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Smooth Operators: T-Mobile’s Macedonian Adventure

BIRN reveals how an investigation into a telecoms deal yielded a $95 million corruption settlement in the US – while the politicians involved escaped scrutiny in Macedonia.

Goran Rizaov BIRN Skopje, Podgorica and Athens

Talk is cheap – but talk-plans were not always so. In the dark ages before the smartphone put the internet in your pocket, every minute of mobile conversation was carefully metered.

It has been a long road to free and fast wireless traffic. For most countries, this has involved the auctioning of telecoms frequencies, the construction of networks, and the steady erosion of monopolies through the introduction of competitors.

But in Macedonia, one of Europe’s poorest countries, the road to cheap calls took some mysterious detours.

Macedonia's government and Magyar Telekom are joint partners in a telecoms network, with offices in central Skopje.

According to United States prosecutors, it involved a secret meeting at a Holiday Inn hotel, the destruction of vital evidence, and the movement of millions of euros in bribes to companies registered in Cyprus.

And for the humble consumer, it also involved years of needlessly high call charges.

“I had bills that would make a wealthier man’s eyes water,” says Zarko, a 35-year-old university lecturer, recalling the early years of the new millennium, when there were only two mobile operators in the country.

This story by the Balkan Investigative Reporting Network (BIRN) reveals how Macedonia’s people paid the price for a deal between their government and its partner in the telecoms industry – a subsidiary of Deutsche Telekom, the global giant behind the T-Mobile brand.

It also exposes how the Macedonian politicians who were involved in the agreement may have broken the law – but have yet to be investigated. Meanwhile, the telecoms firms have paid $95 million (€71 million) to settle related corruption charges in the US.

“The Macedonian prosecutors must not allow this case to pass,” says Dragan Malinovski, the former chairman of the country’s main anti-corruption body. “It is unthinkable to wait for the Americans to do something for us.”

Behind every act of bribery lies a source, a motive and a recipient. US prosecutors can claim to have done more than half the work – tracing who made corrupt payments, and why.

But their counterparts in the Macedonian judiciary have yet to unpick the third question – of where the money went.

‘Remedial measures’

Zarko now lives in Germany. Like everyone else, he stays in touch with his family using free internet-based services such as Skype and Viber.

Zarko left Macedonia in 2006, the year that MobiMak, the largest wireless network in the country, was rebranded T-Mobile. The network was operated by MakTel, a company part-owned by the Macedonian government.While costly for consumers, MakTel’s dominance of the wireless market was very profitable for its owners. Its dividend payments were “a significant source of revenue for the Macedonian government”, according to documents filed in a US court.

However, MakTel’s pre-eminence would come under attack in 2007, when a third mobile operator won a licence. VIP, a subsidiary of Telekom Austria, broke into the Macedonian market in that year.

It announced its arrival by offering pre-paid call tariffs that were 71 per cent cheaper than existing deals, according to a spokesman for VIP in Skopje. After one year, it had 10 per cent of the market share. In 2013, that figure was approaching 30 per cent.

“VIP’s entry into the Macedonian market introduced competition in the true sense of the word,” the spokesman says.

The old Macedonian telecoms and post-office building dates to the Yugoslav era – and will soon be hidden behind neo-baroque construction.

MakTel’s mobile network had enjoyed a long run at the top. Since 2001, it had operated as a privatised joint venture between the government and Magyar Telekom, the Hungarian subsidiary of Deutsche Telekom. For the next six years, its only rival had been the much smaller Cosmote network.

This arrangement troubled the European Union, which Macedonia had applied to join. Brussels wanted the telecoms sector to be liberalised. With a view to meeting this demand, Macedonia introduced a law that would allow a third operator onto the market.

The law was passed in 2005 – but it would be another two years before VIP won its licence. Why did it take so long for the competition to arrive?

According to US court documents, the answer lies in a secret agreement, struck between the government in Skopje and Magyar Telekom, its partner in MakTel.

The agreement is said to have preserved MakTel’s privileged position in the market, in violation of Macedonian laws.

BIRN has obtained a copy of the agreement, which appears to give the company the right to influence telecoms regulations. Such laws are normally the strict preserve of sovereign governments.

A former Macedonian prime minister, Vlado Buckovski, has confirmed to BIRN that he signed the deal, which he insists was neither secret, nor unlawful.

However, this very agreement was at the centre of two investigations that have earned US government agencies millions of dollars in out-of-court settlements.

