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ANALYSIS: Game of Phones, Part I—$2.6 Billion in FCPA Penalties

April 15, 2019, 6:53 PM

The third installment of a series of Foreign Corrupt Practices Act (FCPA) enforcement actions of escalating severity dropped on March 6, 2019, when the Russian telecommunications giant Mobile TeleSystems (MTS) agreed to $850 million in penalties for its alleged involvement in bribery related to access to the telecommunications market in Uzbekistan. This punishment followed penalties of $965 million in September 2017 and $795 million in February 2016 against European telecommunications companies that had engaged in similar conduct. The monetary penalty bloodletting has occurred on a vast stage stretching across Europe and into Central Asia, which has seen the downfall of the scion of a ruling family and a cameo appearance by Julio Iglesias. It is not over yet, having the potential to spread to more political leaders, businesses, and countries in the years to come.

House Karimov of Uzbekistan

To understand these events, one must start with the country and ruling family that set them in motion. The story starts with Gulnara Karimova, daughter of the late Islam Karimov, the first president of independent Uzbekistan. Karimov père, who had served as First Secretary of the Communist Party of Uzbekistan and President of the Uzbek Soviet Socialist Republic in 1988–91, declared the independence of Uzbekistan in August 1991 and was its president from September 1991 until his passing in September 2016. Karimova lived a grand and varied life by any standard as the eldest daughter of the 25-year president. The following are only a few of her accomplishments: designing “Guli"-branded jewelry produced by Chopard, recording an album under the stage name “Googoosha” (Twitter @realgoogoosha, YouTube channel RealGooGoosha) and a duet of Latin jazz standard Besame Mucho with Julio Iglesias, and serving as Uzbekistan’s Ambassador to Spain and Permanent Representative to the United Nations in Geneva. Harvard University granted her a master’s degree in 2000, following her early 1990s studies in jewelry design at Fashion Institute of Technology.

This fabulous global lifestyle grew from the soil of spectacular corruption. Reports of Karimova amassing a fortune of hundreds of millions of dollars by seizing control over businesses in Uzbekistan, based partly on U.S. diplomatic cables released by Wikileaks, became widespread in western media in the early 2010s (e.g. The New Yorker, Washington Post, Foreign Policy, Daily Beast). She reportedly used her status as the president’s daughter and her influence over Uzbekistan’s tax and law enforcement authorities to grab businesses as large as the Coca-Cola affiliate in Uzbekistan, Coca-Cola Bottlers Uzbekistan (CCBU). As if taking CCBU was not noteworthy enough, it occurred during her divorce from her U.S. citizen ex-husband, who once had been an ideal local partner for Coca-Cola as an American businessman and son-in-law of Uzbekistan’s president, but found himself investigated, prosecuted, and expropriated by Uzbek authorities during the divorce proceedings. CCBU ended up majority owned by the Uzbekistan state holding company Ozbekoziqovqatxolding.

Karimova’s world fell apart as the reports of her role in corruption in Uzbekistan spread internationally. She reportedly had been positioning herself as a successor to her father but fell into disfavor with him and the rest of the family, and she disappeared from public view in 2014, put into house arrest in Tashkent, Uzbekistan’s capital. Uzbek authorities convicted her of a variety of crimes and sentenced her to five years of “restricted freedom” in 2015, according to RFE/RL, citing the Uzbekistan Prosecutor-General’s Office. By then, U.S. and European authorities were nearing the conclusion of the first of a series of FCPA enforcement actions against European telecom companies that had been caught in Karimova’s corruption schemes.

Mother of Drag Downs

A massive scheme to extract payments from foreign telecom companies in exchange for access to the buildout of Uzbekistan’s rapidly growing mobile telephone market had come to light beginning in September 2012. First a documentary on SVT, Swedish public television, reported that Sweden’s TeliaSonera had gained access to a 3G wireless connectivity protocol license in Uzbekistan in 2007 by paying approximately $320 million to a Gibraltar company whose sole owner was a close associate of Gulnara Karimova, a director of Karimova’s fashion house. Further reports by news media and the Organized Crime and Corruption Reporting Project (OCCRP) described that from 2006 through 2011 Karimova had extracted over $1 billion worth of payments and equity from multiple telecom companies: TeliaSonera; VimpelCom, now named VEON, a Netherlands company owned by Alfa Group of Russia and Telenor of Norway; MTS of Russia; and others.

