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Entries in Hungary (24)


SEC drops some charges against former Magyar Telekom execs

The Wall Street Journal's Joel Schectman reported Monday that the SEC is dropping allegations that former executives of the Hungarian unit of Deutsche Telekom bribed officials in Montenegro.

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Two arrested in ongoing Rolls Royce bribery probe

Two people were arrested in London on Wednesday as part of the Serious Fraud Office's investigation into aerospace and defense company Rolls Royce's dealings in Asia.

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Magyar Telekom execs lose motion to dismiss

A federal district court in New York City issued an order Friday denying a motion to dismiss a civil FCPA enforcement action against three executives of Magyar Telekom Plc.

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Beam launches India investigation

Illinois-based spirits company Beam Inc. is investigating possible FCPA violations in India, according to a report Friday by the Times of India.

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Magyar And Deutsche Telekom In $95 Million Settlement

Magyar Telekom Plc. of Hungary and its majority owner Deutsche Telekom AG will pay a combined $63.9 million criminal penalty to the DOJ to resolve Foreign Corrupt Practices Act charges.

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Bloomberg: SEC Sues Deutsche Telekom, Magyar, And Three Execs

Thom Weidlich of Bloomberg has just reported from federal court in Manhattan that the SEC has filed a civil suit againt Deutsche Telekom AG and its Magyar Telecom unit for FCPA offenses.

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[Updated] Motorola Investigation Launched, Source Reports

An Austrian news weekly reported last week that U.S. enforcement authorities are investigating an Austrian lobbyist and Motorola over alleged bribes of up to €2.2 million, according to an AFP story.

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Magyar Telekom To Settle With SEC

Hungary's Magyar Telekom has reserved about $62 million for an expected settlement of FCPA-related charges with the SEC, according to reports by Reuters and others.

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The Compliance World Series

Holding countries publicly accountable for antibribery enforcement is a key to global compliance. Measuring performance inning by inning and posting the results on the scoreboard tells each government where it stands. And it tells the citizens of each country what their leaders are doing to fight global graft.

Last week we talked about Trace's contribution to the compliance scoreboard with its first-ever Global Enforcement Report -- a remarkable summary of "all known international anti-bribery enforcement actions since the FCPA’s passage some 33 years ago."

This week there's more good news. The OECD's Working Group on Bribery has just published enforcement data from 37 of its 38 members that measures  enforcement activity. It includes "criminal, administrative and civil cases of foreign bribery that have resulted in a final disposition, such as a criminal conviction or acquittal, or similar findings under an administrative or civil procedure." The numbers go back to 1999, the year the OECD's Antibribery Convention came into force.

The highlights: One hundred forty-eight individuals and 77 entities were sanctioned under criminal proceedings for foreign bribery in 13 Parties (member countries) between 1999 and the end of 2009. At least 40 of the sanctioned individuals were sentenced to prison. Combined fines of up to €1.24 billion have been imposed on companies sanctioned for foreign bribery. About 280 investigations are ongoing in 21 Parties to the Antibribery Convention.

The low-lights: Germany records the most acquittals in enforcement actions with 24. Japan, the world's second largest economy, reported eight enforcement actions during the 10 years from 1999, and France, the world's fifth largest economy, reported one. (Hungary, with about the world's 70th biggest economy, reported 27 enforcement actions).

The Working Group's enforcement data can be downloaded from the OECD's site here.


Former BAE Agent Charged For Bribes

Austrian national Alfons Mensdorff-Pouilly: BAE's agent has been charged in Britain with corruption but his prosecution still needs approval from the U.K.'s attorney general.The U.K.'s Serious Fraud Office on Friday charged one of BAE's former middlemen, Count Alfons Mensdorff-Pouilly, with bribery in connection with arms sales to countries in Eastern and Central Europe. He was formally accused of "conspiracy to corrupt, contrary to section 1 of the Criminal Law Act 1977."