Deutsche Telekom and Magyar Telekom paid the US Department of Justice a combined penalty of $63.9 million in 2011. Magyar Telekom has paid a further $31.2 million to the Securities and Exchange Commission (SEC), the US financial regulator.

According to a spokeswoman for Deutsche Telekom, the firm’s agreement with the US authorities acknowledges its co-operation in the investigations, the “remedial measures” it has taken so far, as well as its commitment to more such measures.

In an emailed statement to BIRN, spokeswoman Elpida Trizi says Deutsche Telekom attaches the “utmost importance” to “anti-corruption and other compliance policies and procedures”.

The SEC is currently pursuing a third, civil case against three former Magyar Telekom executives for bribing government officials. They deny the charges.

Stalled prosecutions

The combined $95 million settlements are among the top ten highest payments collected under the Foreign Corrupt Practices Act (FCPA). The law prohibits firms that are listed on US stock exchanges from giving bribes or making irregular payments to foreign officials.

The settlements mean neither company has had to admit or deny guilt. Under the terms of the agreement, the Department of Justice said it would not prosecute the firms for the next two years, as long as they continued to improve compliance procedures and abided by the law.

Magyar Telekom also accepted as “true and accurate” a series of detailed allegations about the corrupt payments that were included in the agreement to settle the charges.

These allegations could still be contested if other suspects in the case are brought to trial.

“Just because a company admits to a certain set of facts, that admission is not binding vis a vis other people,” says Mike Koehler, a law professor at Southern Illinois University who blogs about FCPA enforcement.

The US prosecutors have nevertheless unearthed a wealth of evidence that points to a scheme that appeared to make corrupt payments to Macedonian officials.

Yet no government officials in Macedonia have been investigated over the case, more than five years after US agencies began their inquiries.

Only four individuals have been charged by prosecutors in Skopje over the telecoms affair. All are foreign citizens. The charges against one of them were recently dropped. The remaining three have never been brought before a court. The charges were filed in 2008.

“At this stage of the procedure, none of the legal requirements for an international arrest warrant have been met,” a spokesman for the Criminal Court in Skopje told BIRN.

Malinovski, the former head of the state anti-corruption body, says the country’s prosecutors are certainly capable of pursuing a more robust investigation.

“The question is whether they want to do it,” he says. “The corruption must have been directed towards some officials. Getting hold of those officials should not require an international warrant.”

The settlements in the US also accused Magyar Telekom of bribing government officials in Montenegro. However, despite a parliamentary inquiry in the country, there have been no prosecutions.

Pressure from Brussels

MakTel entered the new millennium as a relic of Macedonia’s communist past.

The firm was fully owned by the state, and had a total monopoly over fixed-line connections as well as a fledgling mobile network. In January 2001, the government, led by a party known by its acronym, VMRO-DPMNE, sold the majority share in the firm to a consortium led by Magyar Telekom.

“Our plan is rather simple,” the Hungarian firm’s former CEO, Elek Straub, was quoted as saying in a company press release. “We want to deliver the best possible service at an affordable price.”

Nikola Gruevski, the current Macedonian prime minister who held the office of finance minister at the time, said he hoped the privatisation was a sign of things to come. He alluded to the German origins of Magyar Telekom’s parent company, Deutsche Telekom.

“The sale... is the best choice and I believe it will bring other German investors to Macedonia,” he is quoted as saying in another company press release.

In the summer of 2001, however, it would be foreign diplomats – rather than investors – who riveted their attention upon Macedonia.

Guerrillas from the ethnic Albanian minority had taken up arms against the state. Their uprising – and the Macedonian military’s response – brought the country to the brink of civil war. Thousands were displaced as the fighting escalated.

Mediators from the US and EU brought the warring parties to the negotiating table. A peace deal was struck, putting a brake on hostilities. Elections followed in 2002, bringing a change of government.

The Social Democrats, known by their acronym, SDSM, were joined in coalition by a smaller ethnic Albanian party, DUI, whose leaders were drawn from the ranks of the guerrilla movement.

Relieved to have averted another Balkan war, the EU rewarded Macedonia by fast-tracking its application for membership. It also began taking a closer interest in the country’s communications sector, still dominated by the monolithic MakTel.

Radmila Sekerinska, an opposition deputy who was then the SDSM’s minister for EU integration, says Brussels was “pushing for the liberalisation of the telecoms market”.

‘Unwanted competition’

In February 2005, the Macedonian government approved legislation that would open up the sector to competitors, in apparent compliance with the EU’s demands.

