Russian-backed, U.S.-listed VimpelCom, Ltd, Uzbekistan’s largest mobile operator in terms of subscribers, announced this week that it is being investigated by the U.S. Securities and Exchange Commission (SEC) and Dutch authorities. The case follows an investigation by Swedish authorities into TeliaSonera’s operations in Uzbekistan, which focused upon allegations that TeliaSonera paid over $300 million to obtain an Uzbek 3G license using a suspicious intermediary company with links to the Uzbek President’s daughter, Gulnara Karimova.
In fact, TeliaSonera first came under scrutiny from the Swedish authorities in 2012 after a documentary revealed its business dealings with the authoritarian leader of Uzbekistan, Islam Karimov. Since that time, there has been a rift between President Karimov and his daughter Gulnara, a businesswoman and pop star (who is also known by her stage name Googoosha). TeliaSonera and VimpleCom both dealt with the Gibraltar-based company Takilant Ltd, a well-known front entity for Ms. Karimova. It subsequently came to light that Takilant, at the time owned by a former aide to Karimova, Gayane Avakyan, served as an intermediary for TeliaSonera’s entry into the market, with the company paying over $300 million to Takilant for 3G spectrum rights in 2007. The company’s own investigation found that TeliaSonera company had not intentionally committed bribery or participated in money laundering. Significantly, in May of 2013, documents surfaced suggesting that Karimova played an active part in negotiations with TeliaSonera, including a request for $ 15 million to “escort” the Swedish company through a process involving five separate regulatory authorities in Uzbekistan.
By comparison to TeliaSonera, VimpelCom’s involvement with Takilant Ltd is less well-known; however, in its annual 20-F filing to the SEC (at page 13) in March of last year the company noted that Takilant held a minority stake in its Uzbek subsidiary, Beeline (formerly Unitel), between 2007 and 2009 and stated that it had worked with Takilant to acquire frequencies in Uzbekistan. In the 20-F filing, VimpelCom even warned that it could provide no assurances that it would “not become subject to investigations, face liability or suffer reputational harm” due to its dealings with Takilant Ltd. Notably, this proved to be a sign of things to come as the investigation has clearly now been widened to include VimpelCom and Takilant figures as a link common to both TelioSonera’s and VimpelCom’s operations in Uzbekistan.
Notably, Ms. Karimova’s diplomatic immunity was lifted last year as she lost her position as Uzbekistan’s United Nations envoy (after a very public falling out with her father). Swiss public prosecutors recently acknowledged that Ms. Karimova has been under investigation since September 16, 2013 and that her diplomatic immunity had clearly prevented any actions from being taken against her at that time. She has been under house arrest in Uzbekistan since February 17, 2014.
The SEC’s involvement in the investigation of Russian-backed, Amsterdam-based VimpelCom comes as no surprise. U.S. regulators are certain to take an active interest in the case; not only due to a desire to proactively pursue corruption allegations. An ongoing crisis in Ukraine’s Crimean territory adds additional impetus. Crimea’s autonomous authorities held a referendum recently to determine whether it would become Russia’s 84th province. Actively pursuing investigations such as these may be a stealthy method for the U.S. authorities to target assets linked to the Russian elites in the event that international sanctions prove difficult to impose or are simply ineffective. Such investigations could also act in conjunction with any sanctions as a signal of intent to scrutinize Russian financial interests abroad.
Notably, VimpelCom is owned by Russian tycoon Mikhail Fridman, who founded the Alfa Group Consortium, an entity which currently controls numerous business interests including Alfa-Bank (founded in 1991), Alfa Capital Management, Rosvodokanal Group, AlfaStrakhovanie Group and A1 Group. Alfa Group’s portfolio includes stakes in oil and gas giant TNK-BP, the retailer X5 Retail Group, and telecom company VimpelCom Ltd as well as Turkcell. Presently, Mr. Fridman serves as Chairman of the Supervisory Board of Alfa Group Consortium, Chairman of the Board of Directors of TNK-BP and as a member of the Board of Directors of ABH Holdings S.A. (a holding company of Alfa-Banking Group) and the Supervisory Board of Directors of VimpelCom. Accordingly, if international sanctions prove difficult to achieve, U.S. regulators might look to scrutinize enterprises in the former Soviet countries in order to target Russian assets, and we could see an increasing number of such investigations.
From a Foreign Corrupt Practices Act (FCPA) compliance standpoint, any documentation and due diligence efforts involving third-party dealings is certain to be a substantial factor in the case. An analysis of any existing compliance program will be a focal point, as will efforts by the company to conceal corrupt dealings with Uzbek intermediaries (particularly Takilant), and scrutiny of VimpelCom’s accounting and record-keeping practices will be a concern in any SEC investigation. At a minimum, it certainly looks like VimpelCom had dealings with a highly suspect intermediary in Takilant (a Gibraltar-based company operating in Uzbekistan with links to political figures). In my view, the SEC will be interested to determine precisely how VimpelCom documented its relationships with Takilant, as well as any internal compliance measures that it undertook during the time period and any suspect dealings involving Beeline, VimpleCom’s Uzbek subsidiary. According to Jon Umarov, an attorney at The Volkov Law Group, “Talikant’s business structure should have raised a red flag that VimpelCom should have addressed before entering into a business relationship.” The effectiveness of VimpelCom’s internal compliance program, its corresponding level of accounting transparency and due diligence efforts will all be important aspects the SEC investigation.