How much will you lose in a big telecoms fraud? You may reasonably point out that ‘big’ is relative to the size of the company but for the sake of discussion, let’s say the question relates to the whole industry. So, how big is ‘big’? I’m thinking in round numbers here, but I’d say $1m is big, but not exceptional. $10m is big and $100m is exceptional, almost unique. So do you think you have a billion dollar risk from telecoms fraud?
If you said it was incredible I would agree. I can’t think of any fraud which has come anywhere near that, yet telecoms players are continuing to take hits of that scale because they’ve been charged with bribery and corruption. And whilst it may be tempting to characterise bribery as the action of cowboy operators or something confined to developing markets, it’s just not true.
In 2008, the New York Times reported that Siemens had agreed to pay fines totalling US$ 1.6 billion to US and European authorities to settle charges that it routinely used bribes to secure contracts around the world. Beginning in the mid-1990s, Siemens established slush funds to pay bribes and kickbacks to foreign officials for securing government contracts for projects like a national identity card project in Argentina, a nationwide cellphone network in Bangladesh and a United Nations oil-for-food program in Iraq under Saddam Hussein. Whilst Siemens admitted violating the Foreign Corrupt Practices Act (FCPA), it avoided both a guilty plea and a conviction for bribery, allowing it to maintain its “responsible contractor” status without which it could have been excluded from public procurement contracts.
In December 2011, the US Department of Justice (DoJ) announced that parallel enforcement actions by the DoJ and the U.S. Securities and Exchange Commission (SEC) had resulted in Magyar Telekom and Deutsche Telekom paying penalties of more than US$ 95 million to resolve investigations under FCPA. According to court documents, Magyar Telekom executives established a number of sham contracts to pay EUR 4.9 million (US$ 6m) to entities owned and controlled by a Greek intermediary, knowing or believing that all or part of that money would be passed on to Macedonian officials. The transactions were recorded in Magyar Telekom’s books and Deutsche Telekom, which owned approximately 60 percent of Magyar Telekom, reported Magyar Telekom’s results in its consolidated financial statements.
In February 2016, the SEC announced a global settlement along with the DoJ and Dutch regulators which committed VimpelCom to paying more than US$ 795 million to resolve FCPA violations during its efforts to win business in Uzbekistan. The SEC said that VimpelCom had paid over US$ 100 million to an official with significant influence over top leaders of the Uzbek government. The bribes, hidden through sham contracts and charitable contributions, meant VimpelCom’s books and records were riddled with inaccuracies.
Earlier this month, the Wall Street Journal reported that U.S. and Dutch authorities are asking Swedish telecom operator Telia Company AB to pay US$ 1.4 billion to settle FCPA allegations that it paid hundreds of millions of dollars in bribes to secure business in Uzbekistan. Telia Chairwoman Marie Ehrling said the company’s entry into Uzbekistan
“was done in an unethical and wrongful way, and we are prepared to take full responsibility.”
However, she was understandably less enthusiastic about picking up the bill, “our initial reaction to the proposal is that the amount is very high.”
The case involving MTS (Mobile Telesystems PJSC) is slightly different to those above because there has been no prosecution or settlement so far. However, U.S. prosecutors have said they believe MTS also paid bribes to operate in Uzbekistan. A spokesman for MTS said the company continued to cooperate with the DoJ and SEC in their investigations. I bet they are. I don’t know if MTS violated FCPA but Uzbekistan was clearly a high stakes game and the other players paid US$100m to get in and US$1 billion to get out – so my money is on the DoJ.
You might wonder why U.S. agencies have overseas jurisdiction? It’s because the shares of Deutsche Telkom, VimpelCom and MTS are all traded on US stock exchanges. Although Telia delisted about 10 years ago, it still has American depositary receipts registered with the SEC.
So what are the lessons from all this?
- First of all, recognising that this is not effective risk management; what’s the point of mitigating your external fraud risks and then getting poleaxed by something ten times bigger from inside your own company?
- Realising that the true cost is way more than the US$1 billion fine. I know of one multi-national which was fined EUR 600m but calculated the cost of expert lawyers, accountants, advisers, etc. employed in defending the action as a further EUR 725m – yes, that’s more than the fine. And what about the hit to the share price; how does a 15 percent drop affect your cost of borrowing?
- It’s not just U.S. listed companies that are affected – you can still come under U.S. jurisdiction if your transactions are in dollars. And many countries are now enacting equivalent anti-bribery legislation, such as the UK Bribery Act.
- It’s avoidable! I guarantee that every business which finds itself the subject of an anti-bribery and/or corruption investigation immediately examines its anti-bribery policy and processes (if they exist) and invests in bringing them to the standard they should have been in the first place.
Avoiding that Billion Dollar Risk
What are the five simple steps you need to prevent bribery and corruption? They’re pretty straightforward:
- Tone from the top
- Risk based approach
- Appropriate due diligence
- Communication and training
- Monitoring and review
Perfect anti-bribery controls don’t exist and no business can prevent bribery at all times. However, organisations with procedures aren’t going to find a billion dollar risk turning into a billion dollar fine.
Want to discuss countermeasures?
This article first appeared on commsrisk.com in October 2016