Total $114.5MM

Separately the SEC identified $38MM in charitable donations which had no adequate internal controls in place to determine if the donations were legitimate or violations of the FCPA.

Yet the company also engaged in an intentional program to falsify its books and records intended to conceal the bribe payments from its outside counsel which was asked to bless certain transactions as well as regulators who might ask difficult or troubling questions for some of the bribery schemes going forward. As set out in the VimpelCom Information these false books and records included, payments funneled through a shell corporation owned by the foreign officials and included the following bribery mechanisms:

  1. The bribe related to the partnership agreement in which Shell Company first purchased and then sold an indirect equity interest in Unitel was falsely recorded in VIMPELCOM’s consolidated books and records as the receipt of loan proceeds in 2007 to be repaid in 2009 and secured by shares in a VIMPELCOM subsidiary.
  2. The bribe related to the acquisition of 3G frequencies in 2007 was falsely recorded in VIMPELCOM’s consolidated books and records as the acquisition of an intangible asset, namely 3G frequencies, and as consulting expenses.
  3. The bribe in 2008 was falsely recorded in VIMPELCOM’s 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.
  4. The bribe related to consultancy services associated with the acquisition of 4G frequencies in 2011 was falsely recorded in VIMPELCOM’s consolidated books and recorded as “consulting services” and treated as consulting services and as an acquisition of an intangible asset, namely 4G frequencies. Additionally bribes paid through a reseller “were falsely recorded in VIMPELCOM’S consolidated books and records as “professional services” expenses.

Interestingly there was no mention of how the case came to the DOJ or SEC. In Unitel’s criminal plea, there was no credit given for self-disclosure so it can only be assumed it came to the US government’s attention in some other manner. Apparently there were other telecom companies in on the bribery scheme in Uzbekistan as well. The DOJ Press Release noted, that it has “also filed a civil complaint today seeking forfeiture of $550 million held in Swiss bank accounts which represent proceeds of illegal bribes paid, or property involved in the laundering of those payments, to the Uzbek official by VimpelCom and two other telecommunications companies operating in Uzbekistan. A previous complaint filed by DOJ seeks $300 million in proceeds of illegal bribes paid, or property involved in the laundering of those payments, by these companies to the same Uzbek official. In that case, on January 11, 2016, United States District Judge Andrew L. Carter, Jr. entered a partial default judgment against all potential claimants other than the Republic of Uzbekistan. As alleged in the two complaints, the telecommunications companies paid $850 million in bribes to the Uzbek official to obtain and retain the ability to do business in Uzbekistan.”

Over the next few blogs posts, I will be exploring each of the bribery schemes and internal fraud engaged in by both Unitel and VimpelCom employees, managers, executives and board members which allowed this corruption to flourish for so long. The last word is probably best said by VimpelCom’s parent, the Norwegian company Telenor Group, who in turn is owned 54% by the government of Norway. Telenor is reportedly trying to divest its interest in VimpelCom. Indeed.

 

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