Prosecutors in Sweden detained three executives from Bombardier Inc.'s Swedish unit on suspicion of "aggravated bribery" in a case that involves the sale of rail-signalling equipment to Azerbaijan and dealings with a shell company linked to a long-time confidante of Russian President Vladimir Putin.
A Stockholm court heard Friday that the country's National Anti-Corruption Unit believes the Swedish arm of Bombardier Transportation – the division that makes trains and rail equipment – colluded with Azeri government officials to win a $340-million (U.S.) contract in 2013.
Prosecutors told the court that the contract was secured in part by creating a joint venture called Trans-Signal-Rabita and fictionalizing the new company's history to meet the specifications of the bid. Trans-Signal Rabita won the contract despite offering only the fifth-best price among eight bidders.
The anti-corruption unit also accused Bombardier Transportation of selling its sophisticated Ebi Lock-950 train signalling equipment to Azerbaijan via a shell company called Multiserv Overseas that was the focus of an investigation published last year by The Globe and Mail.
Prosecutors introduced documents showing that Bombardier Transportation Sweden sold the Ebi-Lock 950s to Multiserv Overseas for $20-million before the shell company sold the systems on to Trans-Signal-Rabita for $104-million. They believe at least some of the $84-million gap went to pay off Azerbaijani officials to win the contract.
Thomas Forsberg, senior public prosecutor on the anti-corruption unit, told The Globe and Mail that the case could become larger than the three individuals currently under suspicion. He added that he was at this point focused only on Bombardier Transportation Sweden. "We have received a lot of information during our searches, so we will analyze it and follow up. We will have a lot of interrogations with a lot of people in the next couple of weeks."
The arrest of the three employees comes at a time when Bombardier is trying to get traction for a financial turnaround. Under chief executive officer Alain Bellemare, who was appointed two years ago, the Montreal-based manufacturer has raised billions in new financing to shore up its balance sheet.
Some of that new money has come from the Quebec and federal governments; $1.5-billion came from the Caisse de dépôt et placement du Québec in return for a 30-per-cent stake in the rail business. Bombardier shares are up 79 per cent in the past year, as more investors have come to believe that its business prospects are improving. Last month, Ottawa agreed to contribute $372.5-million (Canadian) to help with development of Bombardier aircraft, including the C Series passenger jet on which the company has staked much of its future.
Claas Belling, a spokesperson for Bombardier Transportation in Europe, said in a statement: "We can confirm that some Bombardier Transportation Sweden employees have been questioned by the Swedish police. At this time, it is premature to make any statement as to the outcome of the investigation and proceedings. We will continue to co-operate fully with the Swedish authorities and will provide additional information when available and appropriate. As always, we are committed to operating in full compliance with all legal rules and requirements and our own high ethical standards."
At a press conference in Houston, Tex., Prime Minister Justin Trudeau said the government expects Canadian companies to "uphold the highest standards of ethical and legal behaviour."
"It's an important part of the Canada's brand when we engage with the world that people know if you are buying from a Canadian company or working with a Canadian institution that you can be assured that … Canada is seen as a reliable positive partner," Mr. Trudeau said.
But he added that it was too early to tell whether the case would affect the government's willingness to give more financial aid to Bombardier.
"[We] will continue to monitor and gauge. At this point I can't predict it will have any impact. I think it is very clear this was an entirely separate issue from where we'll be investing in Canada, in the investments Bombardier is making in Canadian aerospace, which is going to lead to good jobs for Canadians right across country and economic growth that is going to make a positive difference."
The Globe asked the office of Innovation Minister Navdeep Bains whether the government knew about the Swedish investigation when it pledged the money to Bombardier in February, but did not receive a specific reply. The minister and his office answered that it conducted "extensive due diligence" before entering into the agreement and referred further questions to Bombardier.
In Stockholm, Mr. Forsberg suggested that Bombardier Transportation Sweden had not been fully co-operative with his investigation so far, providing only some of the documents the anti-corruption unit has requested.
"They say they will co-operate, of course, but we ask for due diligence and [haven't] received it. They are letting us know there is a non-disclosure agreement so they are not able to give us, to provide us with such evidence," Mr. Forsberg said.
In December, The Globe published a major report outlining Bombardier's relationship with Multiserv Overseas. The investigation discovered that Multiserv was founded in 2010 by an associate of former Russian Railways boss Vladimir Yakunin, who at the time was a key member of Mr. Putin's inner circle.
The Globe also found that Multiserv Overseas had no functioning office or staff and used a constantly shifting management and ownership structure involving multiple offshore havens, yet it appeared to be involved in the sale of more than $150-million (U.S.) of Bombardier rail equipment in Russia.