The SFO alleged that Mensdorff-Pouilly, 56, conspired with others from 2002 though 2008 to bribe government officials and representatives from the Czech Republic, Hungary, and Austria. The bribes were intended to secure contracts from those governments for the sale of SAAB/Gripen fighter jets marketed by BAe Systems plc.

David Leigh and Rob Evans, the investigative journalists from the Guardian who first reported BAE's alleged corrupt selling practices nearly five years ago, said Friday that Mensdorff-Pouilly's prosecution still needs approval from Britain's attorney general, Lady Scotland. Mensdorff-Pouilly lives in Luising, Austria and is an Austrian citizen. The attorney general hasn't yet agreed to let the case proceed, the SFO's lawyers said, and they asked the court for a month-long adjournment while she decides. 

These are the first criminal charges arising from the investigation of BAE's practices.

The SFO dropped an investigation in December 2006 into allegations the company bribed members of the Saudi Arabian government in exchange for the sale of Typhoon jet fighters. The SFO said it had to abandon the case after Saudi Arabia threatened to end anti-terrorism cooperation with the British government.

The U.S. Justice Department is reportedly still investigating BAE's payments of about $2 billion to Saudi Prince Bandar bin Sultan. He was formerly ambassador to the United States and some of the payments allegedly passed through U.S. bank accounts he controlled.

The SFO on Friday said its current investigation of BAE has involved collaboration with the Vienna (Austria) Prosecution Office (Staatsanwaltschaft Wien) and police (Bundeskriminalamt) and was coordinated with help from Eurojust. The SFO said it also had help from Czech, Hungarian and Swiss authorities.

View a copy of the Serious Fraud Office's January 29, 2010 release here.


Magyar's Magnum Opus

We liked it. All 1,162 words. Magyar Telekom's SEC disclosure last week about its internal investigation into fraudulent contracting practices could have been short and bland and very ordinary. A typical corporate blank wall. Instead it was abundant in length and detail  -- one of the most rewarding public disclosures about an internal investigation we've ever read. It appeared in the company's SEC Form 6-K, Report of Foreign Private Issuer, filed December 3, 2009 here. (Another disclosure we admired earlier this year came from Pride International Inc.; it contained 1,168 words.)

What did we learn about Hungary's Magyar? Among other things that:

  • Between 2000 and 2006, a small group of unnamed former senior executives from headquarters and a Macedonian affiliate spent  €24 million through over twenty consultancy, lobbying, and other contracts that were probably phony.
  • The contracts were used to create a pool of unaccounted cash.
  • The purpose of the contracts and slush fund was to "obtain specific regulatory and other benefits from the government of Macedonia."
  • The scheme worked. Magyar "generally received the benefits sought and then made expenditures under one or more of the suspect contracts."
  • The lawyers hired by Magyar's audit committee, White and Case, couldn't track down who got the illicit cash. “[T]he Investigation did not uncover evidence showing receipt of payments by any Macedonian government officials or political party officials.”
  • So the company can't say whether it violated the Foreign Corrupt Practices Act's antibribery provisions. But it did commit accounting offenses. "These contracts were not appropriately recorded in the books and records of the Company and its relevant subsidiaries.  . . . the Company has already reclassified . . . the accounting treatment relating to certain of these contracts to more accurately account for these expenditures."

So that's the news. But why, we wondered, did Magyar put an extra thousand words into its disclosure? Why didn't it stick to the usual script -- "An internal investigation has concluded that improper payments may have been made to influence the award of certain contracts. Remedial action has been taken. Discussions with authorities in the U.S. and other countries are ongoing." Why War and Peace when it could have gotten away with a Hallmark greeting card?

Here are five reasons that come to mind:

The internal report is good news. There's been a dark cloud over Magyar since it discovered the corruption during its 2005 audit and launched the investigation in 2006. But the disclosure brings sunny skies. Why not make the most of it? It cleared everyone now there and pinned the blame on people who are already gone. "Nothing in the Final Report implicates any current senior executive or Board member of the Company in connection with any wrongdoing."