Karimova used numerous methods to demand and receive bribes from TeliaSonera, VimpelCom, and MTS, described by the U.S. Department of Justice in its March 2019 indictment of her. Demanding payments for her assistance in obtaining licenses, or to avoid threats of tax investigations, was the simplest method. Compelling the grant of an ownership share in the foreign telecom company’s subsidiary in Uzbekistan to a shell company controlled by her was a more elaborate one. These grants often included contractual language requiring the foreign telecom company to buy back the equity at a future date at a hefty profit for her, with one such instance with MTS in 2004 using a put-and-call option—a financially sophisticated way to enforce an elaborate bribery scheme. Forcing the foreign company to invest in a local partner controlled by her or to extend loans to her for ostensible business purposes were additional schemes.

As daughter of the de facto president for life, Karimova had an extensive arsenal of legal tools to force the payment of bribes and then launder them. She wielded influence over Uzbekistan’s telecom licensing and tax authorities to back her threats to withhold frequency licenses and initiate tax investigations that were keys to her shakedowns of TeliaSonera, VimpelCom, and MTS. To receive and launder simple monetary bribes, she had an array of shell companies and charitable organizations under her control. She personally owned telecom companies to hold ownership shares in local subsidiaries of foreign telecom companies and then reaped the guaranteed windfalls from contracted share buy-backs.

The impunity that Karimova enjoyed in Uzbekistan allowed her to steal on a massive scale from the state as well. For example, the scheme that involved the 2004 put and call option also included causing the government of Uzbekistan to cede its 31.4% ownership stake in MTS’s local subsidiary to a shell company controlled by her in 2002. She experienced no apparent consequences for this action from her family or any other Uzbek authorities prior to her house arrest in 2014.

These bribery schemes went on for years before western media reports and law enforcement investigations exposed them. DOJ and SEC filings on MTS (DOJ Criminal Information, SEC Order), VimpelCom (DOJ Criminal Information, SEC Complaint), and TeliaSonera (DOJ Criminal Information, SEC Order) described acts of bribery from 2004 to 2012, 2006 to 2012, and 2007 to 2010, respectively. They were the price that these companies paid for access to the market for the buildout of Uzbekistan’s mobile phone networks, which they obviously expected to be profitable enough to justify the cost and the risk at that time of discovery and legal liability under the FCPA.

MTS, VimpelCom, and TeliaSonera found themselves dragged down further in 2016–19 as the U.S. Department of Justice (DOJ), the Securities and Exchange Commission (SEC), and European law enforcement agencies concluded enforcement actions punishing them for their acts of bribery, under the FCPA and equivalent foreign laws.

  • VimpelCom: In February 2016, VimpelCom agreed to a $795 million global resolution. It agreed to pay $230 million to the DOJ, disgorged $375 million to the SEC and the Netherlands Public Prosecution Service, and paid a criminal penalty of $230 million to the Netherlands Public Prosecution Service.
  • TeliaSonera: In September 2017, TeliaSonera agreed to a global resolution that totaled over $965 million, the largest FCPA monetary penalty then. FCPA penalties were $548.6 million in criminal penalties to the DOJ and $457.2 million in disgorgement to the SEC, with the totals including amounts shared between the DOJ and SEC ($40 million offset from the SEC disgorgement for the DOJ penalty) and with foreign governments. The Netherlands Public Prosecution Service received half of the criminal penalty assessed by DOJ, $274 million. Sweden’s Prosecution Authority and the Netherlands Public Prosecution Service would receive $208.5 million of the disgorgement to the SEC, with the split to be determined by the outcome of Sweden’s criminal prosecution of TeliaSonera executives.
  • MTS: On March 6, 2019 (a red-letter date for Russian science, the 150th anniversary of Dmitri Mendeleev presenting the first periodic table to the Russian Chemical Society in 1869), MTS and its Uzbek subsidiary Kolorit entered into a resolution with the DOJ and SEC agreeing to a combined total penalty of $850 million. There was a criminal penalty of $850 million and a $100 million civil penalty, with the SEC civil penalty credited to the DOJ’s criminal penalty.