Part of the Globe's investigation was read to the court Friday as evidence.
The three Bombardier officials arrested in Sweden were placed this week under pretrial detention, a measure Swedish police can use to prevent suspects from fleeing or tampering with evidence. Formal charges have not been laid.
One of the three suspects appeared in court on Friday: Evgeny Pavlov, a 37-year-old Russian national based in Stockholm who is described on his LinkedIn profile as "head of sales, marketing and country co-ordinator, region north" for Bombardier Transportation. In 2013, when the Azerbaijan deal was signed, he was head of business development and deputy general director of Bombardier's Moscow office.
Speaking in his own defence, Mr. Pavlov told the court he had never paid a bribe. Dressed in a blue shirt and green trousers, he offered to hand over his passport as a guarantee that he would not leave Sweden during the investigation.
Judge Anne Wartin, however, accepted the prosecution's argument that Mr. Pavlov could easily obtain another travel document and extended his detention for two weeks. Russia and Sweden do not have a mutual extradition treaty.
Mr. Pavlov was taken to and from the courtroom in handcuffs.
The other two suspects are Swedish citizens. As of Friday afternoon, one had been released and the other one is expected to be freed over the weekend as the investigation continues.
A conviction for aggravated bribery carries a maximum sentence of six years in prison under Swedish law.
Mr. Forsberg said the court's decision to extend Mr. Pavlov's detention meant the judge believed there was "probable cause" of a conviction in the case. "We have sufficient evidence, I would say."
If proven, the allegations could have serious consequences for Montreal-based Bombardier Inc., as the 2013 contract to install computerized signalling systems along one of Azerbaijan's busiest rail lines was 85 per cent funded by the World Bank. Any company convicted of fraud or corruption is barred from competing for future World Bank projects.
E-mails entered in court between Mr. Pavlov and his colleagues suggest that it was someone within state-owned Azerbaijan Railways who suggested – during the World Bank bidding process – the creation of the joint venture that eventually won the deal, Trans-Signal-Rabita.
"The partners such as AZD want to keep all [these] activities in the secret. So we need to keep it in the top-secret inside of BT," reads a Nov. 12, 2012 e-mail from Mr. Pavlov. AZD is a commonly used acronym for Azerbaijan Railways, while BT is Mr. Pavlov's repeatedly-used shorthand for Bombardier Transportation.
Prosecutors also told the court that the chief executive officer of the newly-created Trans-Signal-Rabita was an official from Azerbaijan Railways. The new company is owned 60 per cent by Bombardier Transportation Sweden and 36 per cent by Bombardier Transportation Signal, a joint venture between Bombardier and Russian Railways.
The final 4 per cent was owned by a Russian company, Zheldoravtomatizaciya, that prosecutors believe is controlled by officials close to Mr. Yakunin.
Bombardier employs about 2,000 people in Sweden. The Stockholm office of Bombardier Transportation is the global headquarters of its Rail Control Solutions division, which produces the Ebi Lock 950 system, as well as functioning as the hub for Bombardier's rail operations in Russia and the rest of the former Soviet Union.
The Globe and Mail investigation highlighted 100 transactions between Bombardier Transportation Sweden and Multiserv Overseas worth a total $150-million. One of those transactions was related to the project in Azerbaijan, the other 99 involved the import of Ebi Lock-950s into Russia.
The transactions via Multiserv Overseas began in 2011 and continued until at least October of last year.
In a published response to The Globe and Mail's investigation in December, Mike Nadolski, Bombardier's vice-president of communications and public affairs, wrote that the article "maligned Bombardier's integrity and business practices." He said Multiserv Overseas "manages the subcontractors responsible for the logistics related to shipping components from our Sweden facility" and also "assumes the financial risk associated with the large swings in the foreign exchange" rates that can occur.
Company registration documents show the founder of Multiserv Overseas is Yuriy Obodovskiy, who has been identified in Russian media as an associate of Mr. Yakunin. Mr. Obodovskiy is also the deputy head of the board of directors of Elteza, a joint venture between Bombardier Transportation and Russian Railways that was established in 2007.
Mr. Yakunin was ousted as head of Russian Railways in 2015 amid allegations of massive corruption.
Because of his ties to Mr. Putin, Mr. Yakunin has for the past three years been on a list of Kremlin-connected individuals hit with sanctions by the U.S. Treasury Department over Russia's 2014 annexation of the Crimean Peninsula.
However, Mr. Yakunin is not on Canada's even-longer list of individuals hit with sanctions over the conflict in Ukraine. Bombardier acknowledged in December that it lobbied Ottawa to keep Mr. Yakunin off the list because "including Mr. Yakunin on Canada's sanctions list could have unilaterally harmed a Canadian business."