The new law included tough anti-monopoly provisions, stating that it would prevent operators with “meaningful market share” from “misusing their position”. It also imposed a higher frequency fee on the networks – in other words, charging them more to use wireless bandwidth.

However, some executives from Magyar Telekom were none too happy at the prospect of a new competitor.

According to US court documents, two employees of the company conveyed their displeasure to Macedonian government officials at a meeting in Skopje in January 2005 – one month before the law would be passed. Also present at the meeting were three men referred to by the court as “Greek intermediaries”.

Skopje's central square is now dominated by the statue of an equestrian warrior.

The following May, executives from Magyar Telekom signed an agreement with a top Macedonian politician. Its purpose, according to court papers, was to “delay or preclude” the award of a third mobile telephone license.

The agreement would also “mitigate the other adverse effects of the new law”, partly by excusing MakTel from having to pay the “full amount of the increased frequency fee”.

At the end of May 2005, Macedonian government officials met Magyar Telekom executives at the Holiday Inn hotel in Skopje. Two of the Greek intermediaries were also present.

According to court documents, all parties at the meeting “agreed to keep the existence and purpose of the agreement from others, including Magyar Telekom’s auditors and the public”.

In August that year, court papers say that the Magyar Telekom executives prepared another secret agreement for a second high-ranking Macedonian official from a smaller political party.

In order to secure this official’s support, they promised to award a “business opportunity” to “an entity designated” by his political party. The opportunity never materialised – but the official’s support was nonetheless secured and the document was signed.

The only signed copies of both secret agreements were entrusted to a man identified in court papers as the first Greek intermediary.

‘Legitimate deal’

BIRN has obtained unsigned copies of both agreements, each one bearing the title, “Protocol of Cooperation”.

The first agreement leaves a space for the signature of a representative of the Macedonian government, named on the protocol as “Vlado Buckovski” – the man who was then prime minister.

During an interview in the Skopje university building where he now teaches law, Buckovski confirmed that he did indeed sign the protocol. “There is nothing questionable here, this is not a corrupt agreement,” he told BIRN.

The protocol was never listed in government archives, as required under Macedonian law. However, Buckovski insists that it was not secret. He says that the form of the agreement did not require it to be entered in official records.

Alongside academia, Buckovski continues to pursue a career in politics. He has broken away from the SDSM, which is now the biggest force in the opposition. As the leader of a new party, he has become a fierce critic of the one he left.

Buckovski is also embroiled in a long-running military procurement case, in which he was accused of inflating an order for spare tank parts. This summer, he was sentenced to a three-year jail term for his role in the affair. He denies all charges of corruption and is appealing the verdict.

Buckovski says the protocol was meant to resolve an impasse with Magyar Telekom at a time when the company owed its partner in MakTel, the Macedonian government, several years’ worth of dividends.

“The protocol of cooperation does not regulate the liberalisation of the market,” he says. “The protocol in fact regulates the relationship [with Magyar Telekom]. First of all, it decides how the dividend will be paid. And it talks about future plans.”

The protocol does indeed refer to a new timetable for paying the government its share of the dividend.

It also says that future payments will be conditional upon the “reliability of the regulatory framework” in the Macedonian telecoms market.

Further on, the protocol says that any by-laws in Macedonia will be “brought in a previous consultation with MakTel/Matav”. Matav was the former name of Magyar Telekom.

Elsewhere, the protocol states that the government of Macedonia will “accept all proposals for the by-laws which will be given by MakTel/Matav” – as long as they are in accordance with “the law and European practice”.

In the current lawsuit against Magyar Telekom executives, the defence has argued that the protocol was nothing more than a “memorandum of understanding” between the two shareholders in MakTel.

Far from being a secret document, the defence says the protocol merely reflected “negotiated political and business compromises” that were in keeping with European laws and practice.

However, the SEC argues that the intention behind the agreement was anything but innocent.

“The protocol of co-operation was unlawful under Macedonian law,” says the complaint against the three Magyar Telekom executives.

“It required government officials to ignore their lawful duties” by blocking the entry of a third operator and reducing the frequency fees that MakTel was meant to pay.

The copy of the second protocol of co-operation acquired by BIRN leaves a blank space for a signature by another representative of the Macedonian government – Xhemali Mihazi, the former telecoms minister. Mihazi is a member of DUI, the ethnic Albanian party that partnered SDSM in the post-conflict coalition.