These FCPA enforcement actions were unprecedented both for their high monetary penalties—a then-record high of $965 million in the TeliaSonera case, and more than $2.6 billion in total—and for the wide international cooperation in investigating and prosecuting them. In addition to authorities in the Netherlands and Sweden, DOJ cited the assistance of law enforcement colleagues in Austria, Belgium, Cyprus, France, Ireland, Isle of Man, Latvia, Luxembourg, Norway, Switzerland, and the United Kingdom.

Class actions lawsuits have inevitably followed in the United States for the companies with U.S.-listed securities. VimpelCom, whose ADRs trade on NASDAQ, faced lawsuits three months before the announcement of its global resolution (In re VEON Ltd. Securities Litigation; Westway Alliance Corp. v. VEON, Ltd. et al). Litigation continued until the court dismissed the consolidated class action on August 30, 2018. MTS, also with ADRs traded on NASDAQ, faces a lawsuit filed on March 19, 2019 (Salim v. Mobile TeleSystems PJSC et al). MTS announced in February that it was considering delisting its ADRs, and the lawsuit may give it further incentive to delist. Telia, which terminated the U.S. listing of its ADRs in 2004 and ended their registration in 2007, alone avoided class action lawsuits for its FCPA settlement.

Shame. Shame. Shame.

Gulnara Karimova has barely begun to face the full consequences of her actions prior to her downfall in 2014. On March 7, 2019, the day after announcing the settlement with MTS, the DOJ announced the filing of a criminal indictment of Karimova and Bekhzod Akhmedov, the general director in 2002–12 of Uzdunrobita, an Uzbekistan subsidiary of MTS. The indictment charged Karimova with money laundering and Akhmedov with money laundering, violation of the FCPA and conspiracy to violate the FCPA. Nearly simultaneously, on March 5, 2019, the Uzbekistan Prosecutor-General’s Office announced that a court had ordered her to be put in prison for violating the terms of her house arrest. She allegedly violated them more than three months earlier, on November 22, 2018, by leaving the apartment and using the internet despite receiving warnings. The limited facts hint at a complicated struggle for the disgraced daughter of the late resident, further described in an interview of her daughter Iman Karimova, at whose apartment Gulnara Karimova was serving her house arrest. What will happen to her in Uzbekistan, and whether she will ever stand trial in the United States, remain to be seen.

A story of such epic hubris and corruption may be too extreme for FCPA compliance to be worth discussing. The bribery in these cases was so large in scale and so blatant that legal commenters who usually find FCPA compliance lessons in enforcement actions have been somewhat at a loss to find any such lessons from the MTS, VimpelCom, and TeliaSonera settlements. The significant messages sent by this line of FCPA enforcement actions instead involve higher-level issues.

One lesson is that political arguments about the FCPA reported in news media have been noise rather than substance, and FCPA enforcement is continuing despite domestic and international political disagreements. This line of actions began under the Obama Administration and continued under the Trump Administration, involved cooperation with the law enforcement agencies of a host of U.S. allies in Europe, and has culminated in a major enforcement action against a Russian company. It shows that professionals in the DOJ, the SEC, and foreign law enforcement agencies have continued to carry out their missions, regardless of what politicians have been saying.

An even more significant lesson is that the actions against Gulnara Karimova and international businesses involved in her corruption schemes appear to have FCPA enforcement branching out in new directions. They could be harbingers of further actions to come in FCPA enforcement and related fields.

Part II will address this aspect of the recent DOJ actions in this line of FCPA enforcement actions.