Magyar's management team is young. Executive chairman and CEO Christopher Mattheisen is 47; CFO Thilo Kusch is 43; and COO Róbert Pataki is 37. They've got a lot of open road and ambitious regional plans ahead of them. The detailed disclosure should help them put Magyar's past practices in the rearview mirror.

The CEO is American. His Forbes Profile says Mattheisen "studied economics and finance at Indiana University of Bloomington and at Columbia University. He first came to Hungary in 1990 to start a strategic planning and business consulting company." Expat American CEOs are all "domestic concerns" and are usually savvy about the FCPA and its risks. The mega disclosure may reflect Mattheisen's heightened sensitivity. 

Magyar has a couple of important shareholders. German giant Deutsche Telekom owns 59.52% of the company and the public owns most of the rest. No doubt DT wanted a quick and clean end to Magyar's corruption mess, to avoid the risk of association with another German giant, Siemens. Its corruption made global headlines for most of 2007 and 2008. Then there's the Hungarian government. It still owns a golden share in Magyar (the company was formed from the privatized state phone system). With its EU integration in full swing, Hungary's leaders wouldn't want a lingering corruption scandal either.

Bang for the buck. The internal investigation was expensive -- $28 million last year alone. The detailed disclosure helps management justify the price tag.

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What's next for Magyar? It said the U.S. Justice Department and SEC are still investigating the company, along with Macedonia's Inerior Ministry. The company said it can't "predict what the final outcome of those investigations may be or the impact, if any, they may have on [its] financial statements or results of operations." More ominously for the unnamed former senior executives, Magyar said the Hungarian National Bureau of Investigation has started "a criminal investigation into alleged misappropriation of funds  . . ."

Back in the U.S., the DOJ and SEC should be happy with the way management has handled the investigation, disclosure, and remedial steps. The approach has been aggressive -- maybe a bit too aggressive. The company said it faces a new problem  -- "the possible misuse of personal data of employees" duirng the internal investigation. Hungary's authorities are looking into it.

Magyar Telekom Plc's American Depositary Shares trade on the New York Stock Exchange under the symbol MTA.


Siemens: Systematic Global Corruption

[Updated and Corrected] It was a corporation that tolerated fraud, deceit and concealment. There were slush funds used to bribe public officials. There were phony contracts and fake invoices to cover up the corruption, and there was a boardroom that knew for years what was happening but feigned ignorance. And yet it was one of the world's most important companies, a global powerhouse in electronics and electrical engineering, with nearly 400,000 employees and yearly revenues above $100 billion.

As reported Friday, Siemens AG will plead guilty as early as Dec. 15th to Justice Department charges of violating the Foreign Corrupt Practices Act, likely resulting in fines of $450 million. And once an expected agreement with the Securities and Exchange Commission is signed, the company will also be required to disgorge at least $350 million of its tainted profits.

The Justice Department's Information charging Siemens in the biggest FCPA enforcement action ever tells of more than 4,000 payments worth at least $1.4 billion to foreign officials to obtain or retain business -- and systematic and intentional violations of the internal controls and books and records provisions that might have prevented or detected the payments (15 U.S.C. §§ : 78m(b)(2), 78(b)(5) and 78ff(a)).

How could it have happened? Because of the corporate structure Siemens created and the culture it nourished. Where operating groups and foreign subsidiaries were accountable for their bottom line but little else. Where ethics training didn't happen. Where compliance personnel and inside auditors were choked off from resources and hobbled by internal restrictions and a confused mission. Where reliable reports to headquarters of large-scale corruption weren't investigated. Where senior employees known to have paid bribes and cooked the books were never disciplined -- but instead were allowed to retire with benefits, bonuses and severance packages.

