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DOJ penalizes Russia’s largest mobile telecom, Uzbek sub nearly $1 billion for corruption failings

Monday, April 1, 2019   (0 Comments)
Posted by: Brian Monroe
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By Brian Monroe
April 1, 2019

Federal prosecutors have penalized Russia’s largest mobile telecommunications company and an Uzbek subsidiary nearly $1 billion for a massive corruption and money laundering scheme that reached to the highest levels of the Uzbekistan political and business elite – including ties to the country’s former president.

This U.S. Department of Justice (DOJ) and Securities Exchange Commission (SEC) last month levied an $850 million fine against Moscow-based Mobile TeleSystems PJSC (MTS), the largest mobile telecommunications company in Russia and an issuer of publicly traded securities in the United States, and its wholly owned Uzbek subsidiary, Kolorit Dizayn Inc. LLC (KOLORIT), related to hundreds of millions of dollars in bribes paid in Uzbekistan to win choice deals.

To read the full DOJ action, click here.

The corruption scheme hinged on wooing a high-ranking regulator – a watchdog body typically charged with examining and penalizing companies for bribery and other illicit acts – and parlaying that influence into choice business contracts to the tune of nearly $1 billion.

In tandem, the case also played on one of the world’s biggest money laundering vulnerabilities, a dynamic at the center of many of the largest corruption and money laundering scandals that have come to light in recent years: criminals using anonymous and opaque shell companies to cleanse their illicit gains – a tactic that can make it nigh impossible for beings to realize certain firms are all connected to same individual.

Investigators also unveiled corruption and money laundering charges against a former Uzbek official who is the daughter of the former president of Uzbekistan and against the former CEO of Uzdunrobita LLC, another MTS subsidiary, involving more than $865 million in bribes.

The sprawling scheme included graft-gilt payments from MTS, VimpelCom Limited (now VEON) and Telia Company AB (Telia) to the former Uzbek official to “secure her assistance in entering and maintaining their business operations in Uzbekistan’s telecommunications market.”

The individuals and companies involved violated the U.S. Foreign Corrupt Practices Act (FCPA), a law that prevents U.S firms from bribing foreign officials to gain an edge and boost revenues.

The U.S. has been more aggressive in recent years using the extraterritorial power of the FCPA to garner massive penalties against financial institutions and corporates in a bevy of areas, including energy, telecommunications, the medical field and others.

MTS penalty one of the largest FCPA fines ever

In fact, the $850 million is the third largest FCPA penalty, according to respected industry chronicler, the FCPA Blog, behind the highest fine, the $1.78 billion paid by Brazil’s Petrobras last year the $965 million paid by Sweden’s Telia in 2017 and beating out the $800 million paid by Germany’s Siemens.

But this case had the unique twist of instead of bribing a high-ranking politically-exposed person (PEP) at a government-owned company, the individuals charged in this scheme targeted the regulatory body responsible for granting access to risky and prosperous sector.

In particular, authorities charged Gulnara Karimova, 46, a citizen of Uzbekistan, with conspiracy to commit money laundering. Karimova is a former Uzbek official who “allegedly had influence over the Uzbek governmental body that regulated the telecom industry.”  

The scheme had its origins in the early 2000s, where Karimova and Akhmedov agreed that Akhmedov would squeeze corrupt bribe payments from telecommunications companies seeking to enter the Uzbek market and direct them on how to launder the money and get the funds back to them. 

In exchange, Karimova “used her influence over Uzbek authorities to help the telecommunications companies obtain and retain lucrative business opportunities in the Uzbek telecommunications market,” according to prosecutors, amassing a staggering sum over nearly two decades at nearly $1 billion.  

In total, Akhmedov manipulated and schemed with telecom companies and others to pay Karimova more than $865 million in bribes, and Akhmedov and Karimova worked with others to launder and conceal those funds to, including funds in and moving through bank accounts in the United States, in order to continue and even further the ongoing bribery scheme, according to court documents. 

So where does the $850 million MTS penalty rank among the largest ever FCPA fines? In the top five, according to the FCPA Blog:

1. Petróleo Brasileiro S.A. – Petrobras (Brazil): $1.78 billion in 2018.

2. Telia Company AB (Sweden): $965 million in 2017.

3. MTS (Russia): $850 million in 2019.

4.  Siemens (Germany): $800 million in 2008.

5.  VimpelCom (Holland): $795 million in 2016.

6. Alstom (France): $772 million in 2014.

7. Société Générale S.A. (France): $585 million in 2018.

8.  KBR / Halliburton (United States): $579 million in 2009.

9.  Teva Pharmaceutical (Israel): $519 million in 2016.

10. Keppel Offshore & Marine Ltd.(Singapore): $422 million in 2017.

Source: The FCPA Blog.

Shadowy shell companies helped hide ownership, launder funds

Not surprisingly, as in the case of many of the world’s largest corruption and money laundering scandals, anonymous shell corporations owned by shadowy puppeteers pulling the strings were at the heart of the scheme.

Unknown ownership details fully enabled the corruption and money laundering machine to operate for so long without many of the financial institutions involved being able to put the various puzzle pieces together to realize they were all connected to the same group.

The companies “structured and concealed the bribes through payments to shell companies that members of MTS’s and other related companies’ management knew were beneficially owned by Karimova,” according to federal investigators.   

“Gulnara Karimova stands accused of exploiting her official position to solicit and accept more than $865 million in bribes from three publicly traded telecom companies, and then laundering those bribes through the U.S. financial system,” said Assistant Attorney General Brian Benczkowski.

Connection to bank AML risk assessments, SARs

As well, the heft and girth of the MTS penalty has yet again put corruption at the forefront among the jostling pantheon of compliance risks, with banks no doubt holding the accounts of the shell companies involved.

So large domestic and international banks will be fretting anew to uncover what transactional ties they had to the shell firms directly, MTS, the named individuals and regions and any tenuously related third parties.

 As a point of context, just a few years ago, in 2016, FCPA enforcement hit record highs – a fact not last on financial institutions as one of their ilk, France’s SocGen, is still smarting from paying $585 million for corruption failings last year.  

And while that momentum waned somewhat in 2018, the U.S. has in recent months stated publicly it is making the identification and investigation of grand kleptocracy a priority for counter-crime agencies and recently-created special ops-style task forces with a more precise and aggressive mission to uncover the financial underpinnings allowing corruption to flourish.

And while this penalty is not hitting a bank directly, it is hitting on what is in some countries under the ambit of financial institution by touching the securities space.

Moreover, this case has AML tethers aplenty as these companies no doubt had accounts with domestic and international banks in order to facilitate the cycle of corruption, including the firms doling out the graft-gilt dollars to the nebulous and opaque shell companies taking the bribe funds.

So bank compliance teams should scour their transactional records anew with this new lens to see if any payments to or from these companies seem to be at a higher corruption risk in hindsight.

In particular, institutions with relationships with the shell companies should re-check the due diligence and risk assessments done at account opening and, again with 20/20 hindsight, review if any suspicious activity reports (SARs) were missed to ensure they are filed, and the gaps that allowed them fixed, before regulators are at the door asking these questions themselves.

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