Special Report: US, Swedish prosecutors study graft complaint naming son of Turkey's Erdogan

The proposed plan was detailed in communications and business documents seen by Reuters

(Reuters) – Anti-corruption authorities in the United States and Sweden are reviewing a complaint alleging that the Swedish affiliate of a US company pledged to pay tens of millions of dollars in kickbacks if a son of Turkey's President Recep Tayyip Erdogan helped it secure a dominant market position in the country.

The proposed plan was detailed in communications and business documents seen by Reuters, as well as by a person familiar with the matter. Reuters is reporting this plan and the resulting preliminary probes for the first time.

Ultimately, no kickbacks were paid, according to the complaint submitted to authorities by an individual and reviewed by Reuters. In fact, Dignita Systems AB, the Swedish company, abruptly abandoned the project late last year, according to two people familiar with the matter and company communications seen by Reuters.

Dignita's US owner confirmed to Reuters that the project was dropped, saying it had learned of "potentially concerning conduct" in Turkey and terminated several people involved.

The company's plan, according to the complaint, was for the administration of President Erdogan to pass regulations that would boost sales of Dignita's product: dashboard breathalyzers that lock a vehicle's ignition when the driver is inebriated.

In return for 10 years of commercial exclusivity selling its products, Dignita committed it would pay tens of millions of dollars in lobbying fees, via a shell company, to two institutions for which Bilal Erdogan is a board member, the complaint says.

Although the effort was scuttled in September, it provides rare insight into how an investor regarded Bilal Erdogan as a key person to gain access to President Erdogan, who won a new five-year mandate on May 28.

Dignita's chief executive officer, Anders Eriksson, told Reuters he could not discuss the alleged scheme because he was about to leave the company and bound by a confidentiality agreement.

Through a lawyer, Bilal Erdogan said allegations that he colluded with Dignita "are completely incorrect." It is a "web of lies," the lawyer added. A senior official with the Turkish presidency's communications directorate declined to comment for this article.

Reuters was unable to confirm independently whether President Erdogan and his son Bilal were aware of, or had involvement in Dignita's alleged kickback scheme.

After receiving the complaint in April, the US Department of Justice and Swedish prosecutors tasked a special agent and a detective inspector, respectively, to conduct preliminary probes and determine if any provisions of American and Swedish anti-bribery laws may have been violated, according to official responses seen by Reuters. The preliminary probes may not lead to formal investigations or charges.

In both countries, a pledge to pay commissions may constitute a criminal offense under certain circumstances, US and Swedish anti-corruption experts said. In the United States, a violation of the Foreign Corrupt Practices Act (FCPA) can be established even if no money changed hands, said Scott Greytak, an attorney with anti-graft watchdog Transparency International US in Washington. "But you would have to show that there was an agreement and that there was some sort of overt act, such as opening a bank account to provide a place for that money to go."

Spokespeople for the DOJ and Swedish prosecutors said they had no comment.

The United States may have jurisdiction to investigate Dignita's actions in Turkey under the FCPA because the Swedish company is owned by 1A Smart Start LLC, a Texas-based company that belongs to Apollo Global Management, one of the world's largest asset managers.

Apollo referred questions about its alleged role to Smart Start, which said that it has never sold products or generated any revenue in Turkey.

"Upon learning of potentially concerning conduct regarding future business opportunities in Turkey, we promptly investigated and took corrective action, including terminating the sole employee and the third-party consultants involved," the company said in a statement to Reuters. "As a result, we have not moved forward with doing business in Turkey."

Smart Start retains an affiliate registered in Turkey, according to Turkish corporate records.

News of Sweden's preliminary probe into Dignita's Turkish endeavor comes at a sensitive moment in bilateral relations between Ankara and Stockholm. Turkey has blocked Sweden from joining the North Atlantic Treaty Organisation (NATO), accusing the Nordic country of providing refuge to alleged terrorists, an accusation Swedish authorities have rejected.

TWO-PRONGED STRATEGY

The Swedish company's plan hinged on convincing Turkish authorities to render the use of its breathalyzers and ignition locks mandatory for certain categories of drivers and vehicles, and then obtaining 10-year exclusivity for their supply, according to an eight-slide presentation prepared for President Erdogan in summer 2022, and seen by Reuters.

