Magyar Telekom, Former Executives Charged with Bribing Officials
The Securities and Exchange Commission has charged the largest telecommunications provider in Hungary and three of its former top executives with bribing government and political party officials in Macedonia and Montenegro to win business and shut out competition in the telecommunications industry.
The SEC alleges that three senior executives at Magyar Telekom Plc. orchestrated, approved, and executed a plan to bribe Macedonian officials in 2005 and 2006 to prevent the introduction of a new competitor and gain other regulatory benefits. Magyar Telekom’s subsidiaries in Macedonia made illegal payments of approximately $6 million under the guise of bogus consulting and marketing contracts.
The same executives orchestrated a second scheme in 2005 in Montenegro related to Magyar Telekom’s acquisition of the state-owned telecommunications company there. Magyar Telekom paid approximately $9 million through four sham contracts to funnel money to government officials in Montenegro.
Magyar Telekom’s parent company Deutsche Telekom AG also is charged with books and records and internal controls violations of the Foreign Corrupt Practices Act (FCPA).
Magyar Telekom agreed to settle the SEC’s charges by paying more than $31.2 million in disgorgement and pre-judgment interest. Magyar Telekom also agreed to pay a $59.6 million criminal penalty as part of a deferred prosecution agreement announced today by the U.S. Department of Justice. Deutsche Telekom settled the SEC’s charges, and as part of a non-prosecution agreement with the Department of Justice agreed to pay a penalty of $4.36 million.
“Magyar Telekom’s senior executives used sham contracts to funnel millions of dollars in corrupt payments to foreign officials who could help them keep competitors out and win business,” said Kara Novaco Brockmeyer, Chief of the SEC Enforcement Division’s FCPA Unit.
“They purposely structured the sham contracts to circumvent internal review, and when questions were eventually raised about their use of ‘consulting’ contracts, they reconfigured them as ‘marketing’ contracts to avoid scrutiny and prolong their scheme.”
The three former top executives at Magyar Telekom charged by the SEC for orchestrating the bribery schemes are Elek Straub, former Chairman and CEO, Andras Balogh, former Director of Central Strategic Organization, and Tamas Morvai, former Director of Business Development and Acquisitions.
According to the SEC’s complaints filed in the Southern District of New York, in the wake of legislation intended to liberalize the Macedonian telecommunications market, Magyar Telekom entered into a secret agreement entitled the “Protocol of Cooperation” with senior Macedonian government officials to delay or preclude the issuance of a license to a new competitor and mitigate other adverse effects of the new law.
To win their support, Magyar Telekom paid €4.875 million to a third-party intermediary under a series of sham contracts with the intention that the intermediary would forward money to the government officials. Magyar Telekom also promised a Macedonian political party the opportunity to designate the beneficiary of a business venture in exchange for the party’s support.
The SEC further alleges that in Montenegro, Magyar Telekom used intermediaries to pay bribes to government officials in return for their support of Magyar Telekom’s acquisition of the state-owned telecommunications company on terms favorable to Magyar Telekom. At least two Montenegrin government officials involved in the acquisition received payments made through the bogus contracts. A family member of a top Montenegrin government official also received payments.
The SEC’s complaint against Straub, Balogh, and Morvai alleges that they violated or aided and abetted violations of the anti-bribery, books and records, and internal controls provisions of the FCPA; knowingly circumvented internal controls and falsified books and records; and made false statements to the company’s auditor.
The SEC seeks disgorgement and penalties and the imposition of permanent injunctions. Magyar Telekom and Deutsche Telekom consented to the entry of final judgments without admitting or denying the SEC’s allegations. The settlements are subject to court approval.
The SEC’s case was investigated by Adam Eisner under the supervision of Charles Cain, Deputy Chief of the FCPA Unit. Robert Dodge will lead the SEC’s litigation efforts. The SEC acknowledges the assistance of the Fraud Section of the Department of Justice’s Criminal Division and the Federal Bureau of Investigation.