And then there's the story in the Sentencing Memorandum of Siemens' eventual road to redemption. Because of the scope of its bribery, the company faced fines under the Federal Sentencing Guidelines of up to $2.7 billion. But the DOJ's prosecutors are asking for a penalty reduced to $450 million. And they haven't charged Siemens under the FCPA's antibribery provisions, so it probably won't be barred from U.S. government contracts. Why? The Justice Department said it views as exceptional Siemens’ wide-ranging cooperation efforts throughout this investigation, which included a sweeping internal investigation, the creation of innovative and effective amnesty and leniency programs, and exemplary efforts with respect to preservation, collection, testing, and analysis of evidence. ... More on that in later posts.

For today, here are some key allegations from the 36-page Information:

  • In April 2006, in response to a special audit request by the board of directors, Siemens’ outside auditors reported at least 250 suspicious payments made through the parent to companies in foreign jurisdictions. The audit report was provided to the board of directors, members of management and the Corporate Compliance Office. But no one made any attempt to investigate these facts, or explore whether they were related to other similar instances of wrongdoing.
  • From 2004 to 2006, in addition to learning of corruption issues involving Siemens in Nigeria, Italy, Greece, Liechtenstein, and elsewhere, the company's senior management learned of government investigations into corruption by Siemens in Israel, Hungary, Azerbaijan, Taiwan, and China. Nevertheless, executives and senior management failed to adequately investigate or follow up on any of these issues.
  • Siemens also failed to take effective disciplinary measures with respect to any of the employees implicated in the various investigations. For example, the three managers implicated in the Italian cases each received a severance package standard for early retirees, despite the fact that certain Siemens board members knew that at least two of the managers had already admitted to paying bribes at the time of their retirement.
  • From 2004 to 2006, the Corporate Compliance Office continued to lack resources, and there was an inherent conflict in its mandate, which included both defending the company against prosecutorial investigations and preventing and punishing compliance breaches. In addition, there were extremely limited internal audit resources to support compliance efforts. All of these factors undermined the improved policies because violations were difficult to detect and remedy, and resources were insufficient to train business people in anti-corruption compliance.
  • There was a consistent failure on the part of certain members of management to alert the Audit Committee to the significance of the compliance failures discovered within Siemens. Reports to the Audit Committee by the Chief Compliance Officer were principally status reports on prosecutorial investigations and often conveyed incomplete information. In some instances, management provided inaccurate information in response to Audit Committee inquiries. At no time did management convey to the Audit Committee a sense of alarm or growing crisis.
And here, from the final paragraph of the Information, are the DOJ's books-and-records charges against the company:

From at least March 2001 to November 2006, Siemens knowingly falsified and caused to be falsified books, records, and accounts required to, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the company. In doing so, Siemens:

(a) used off-books accounts as a way to conceal corrupt payments;

(b) entered into purported business consulting agreements with no basis, sometimes after Siemens had won the relevant project;

(c) justified payments to purported business consultants based on false invoices;

(d) mischaracterized bribes in the corporate books and records as consulting fees and other seemingly legitimate expenses;

(e) accumulated profit reserves as liabilities in internal balance sheet accounts and then used them to make corrupt payments through business consultants as needed;

(f) used removable Post-It notes to affix signatures to approval forms authorizing payments to conceal the identity of the signors and obscure the audit trail; and

(g) drafted and backdated sham business consulting agreements to justify third party payments; and

(h) falsely described kickbacks paid to the Iraqi government in connection with the Oil for Food Program in its corporate books and records as commission payments to agents when Siemens and Siemens France, Siemens Turkey and others were aware that a substantial portion of these payments was being passed on to the Iraqi government in exchange for being awarded contracts with the Iraqi government.

Download a copy of the DOJ's Information charging Siemens AG here.

Download the DOJ's Sentencing Memorandum here.

Download here the charges related to Argentina, Bangladesh and Venezuela.

Download the Joint Statement here.

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Our special thanks to readers who assisted in compiling the documents filed by the DOJ in U.S. District Court in Washington, D.C. Friday. Those linked above are at the heart of this extraordinary FCPA enforcement action.


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