After four years of frustrating efforts, Dignita was able to address a letter to the Turkish leader outlining its plan, according to the business documents, which include a copy of the June 2022 message.

That opportunity arose about four months after a representative of Dignita allegedly met with Bilal Erdogan in Istanbul in February last year to review a two-pronged strategy, according to one of the people familiar with the matter.

Under the first part of the strategy, laid out in detail in an 11-page "marketing exploration agreement" seen by Reuters, a Turkish affiliate of Smart Start committed to pay regular consultancy fees to an Istanbul-based shell company controlled by a person handpicked by the Swedish and US firms.

The consultancy fees to be paid to the shell company ranged from 50 cents to $3 dollars per device and per month, depending on the number of vehicles equipped with Dignita's kits. On that basis, and over the envisioned 10-year exclusivity period, the total fee funneled to the shell company would amount to $54 million for 500,000 vehicles, and snowball to $384 million for two million, the agreement, dated March 2022, and Dignita correspondence show.

The second part of the strategy, discussed only verbally according to the person familiar with the matter, called for the shell company to make hefty donations to two institutions where Bilal Erdogan serves as board member, the Ibn Haldun University and the Tugva youth foundation.

Ibn Haldun University was founded by Turgev, a charity organisation President Erdogan helped create in the 1990s, when he was mayor of Istanbul. Tugva, meanwhile, is registered as a not-for-profit organization authorized to collect donations for social-welfare projects. It operates student dormitories in more than two dozen Turkish cities.

The two foundations have expanded into large social-welfare operations underpinning what opposition leaders have described as a nationwide patronage system used by President Erdogan to look after his voters.

The senior official with the Turkish presidency's communications directorate declined to comment on the patronage accusations expressed by political opponents. A spokesperson for Turgev said the foundation had no affiliation with Dignita, adding that allegations about irregular activities involving the charity were baseless. "In order to ensure the transparency of our activities, our administrative and financial processes are regularly assessed by independent auditors," the spokesperson said. Directors at the Ibn Haldun University and Tugva didn't respond to messages seeking comment.

Bilal Erdogan rarely appears in public. Alongside other members of the Erdogan family, the 42-year-old businessman owns minority interests in BMZ Group, a maritime transport and construction company.

His name has been associated with alleged corruption in the past. In 2016, Italian prosecutors conducted a money-laundering probe into Bilal Erdogan on suspicion he had brought cash into the country without declaring it. He denied the accusation, and Italian prosecutors eventually dropped the probe, citing a lack of evidence. The previous year, the Russian government alleged it had evidence that President Erdogan's son was profiting from cross-border oil trade with Islamic State in Syria. Russia declined to share its evidence. Bilal Erdogan denied the allegations, saying the radical insurgency was an enemy of Turkey.

Dignita set foot in Turkey in 2017 with the ambition of selling its traffic-safety devices. That year, Eriksson, the Dignita CEO, took the helm of the Turkish company set up by Smart Start, Turkish corporate records show.

For several years, Dignita and Smart Start made little headway because they couldn't get access, even indirectly, to President Erdogan, the person familiar with the matter said.

A breakthrough came in early 2021 when an Eriksson aide was able to present the Swedish company's plan to a Turkish professor of theology turned politician, Irfan Gunduz, according to the person familiar with the matter. Dignita had chosen to approach the politician because he is known to be close to Bilal Erdogan, who in turn could provide access to the Turkish president, the person said. Gunduz chairs the board of trustees at Ibn Haldun University; Bilal Erdogan is deputy chairman.

Reached on May 30 in the United States, where he said he was on a business trip, Gunduz told Reuters that it was "all gossip," adding that "neither I nor Bilal ever heard about this company; ever met with this company."

"I CAN'T IMAGINE"

Suddenly, after the alleged meeting with Gunduz, doors began opening and Dignita was able to discuss with a senior member of President Erdogan’s administration how they would amend traffic-safety regulations to cover the use of breathalyzers and ignition locks, according to company correspondence and the person familiar with the matter.

