FCPA Compliance and Ethics Blog

November 1, 2012

“No Saint’s Day” for Bourke

Filed under: conscious avoidance,Department of Justice,Frederick Bourke — tfoxlaw @ 4:44 am

Ed. Note-we continue with our series of guest posts my colleague Mary Jones. 

In the mid 1990’s, Azerbaijan (one of my most favorite places to visit) began privatizing its state-owned enterprises. A Czechoslovakian entrepreneur, Viktor Kozeny, launched an effort to acquire the state-owned oil company, through a privatization auction.   Frederick Bourke (as in the “Dooney and Bourke- makes fabulously expensive purses” Bourke) was one of many investors who it appears was swindled by the clever Czech.  Determined to regain some of his money, Mr. Bourke triggered an investigation that in all respects appears to have backfired on him, as he is now facing jail time for what the jury believed he “knew” about improper payments made to Azeri government officials to secure the state owned Oil Company.  In the eyes of the jury Bourke was clearly no saint.

The practical pointer for today’s blog is straightforward – A person or company may be guilty under the FCPA not only if they fail to act upon actual knowledge of a bribe, but “knowledge” also covers the concept of “conscious avoidance” or “deliberate ignorance”.  It is imperative that companies implement a process which assists employees in identifying “red flags” and allows suspicious actions to be reported so that the company can investigate and not be found guilty of placing their head in the sand.

The anti-bribery provision of the FCPA specifically addresses the issue of vicarious liability for acts of third parties.  The act prohibits ….. “an offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the giving of anything of value to…any person, while knowing that all or a portion of such money or thing of value will be offered, given, or promised, directly or indirectly, to any foreign official, to any foreign political party or official thereof, or to any candidate for foreign political office, for purposes of….”.   Obviously the key question is “what constitutes “knowing”?

The Jury charge in United States vs. Kozeny et al, No. 05 Cr.518 (S.D.N.Y. 2008) contained the following statements:

“The FCPA provides that a person’s state of mind is “knowing” with respect to conduct, a circumstance, or a result if: (i). such person is aware that such person is engaging in such conduct, that such circumstance exists, or that such result is substantially certain to occur; or (ii). such person has a firm belief that such circumstance exists or that such result is substantially certain to occur.

When knowledge of the existence of a particular fact is an element of the offense, such knowledge may be established if a person is aware of a high probability of its existence and consciously and intentionally avoided confirming that fact. Knowledge may be proven in this manner if, but only if, the person suspects the fact, realized its high probability, but refrained from obtaining the final confirmation because he wanted to be able to deny knowledge.

On the other hand, knowledge is not established in this manner if the person merely failed to learn the fact through negligence or if the person actually believed that the transaction was legal.

It also bears noting that while a finding that the person was aware of the high probability of the existence of a fact is enough to prove that this person possessed knowledge, it is not sufficient in order to determine that the person acted “willfully” or “corruptly,” which is a separate and distinct element of the offense.”

At the end of the trial, the Jury convicted Bourke after apparently concluding that Bourke “consciously avoided” finding out whether the deal involved paying bribes to Azerbaijan officials.  Just what were the “suspicious actions” or “red flags” that the government believed was sufficient to impart “knowledge” on Mr. Bourke? First, the court noted that Mr. Bourke was keenly aware of how pervasive corruption was in Azerbaijan generally.  Second,  Bourke had knowledge of both Kozeny’s questionable business reputation, and his insidious nickname, “The Pirate of Prague.”  Third, Bourke purposefully established an investment company, instead of joining “Oily Rock’s” board directly, in an attempt to shield himself from FCPA liability for potential bribes made by “Oily Rock.”  The fourth, last and most substantial factor in establishing that Mr. Bourke “consciously avoided” discovering evidence of bribery in Azerbaijan came from a recorded phone conference in which Mr. Bourke made statements such as: “I’m just saying to you in general…do you think business is done at arm’s length in this part of the world.”  To be fair to all parties, Mr. Bourke is currently appealing the court’s findings.

It is obviously important to consider “red flags” that are evident in the due diligence process.  However, it is also important to have your employees look out for “red flags” that might appear on invoices or other correspondence.  Consider the following language for your FCPA Policy:

The description of a fee listed on an invoice or payment request is not fully understandable or suggests that it may be intended to disguise the actual purpose of the fee.  Here are some examples of cost descriptions that in other cases were used to disguise improper payments:

  • Local/Special/Customs Processing Fee
  • Interventions (Special Intervention or Customs Intervention)
  • Expediting Fee (including Expedited Release)
  • Express Fee (including Express Clearance)
  • Local Government Agency Charge
  • Foreign Charge
  • Special Handling Fee
  • Special Operation
  • Urgent Dispatch or Processing Fee
  • Additional or Special Assessment
  • Additional or Special Transit Fee
  • Customs Overtime
  • Government or Other Outlay
  • Fine or Penalty
  • Maritime Fee
  • Impound Charge
  • Customs Evacuation
  • Preclearance Fee
  • Temporary Extension
  • Emergency Release Fee or Payment
  • Safe Passage Fee
  • Community Fee
  • Operation Fee

All invoices and payment requests from an Agent or Partner should be reviewed for potential “red flag” issues and any concerns regarding these issues should be reported to the Company Compliance Officer or his or her designee for further review and investigation, if appropriate.  All investigations conducted by the Company Compliance Officer or his or her designee should be carefully documented and relevant documents, such as the invoice or payment record, relevant contract, and receipts or other supporting documentation should be maintained by the Company Compliance Officer or his or her designee.

