Canada: Telco Fined $795 Million For Bribery In Uzbekistan, Improper Record Keeping And Failed Internal Controls

On February 18, 2016, Dutch regulators along with the United States Securities and Exchange Commission (SEC) and the United States Department of Justice (DOJ) announced that VimpelCom Ltd. (VimpelCom), a global telecommunications services provider, will pay more than $795 million in total fines to the Dutch and U.S. governments to resolve its violations of foreign anti-corruption statutes including the Foreign Corrupt Practices Act (FCPA). This coordinated settlement comes after the enforcement authorities found that VimpelCom made unlawful payments to win business in Uzbekistan, improperly characterized the payments in its records and financial statements, and failed to maintain a system of internal controls.

Background

Founded in Russia and currently headquartered in Amsterdam, VimpelCom is a global telecommunications services provider whose major shareholders are businesses controlled by Russian oligarch Mikhail Fridman and Norway's Telenor Group. VimpelCom also has a class of securities listed on NASDAQ. VimpelCom manages its operations though separate regional business units, which are each overseen by an officer of VimpelCom and a member of the senior management group. Until 2014, VimpelCom had an ownership interest in Wind Mobile, one of Canada's wireless carriers.

SEC Complaint

The SEC alleged that VimpelCom repeatedly achieved an unfair advantage in the Uzbek telecommunications market by bribing a government official related to the President of Uzbekistan.

Prior to VimpelCom's entry into the Uzbek market in 2006, senior managers at the company determined that this government official was willing to exercise improper influence over other Uzbek government officials in order to attain VimpelCom's business objectives. In 2006, VimpelCom implemented an ostensible consulting arrangement with the government official's shell company through which the official received a payment of $2 million. In 2007, the official's shell company also acquired a 33.3% ownership interest in a holding company for the Uzbek telecommunications business of VimpelCom in exchange for $20 million, with a put option allowing the shell company to sell the interest back to VimpelCom in 2009 for a minimum price of $57.5 million. When this option was exercised in 2009 it represented a return of nearly 200% over the initial sale price in approximately 27 months.

These practices continued from 2006 to at least 2012, during which time VimpelCom used a range of sham contracts and business arrangements to make payments of over $114 million to the same government official. At least an additional $500,000 in payments were disguised as charitable donations to groups with which the official was affiliated. In exchange for the bribes, VimpelCom received government licenses, frequencies, channels and number blocks. For example, when VimpelCom sought to establish a 3G network in Uzbekistan in 2007, it paid the official $25 million to exert improper influence over the regulator responsible for issuing the required 3G licenses. Under this arrangement, the regulator would issue the 3G licenses to a subsidiary of the official's shell company, which in turn would repudiate the licenses so they would instead be issued to a VimpelCom subsidiary. In 2011, VimpelCom repeated this process when it developed a 4G network, with the official's shell company providing fake technical reports to attempt to justify the improper payment of $30 million. In total, the SEC estimates that VimpelCom earned revenues in excess of $2.5 billion as a result of its bribery scheme.

In addition to the unlawful payments themselves, the SEC found that the payments were improperly characterized as legitimate expenses in the books and records of VimpelCom's subsidiaries, and consolidated in VimpelCom's financial statements filed with the SEC throughout the relevant period. VimpelCom also failed to devise and maintain an adequate system of internal controls to prevent bribery.

Penalty

As part of the global settlement, VimpelCom will pay $167.5 million to the SEC, $230.1 million to the DOJ (totalling $397.6 million) and another $397.5 million to the Public Prosecution Service of the Netherlands. These fines are among the largest imposed by the SEC and DOJ under the FCPA, and provide an example of coordinated multi-agency and multilateral enforcement. In addition to the fines, VimpelCom must retain an independent monitor for a minimum of three years to supervise aspects of its overseas business.

The DOJ is also seeking an additional $850 million by way of forfeiture of the proceeds from the bribery scheme held in various European bank accounts controlled by the corrupt Uzbek official. Although these accounts are in Switzerland, Ireland, Belgium and Luxembourg, the funds were reportedly moved through U.S. financial institutions before their deposit in those countries, thereby providing the DOJ with a basis to assert jurisdiction.

Implications for Canadian Companies

This case illustrates, once again, that multijurisdictional enforcement will be pursued in appropriate cases, particularly by those countries that are members of the Organisation for Economic Co-operation and Development (OECD) due to coordination through that organization. In previous anti-corruption enforcement cases, the U.S. enforcement authorities have co-operated with, among others, the U.K. and the German enforcement authorities. In this case, the U.S. worked closely with the Dutch authorities and certain other agencies.  For Canadian companies, especially those that have a U.S. business nexus or are listed on a U.S. stock exchange, the risk of being investigated by both the Canadian RCMP and U.S. enforcement authorities is very much present. While there has yet to be a case of joint penalties imposed by Canadian and U.S. enforcement authorities, such an eventuality is just a matter of time.

In addition to the risk of being subject to multiple investigations, this case provides the following lessons for Canadian companies operating abroad:

  1. Working with individuals who have a reputation of being "fixers" or influential when dealing with regulatory authorities in foreign countries carries a very high risk of scrutiny from anti-corruption enforcement authorities.
  2. Once a company uses bribes to achieve business goals in entering a new market, it becomes almost impossible thereafter to carry on business in a "clean" manner with full integrity. Reversing a course of wrongful conduct in countries where corruption is rampant is far more difficult than refusing to engage in such conduct in the very first instance.
  3. Enforcement authorities are experienced in uncovering sham contracts and payments disguised as charitable donations. Ultimately, these activities not only provide proof of bribery, but also lead to charges based on improper record keeping and failed internal controls.
  4. Anti-corruption enforcement action is on the rise throughout the OECD countries and also in other growing economies such as Brazil, India and China. The significant fines against VimpelCom are the latest in a series of measures that the SEC and other enforcement authorities have taken to crack down on bribery of foreign officials. For more information, see the following Osler resources:

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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