Some countries require public transport operators as well as convicted drunk drivers to equip their vehicles with ignition locking systems. Before turning on the engine, a driver must blow into a mouthpiece: if the breath-alcohol concentration is greater than the legally permitted limit, the device prevents the engine from starting.

In spring 2021, Dignita understood that Gunduz was seeking an upfront lobbying fee, potentially as high as $100 million, according to the person familiar with the matter. "Let’s discuss," Eriksson, the Dignita CEO, said in a June 8 message to his aide for Turkey.

In their correspondence, reviewed by Reuters, Eriksson and his aide initially mentioned Gunduz and Bilal Erdogan by name – or as "the son" in the case of Bilal – especially when discussing meeting schedules, but later took the precautionary step of designating the Turkish side as "the Lobby," according to the person familiar with the matter.

"If the Lobby gets 100 million for this they will be extremely happy," Eriksson said in one message. "I can't imagine they have close to this kind of money or that they will ever have the opportunity to make 100 million again so easily."

Reuters was unable to confirm independently whether Gunduz requested payment of a lobbying fee.

In ensuing messages to his aide, Eriksson sought to clarify what services such a fee would buy. "We want the Lobby to support us over time and to 'protect' us from competition," he wrote in another message on the same day. If competition was allowed in, he said, fees would be halved.

Eriksson also made clear that Dignita wouldn't pay any lobbying fees until it began earning money in Turkey. "If they don't agree, we better stop because we will never be allowed by our owners to pay them before we get paid," the CEO said in a June 14 message.

By early 2022, the Swedish and Turkish sides had abandoned the idea of an upfront payment and shifted to the alleged two-pronged strategy calling for ongoing lobbying fees to be disbursed via a shell company, according to the person familiar with the matter. And after the alleged encounter with Bilal Erdogan – it took place on February 25 last year inside a children's music school located on the Asian side of Istanbul, the person familiar with the matter said – Dignita understood that it should send a formal letter to President Erdogan outlining its business pitch, company correspondence shows.

In summer 2022, Eriksson received a draft of the letter and some instructions from Smart Start’s CEO, Matthew Strausz, company correspondence shows. "Anders," the American CEO told his Swedish colleague in a June 23 message. "See attached. This, other than how we will address the President, is the draft that we will use. It has been cleared by counsel. Can you have translated and sent back for final sign off? Apollo has a (...) lawyer that will give final review, then we will furnish for you to send personally."

Strausz referred questions to a spokesperson for Smart Start, who didn't address the CEO's role in the company's response to questions from Reuters.

The final version of the letter seen by Reuters is dated June 29 and signed with blue ink by the Dignita CEO. In the three-page missive, Eriksson began by praising President Erdogan for his achievements in improving safety on Turkish roads, and saying his company was willing to help him go further. If ignition locks were made mandatory for drunk-driving offenders and public transport vehicles, such as school buses, and if Dignita was awarded a contract, the CEO said, the company stood ready to discuss "the underlying guarantees and conditions that would be required to enable our investment."

The letter was sent to Gunduz, the politician, and delivered to the presidency in mid-July, according to the person familiar with the matter.

Although Dignita could not ascertain whether President Erdogan saw the letter, it had an immediate and positive impact, the person said. That same month, the Swedish company learned from Gunduz that meetings with a senior member of President Erdogan's administration, and possibly with the president himself, would take place soon to discuss the next steps, according to company communications.

Later in July, the planned shell company was founded in Istanbul, according to Turkish business records. One of its purposes is to act as a mediator between domestic and foreign companies, legal filings show. And in August, Dignita prepared the eight-slide document for President Erdogan.

By then, however, according to the other person familiar with the matter, Dignita's owners in the US, Smart Start and Apollo, had grown concerned about the Turkish project's untoward facets, including that it could violate US anti-bribery laws. After an in-house review, a decision was made to stop it, the person said.

In September, Dignita informed a participant in the talks on the Turkish side that the Swedish company had dropped the project, without giving a reason, a message seen by Reuters shows.

"Let's hope for the best," the participant responded.