Tomorrow is November 2nd.  In 1973 on this day the Watergate Investigation began.  Stay tuned to see what else was uncovered besides a little wiretapping.

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Mary Shaddock Jones has practiced law for 25 years in Texas and Louisiana primarily in the international marine and oil service industries.  She was of the first individuals in the United States to earn TRACE Anti-bribery Specialist Accreditation (TASA).  She can be reached at msjones@msjllc.com or 337-513-0335. Her associate, Miller M. Flynt, assisted in the preparation of this series.  He can be reached at mmflynt@msjllc.com.

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This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication.

February 2, 2010

SO YOU WANT TO BUY A BUSINESS: THE ROLE OF THE FCPA IN INTERNATIONAL ACQUISITIONS

The recession has lessened and all that cash your Company has been hoarding for the rainy days of the Obama years is burning a whole in your CEO’s pocket. He has his powder dry and is ready to make a big bang by going on a buying spree, targeting overseas entities, to beat the competition in coming out of your industry’s downturn. The Legal Department is told to put together an acquisition squad and to be ready to go at a moment’s notice. The job assigned to you is to make sure that your acquisition does not run afoul of the Foreign Corrupt Practices Act (FCPA) and to prepare a list of FCPA based due diligence that the Law Department should focus on to perform on the Target Company. What should be on your list? In the recent article, “FCPA Due Diligence in Acquisitions,” Securities and Commodities Regulation, Vol. 43, No. 2, January 20, 2010, lawyers from Squire Sanders, thoroughly explored this topic, through a hypothetical case it was based upon a “real life scenario”. Some of their suggestions included the following suggestions.

I. Who is the Owner of the Target Company?

An initial inquiry should be made into the ownership structure of the target company. If any portion of the entity is owned or held by a government or governmental entity then such an entity is covered under the FCPA as a “foreign governmental instrumentality”. There are several factors to consider in making such a determination. Some of these factors include: percentage ownership of the target company; control exercised over the target company; and how are the employees of the target company described by their country’s government.

II. Are Agents involved in the Transaction?

Many times a “consultant” will be used in facilitating the purchase of a target company in a country outside the United States. If there is a clear and articulated business case for the Agent to be involved in the transaction, there should be due diligence on the Agent. It should include some a review of the Agent’s credentials, ownership structure and financial records going back 3 to 5 years. Lastly, it is also critical to know the reputation of the Agent in the country’s business community. If the Agent passes all these reviews, you establish a business relationship with a strong written contract.

III. Does the Target Company want you to pay for Travel?

What if the Target Company desires your business to pay for a representative to come to the US to visit your facilities? Such a trip falls under the FCPA and its proscription of “offering or promising anything of value”. However, if there are legitimate business expenses which can be paid by the US purchasing company under the FCPA. The key is to evaluate each travel and entertainment request. Generally, coach class travel and hotel expenses such as room charges, business center and telephone charges related to business can be reimbursed. Personal room expenses such as minibar, Pay-for-Movies and spa fees at the hotel should not be reimbursed. Receipts should be provided for any charges and if possible, the third party service provider should be paid directly rather than reimbursement of the Target Company’s representative. Entertainment and business dinners can be reimbursed if there is a legitimate business purpose but personal, including the family expenses of the Target Company’s Representative, cannot be reimbursed under the FCPA. Lastly, do not give a “per-diem” in cash.

IV. Did the Target Company make any “Red Flag” Payments?

In your company’s financial due diligence of the Target Company, did any evidence of “Red Flag” payments turn up which warrant further investigation? If such “Red Flags” arise, the US purchasing company must not turn a blind eye. If there is reason to believe that payments of the Target Company may violation the FCPA, further investigation is mandated. The recent conviction of Frederick Bourke for engaging in “conscious indifference” in that he knew, or should have known, that bribery and corruption was involved in the proposed acquisition, demonstrates the power of the FCPA in the acquisition arena. Red Flag areas would include the discovery of payments for gifts, entertainment, use of agents, facilitation payments or other payments which could not be adequately accounted for are discovered.

V. Are the Books and Records Reasonable?

In addition to its anti-bribery provisions, the FCPA also requires that a company keep such books and records which reasonably reflect the transactions of the entity and that there are proper internal controls. A key in this area is if the Target Company has any payments which are labeled as “miscellaneous” or there are payments which cannot be reasonably described. Gifts, entertainment and business expenses need to be recorded and documented. Internal controls are required to show that the Target Company has its statements in accordance with some form of accepted accounting principles.

