Telecommunications Provider & Subsidiary Enter Into Settlement, Deferred Prosecution Agreement And Plea Agreement With SEC And DOJ For FCPA Violations In Third Recent Enforcement Proceeding Involving Uzbek Telecommunications Market
On March 6, 2019, the Securities and Exchange Commission (“SEC”) announced that it was settling allegations that Russian telecommunications company Mobile Telesystems Pjsc (“MTS”) violated anti-bribery, books and records, and internal accounting controls provisions of the Foreign Corrupt Practices Act (“FCPA”) in order to increase its business in Uzbekistan. Without admitting or denying the SEC’s allegations, MTS agreed to pay a civil penalty of $100 million to the SEC and retain an independent compliance monitor for at least three years. Mobile Telesystems PJSC, Exchange Act Release No. 85261 (Mar. 6, 2019). The same day, the Department of Justice (“DOJ”) announced it had entered into a deferred prosecution agreement (“DPA”) with MTS pursuant to the Department’s FCPA Corporate Enforcement Policy and a plea agreement with MTS’s subsidiary, Kolorit Dizayn Ink LLC (“Kolorit”), for one count of conspiracy to violate the anti-bribery and books and records provisions of the FCPA. Deferred Prosecution Agreement, United States v. Mobile TeleSystems PJSC (S.D.N.Y. 2019); Plea Agreement, United States v. KOLORIT DIZAYN INK Limited Liability Company (SDNY 2019). Pursuant to the DPA, MTS agreed to a fine and restitution of $850 million. The DOJ has agreed to credit MTS’s $100 million civil penalty to the SEC towards this amount.
MTS is a Russian telecommunications provider whose securities trade on the New York Stock Exchange. The allegations against MTS arise from payments MTS made to a government official in Uzbekistan in connection with its Uzbek business over the course of nearly a decade—from 2004 to 2012. According to the SEC, during this period MTS made at least $20 million in illicit payments to obtain and retain business, which generated more than $2.4 billion in revenues. Specifically, MTS allegedly (i) paid an Uzbek company owned by a government official $12 million, $4 million of which went to the government official, in order to obtain the rights to telecommunications frequencies that would otherwise be unavailable to MTS under Uzbek law; (ii) amended options pertaining to an MTS subsidiary in a manner that benefited a company partially owned by the same government official before buying the company out; (iii) paid a company beneficially owned by the government official $30 million in exchange for its rights to 800 MHz frequencies; (iv) purchased Kolorit from the government official for the inflated price of $40 million after the company had been valued at $23 million; and (v) contributed more than $1 million to charities controlled by the government official, mischaracterizing them in MTS’s books and records as advertising and non-operating expenses. In addition, MTS allegedly purchased, through a different subsidiary, $461.5 million of network equipment without keeping records in sufficient detail to determine if those purchases were from companies owned by Uzbek government officials. As a result of these alleged acts, the SEC alleged MTS violated the anti-bribery, books and records, and internal accounting controls provisions of the FCPA, which violations it agreed to settle in exchange for a penalty, cooperation, and a monitorship.
In connection with the same conduct, the DOJ filed a two-count information against MTS for conspiracy to violate the FCPA and violating the internal controls provisions and a one-count information against MTS’s subsidiary, Kolorit. Simultaneous with the filing of the information, the DOJ entered into a DPA with MTS, and MTS’s subsidiary, Kolorit, agreed to plead guilty to one count of conspiracy to violate the books and records provisions of the FCPA. The DOJ announced that factors contributing to its decision that stiff criminal penalties were warranted included: (1) the companies’ failure to voluntarily disclose; (2) the companies’ level of cooperation and remediation, which was described as “lacking,” and “not proactive;” (3) the nature and seriousness of the offenses; and (4) the mitigating factors present in this case, which included a lack of realized pecuniary gain to the companies as a result of the misconduct. When announcing the plea and DPA, the DOJ also reported that it had instituted charges against the former CEO of another MTS subsidiary and a former Uzbek official for their participation in a bribery and money laundering scheme involving more than $865 million in bribes from MTS and other entities.
The enforcement action resulting from MTS’s bribery is the third significant enforcement proceeding by the SEC and DOJ since February 2016 involving public companies operating in the Uzbek telecommunications market. Fines from these three proceedings, issued by the SEC, DOJ, and foreign regulators, total $2.6 billion. These fines highlight the significant risks of entering highly regulated industries in foreign countries, where there may be more of an expectation and history of bribery.