At a lavish Aspen, Colo., holiday party in 1997, luxury handbag mogul Frederic Bourke, Czech speculator Viktor Kozeny and former AIG executive David Pinkerton allegedly hatched an elaborate $450 million scheme to ensure privatization of and a controlling stake in Azerbaijan's state-run oil company.
The scheme involved millions of dollars in bribes to Azeri officials, with cash flown into the country on Kozeny's private jet. For a while the scheme seemed to be successful, but as it began to fall apart in 2000, the feds stepped in. They charged Bourke,
Pinkerton and Kozeny with more than 25 criminal violations under the Foreign Corrupt Practices Act (FCPA).
Bourke pleaded not guilty and came forward with extensive documentation of his co-defendants' misdeeds. He also alleges he risked his own life to personally inform Heydar Aliyev, the president of Azerbaijan, about the bribery scheme. Officials later dropped the charges against Pinkerton, and Kozeny remains a fugitive.
Bribery of a government official is punishable under Azeri law by three to eight years of imprisonment. However, Azeri law excuses from criminal liability anyone from whom a bribe was extorted or who reports the bribe.
Bourke argued that he should not be liable under the FCPA--the U.S. law aimed at preventing American companies from engaging in bribery or other corrupt practices abroad--because he reported the bribes. But according to a landmark Oct. 21 ruling in the Southern District of New York, Bourke is still on the hook.
"There is no immunity from prosecution under the FCPA if the person could not have been prosecuted in the foreign country ... because a provision in the foreign law 'relieves' a person of criminal responsibility," the court wrote. "It is inaccurate to suggest that the payment suddenly became 'lawful' [when the payer reported it]."
The FCPA provides a few exceptions and affirmative defenses. One such defense is the "lawful payments" defense, which provides that if a payment to a foreign official was legal under the law of the country in which it was made, then the person who paid the bribe is immune from prosecution under the FCPA.
When Congress passed the FCPA in 1977, it included this provision to assuage fears that U.S. executives would be criminally prosecuted for making routine payments to low-level officials that are a common part of doing business in many foreign countries.
No case had tested the outer contours of the lawful payments defense until Bourke's argument came before Judge Shira Scheindlin of the Southern District of New York. Her decision will limit the circumstances under which the defense is available.
Bourke argued that while bribing Azeri officials was illegal, he should have been excused from liability because he had a defense to criminal liability under the host country's law.
Judge Scheindlin rejected that argument. For the lawful payments exception to apply, she ruled, the payment must have been specifically permitted under foreign law at the time it was made. The situation Bourke presented--essentially that the briber was excused from criminal liability due to some technicality such as the statute of limitations or reporting the bribe after the fact--is insufficient to raise the defense.
The court left aside for later proceedings Bourke's argument that the payments were extorted.
"The lawful payments defense was already limited, and this decision narrows it even further," says Nicola Hanna, a partner in Gibson Dunn & Crutcher's white collar defense practice. "Even if you had an affirmative defense in the host country, you still can be prosecuted in the U.S."
The Bourke decision is indicative of a larger trend in FCPA enforcement and interpretation--courts and regulators are narrowing the defenses available to executives accused of corrupt conduct abroad and expanding the circumstances under which payments to foreign officials are made criminal (see "Expansive Reading").
"It's not prudent to rely on the FCPA's two affirmative defenses and one exception," says Richard Cassin, a partner at Cassin Law in Singapore and editor of The FCPA Blog. "The government's view of all of them is narrow."
Indeed, since the FCPA's enactment, the DOJ has been trying to narrow the defenses it provides. For instance, in the early 1990s many Western European countries made certain payments to public officials tax deductible. U.S. companies argued that because the payments were deductible under the tax codes of the host countries, they should be considered "lawful" for FCPA purposes. The DOJ rejected that contention, arguing instead that all payments not specifically authorized under foreign law are FCPA violations. The tax treatment of the payments had no impact on their legality under U.S. law.
More recently, the "facilitating payments" exception has come under increased scrutiny. This exception provides that small payments to low-level officials made to facilitate routine clerical or ministerial functions to which the payer was already entitled--such as a processing a visa application or providing police protection--are not illegal under the FCPA.
"This exception is not without controversy," says Gary DiBianco, a partner at Skadden Arps Slate Meagher & Flom. "There is not always a clear dividing line between a bribe and a facilitating payment."
He cautions companies to be mindful of the SEC and DOJ's position on facilitating payments. A February 2008 settlement between the DOJ and Westinghouse Air Brake Technologies Corp. shows how narrow this exception has become.
An Indian subsidiary of Westinghouse allegedly made numerous small payments to rank-and-file Indian regulators to reduce the frequency of compliance audits and to facilitate scheduling of product inspections. Most of these payments were very small--in most cases less than $70. Nonetheless, Westinghouse agreed to pay a $300,000 fine and review its FCPA compliance procedures to avoid prosecution.
"Most so-called 'grease' payments don't fall within the facilitating payments exception after all," Cassin says. "My guess is that at least a third of all internal investigations today are triggered when companies discover illegal bribes that someone first mischaracterized as facilitating payments."
Westinghouse is by no means the only company to find itself in hot water in recent months over payments that seem to fit within the FCPA exceptions. According to statistics tracked by Gibson Dunn & Crutcher, 2007 was a record-breaking year for FCPA enforcement actions, and at press time, 2008 was on pace to meet or exceed 2007 levels.
Moreover, the prospects for those charged with FCPA violations are not good--91 percent of individuals against whom FCPA charges have been resolved in the past 10 years have either pleaded guilty or been convicted at trial. And the severity of fines and jail sentences imposed on violators are at an all-time high.
Meanwhile, courts and regulators continue to chip away at the defenses accused violators can assert. Judge Scheindlin's reading of the lawful payments exception will no doubt be persuasive when any court looks at this defense in the future.
That means in-house counsel would be wise to take a conservative approach to authorizing payments to any foreign official.
"There's no real safety in these FCPA loopholes," Cassin says. "It's always tempting to believe the FCPA's affirmative defenses and exception provide a safe harbor for otherwise illegal payments, but that's usually wishful thinking. The truth is that very few payments to foreign officials are safe under the FCPA."