VI. What Happens Afterwards?

Your Company has completed all the above steps but your due diligence has turned up items which cannot be resolved before your Company’s President wants to fire that dry powder. What can you do? In Opinion Procedure Release 08-02, the Department of Justice gave its opinion on the steps required by a US company contemplating a such a transaction. This opinion held that if Halliburton, in purchasing a Target Company, satisfactorily completed a rigorous, DOJ-mandated 180-day FCPA and anticorruption due diligence work plan after the closing, then the DOJ did not “presently intend” to take enforcement action against Halliburton for any disclosed unlawful pre-acquisition conduct by the Target Company within 180 days of the closing. Halliburton was not the successful bidder for the Target Company but the DOJ’s flexibility and Halliburton’s open dialogue with the DOJ indicates there will be increased involvement between companies and regulators during FCPA acquisition due diligence.

VII. The End or Is it?

The potential liabilities for failing to engage in pre-acquisition FCPA due diligence can be severe. Just how severe can be demonstrated by the eLandia acquisition of Latin Node. The FCPABlog reported that “eLandia also disclosed that its purchase price for Latin Node “was approximately $20.6 million”. After the acquisition, eLandia discovered that Latin Node had engaged in bribery and corruption. eLandia investigated, albeit after the purchase, and self-reported the violations to the DOJ. eLandia was assessed a $2 million fine, shut down Latin Node as an operating business and wrote off the entire purchase. For those of you keeping score at home, that is several years of pre-acquisition due diligence, plus legal fees for the FCPA investigation added to the fine, purchase price, business shut down and full financial write-off.

So what’s the moral of this story? You can keep your powder dry but you must engage in full FCPA due diligence in any overseas transaction before moving forward.

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This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication.

© Thomas R. Fox, 2010

January 28, 2010

FCPA Sentencing Box Score

Tfoxlaw is an avid baseball fan. As a child, he was taught how to keep score at professional baseball games by his Grandfather. This had two effects. The first was immediate; it kept him quiet at ballgames. The second is more long term; he continues to keep score at baseball games up to the present. So he appreciates it when he reads (or hears) the words, “For those of you scoring at home” as was stated by the FCPA Professor in his December 31, 2009 posting on the UTStarcom matter. Judging from his posts, it appears the FCPA Professor is also a baseball fan.

In his post of January 18, entitled, “Four Awaiting Sentencing”; the FCPABlog discussed four persons, currently scheduled to be sentenced in January for pleas or convictions of FCPA violations. Two of the individuals are former Willbros employees who have pled guilty and are awaiting sentencing, Jim Bob Brown and Jason Edward Steph. The remaining two are the husband and wife team of Gerald and Patricia Green, who were convicted in a jury trial of FCPA violations related to their attempts to acquire lucrative film festival contracts in Thailand. The Greens were the third of three high profile FCPA trials which were concluded in 2009. See my prior post, “2009-Year of the Trial” at https://tfoxlaw.wordpress.com/2009/12/31/2009-the-year-of-the-trial/.

The convicted defendants from the first two trials, Frederick Bourke and William Jefferson have been sentenced and are out on bail during their respective appeals. As mentioned in its “Four Awaiting Sentencing”, the FCPA Blog stated that “Under the federal guidelines, Gerald Green, 77, is facing between 20 and 25 years in prison; the government wants him sentenced to life in prison.” While a 25 year sentence for a 77 year old man is tantamount to a life sentence, it is not clear how much weight the trial judge would give to the Prosecution’s proposed life sentence.

As pitchers and catchers are scheduled to report to Spring Training in only 30 days, the FCPABlog article and the FCPA Professor’s comment got Tfoxlaw’s baseball mind thinking about the FCPA sentencing boxscore for the two defendants in the other 2009 FCPA trials and how that might related to those upcoming in 2010.

FCPA SENTENCING BOXSCORE

Defendant Sentencing Guidelines Prosecution Recommended Sentence Defense Recommended Sentence Judge’s Sentence
William

Jefferson

324 to 405 mos.

=27 to 33 yrs.

27 to 33 years “less than 10 years” 13 years
Frederick Bourke 57 to 71 mos.

=4.75 to 6 yrs.

10 years Probation A year and a day
Gerald Green 235 to 293 mos.

=20 to 24.4 yrs.

Life in Prison Green does not pose risk to society Sentencing now set for March 11

 In both the Bourke and Jefferson cases, the trial judge gave jail time considerably less than that suggested by the Sentencing Guidelines and that sought by the Prosecutors; albeit with longer sentences than requested by the defendant’s attorneys. So what does all this mean? Tfoxlaw comes from a civil law background so has no experience as a prosecutors. Perhaps a blogger with the prosecutorial background can help to explain these (apparently) wide discrepancies and what that might mean for Gerald Green.

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