He has not responded to any of BIRN’s requests for a comment. DUI remains in government and is now a minority partner in a coalition dominated by VMRO-DPMNE.

Suspicious contracts

Like the Macedonian operator that it would eventually acquire, Magyar Telekom emerged from the ruins of eastern European communism as another state-owned network in a monopoly position.

The company was privatised during the 1990s, with Deutsche Telekom gradually acquiring the majority share.

In 1997, Magyar Telekom listed its shares on the New York Stock Exchange – a proud moment that reflected its strength at home and its ambitions abroad. According to the company’s website, it was the first firm from central and eastern Europe to be listed on the exchange.

Nearly a decade later, this listing would permit the SEC to investigate Magyar Telekom under the FCPA.

While the act usually targets US-based firms, it can also be used to investigate any foreign companies that are listed on US exchanges and file financial returns to the SEC.

Andrija Mandic, the leader of a Montenegrin opposition party, says local prosecutors have failed to follow up his commission's report.

The trigger for the investigation – and for the eventual discovery of the secret protocols – was a routine audit by PricewaterhouseCoopers, Magyar Telekom’s accountants.

This uncovered two contracts from 2005 whose “nature and business purposes... were not readily apparent”, according to a report that would be filed by Magyar Telekom in 2009.

In February 2006, the audit committee in the telecoms company enlisted the law firm, White & Case, to take a closer look. The firm discovered more suspicious contracts. It also reported that some Magyar Telekom employees had destroyed documents that it had hoped to use in its investigation.

The audit committee ordered a broader, internal inquiry. This concluded in 2009 that senior executives at Magyar Telekom and MakTel had authorised the expenditure of €24 million through more than 20 suspicious contracts.

The contracts were ostensibly for services such as consultancy and lobbying. But in fact, there was no evidence that any such work was performed in the time or manner specified.

“The evidence shows that, contrary to their terms, a number of these contracts were undertaken to obtain specific regulatory and other benefits from the government of Macedonia,” the company’s report says.

In the view of the US prosecutors, the contracts were meant to disguise payments that were intended as bribes.

According to US court documents, the executives paid nearly €4.9 million between 2005 and 2006 to a shell company based in Cyprus and its affiliates. The company was controlled by the three Greek intermediaries.

At the time, Magyar Telekom and MakTel were getting what they wanted in Macedonia. The government had delayed the introduction of a third mobile operator until 2007, and it had reduced the frequency fee imposed on MakTel.

In the words of the court documents, “the telecoms executives knew, or were aware of a high probability that circumstances existed in which, all or a portion of the proceeds” of the payments they had made “would be offered, given, promised or paid, directly or indirectly, to Macedonian government officials”.

However, there is no evidence to show that the payments reached anyone in the Macedonian government.

Exit from the exchange

In the case currently being heard against the three Magyar Telekom executives, the defence has rejected claims of sham contracts in Macedonia, insisting they were legitimate and transparent.

Buckovski dismisses the suggestion that the protocol is linked to the bribery claims made by the SEC.

“This is not corrupt,” he tells BIRN. “I don’t know if they know something else about the payments.”

The SEC launched its investigation into Magyar Telekom in 2006, after the company reported the initial discovery of suspicious contracts.

On 19 November 2007, Magyar Telekom celebrated the 10th anniversary of its listing on the New York Stock Exchange.

Three years later, on 12 November 2010, the company delisted from the exchange. According to the company’s website, it made the move “in order to reduce complexity in financial reporting and administrative costs”.

Magyar Telekom continues to partner the Macedonian government in the ownership of a mobile network, which has since been rebranded T-Mobile. Both parties continue to collect substantial dividends from their joint venture.

 

Goran Rizaov is a Skopje-based journalist. This article was edited by Neil Arun. It was produced as part of the Balkan Fellowship for Journalistic Excellence, an initiative of the Robert Bosch Stiftung and ERSTE Foundation, in cooperation with the Balkan Investigative Reporting Network.

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About the Programme

This year’s fellowship stories are grouped under the umbrella of the annual topic, integrity.

The reporters – drawn from seven Balkan countries – are covering issues ranging from corruption, media and the legacy of conflict.

They will supplement information gathered in their home countries with material from trips to at least two other European countries.

The fellows were selected through open competition to receive funding and professional support that would help them conduct cross-border research into topics of regional and EU significance.

Find out more about the Fellowship in 2013 on the official website of the programme.

Meet the Fellows