Top Menu

My Two Cents On The FCPA’s Affirmative Defenses

Students looking for scholarship ideas, should consider the Foreign Corrupt Practices Act.

Why?

There is a good chance that publication of an article will generate coverage and discussion on the blogosphere and elsewhere.

Case in point is Kyle Sheahen’s “I’m Not Going to Disneyland: Illusory Affirmative Defenses Under the Foreign Corrupt Practices Act.” (see here).

For prior coverage of Sheahen’s article see here, here and here.

Sheahen’s article is about the FCPA’s two affirmative defenses – the so-called local law and promotional expense defenses.

Big picture, Sheahen terms these defenses as being “hollow,” “illusory,” and “useless in practice.”

For starters, I respectfully disagree with Sheahen’s statement that “business and businessmen accused of giving bribes to foreign officials have fared poorly in federal courts” as well as the implication that this somehow supports his thesis.

The three FCPA trials cited from 2009 – Frederick Bourke, William Jefferson, and Gerald and Patricia Greene were a mixed bag for the DOJ, not slam-dunk successes.

For starters, the jury found Jefferson not guilty of substantive FCPA anti-bribery violations (see here).

Sure, Bourke was found guilty by a jury of conspiracy to violate the FCPA and the Travel Act (as well as making false statements to the FBI) (see here), yet when the DOJ alleges that one is a key participant of a “massive bribery scheme” yet secures only a 366 day sentence (see here) from a judge who remarks that “after years of supervising this case, it’s still not entirely clear to me whether Mr. Bourke is a victim or a crook or a little bit of both” – I struggle to put such a case in the decisive “win” category for the DOJ. Plus, Bourke’s case is currently on appeal (see here).

The Green case (see here) would seem to represent the cleanest win for the DOJ even though the sentencing judge expressed concerns whether the Green’s conduct caused any harm in sentencing the couple to six months in prison thereby rejecting the DOJ’s recommended ten year sentence. (See here).

Sheahen’s article was published before the Giffen Gaffe (see here). Giffen aggressively mounted a legal defense and, whether for legal, political or other reasons, the case that began with charges that Giffen made “more than $78 million in unlawful payments to two senior officials of the Republic of Kazakhstan in connection with six separate oil transactions, in which the American oil companies Mobil Oil, Amoco, Texaco and Phillips Petroleum acquired valuable oil and gas rights in Kazakhstan” ended with a one-paragraph superseding information charging a misdemeanor tax violation. Further, back in 2004, Giffen was successful in having FCPA-related criminal charges dismissed when the trial court judge (see here) concluded that the DOJ offered “the slenderest of reeds” to support the collateral criminal charge.

Going back in time …

George McLean won his FCPA case when the Fifth Circuit concluded, see 738 F.2d 655 (5th Cir. 1984) that the FCPA, as it then existed because of the subsequently repealed Eckhardt Amendment, barred prosecution.

Donald Castle and Darrell Lowry (two Canadian “foreign officials”) won their FCPA-related cases, see 741 F.Supp. 116 (N.D. Tex. 1990), when the court dismissed their criminal indictments. The DOJ asserted that even though the officials could not be prosecuted under the FCPA, they could be prosecuted under the general conspiracy statute (18 USC 371) for conspiring to violate the FCPA. However, the court declined DOJ’s invitation to extend the reach of the FCPA through the application of the conspiracy statute to Castle and Lowry.

Richard Liebo was acquitted, following a three week jury trial, of several counts including nine counts of violating the FCPA’s anti-bribery provisions and one count of violating the FCPA’s accounting and record keeping provisions. See 923 F.2d 1308 (8th Cir. 1991). He was found guilty of one FCPA count concerning his company’s purchase of honeymoon airline tickets for the cousin and close friend of Captain Ali Tiemogo, the chief of maintenance for the Niger Air Force. In connection with this conviction, the Eighth Circuit found that the district court “clearly abused its discretion in denying Liebo’s motion for a new trial” and remanded for a new trial.

Hans Bodmer didn’t fare too badly either in 2004 when Judge Shira Scheindlin (the same judge in the Bourke case) held that the portion of the criminal indictment “charging Bodmer with conspiracy to violate the FCPA contravenes the constitutional fair notice requirement, and the rule of lenity demands its dismissal.”

Of course, the DOJ has had its fair share of FCPA successes, but it remains a misperception that FCPA defendants have “fare[d] so badly” in FCPA trials as Sheahen, and others, have asserted.

Returning to the substance of Sheahen’s article, he discusses the October 2008 Bourke decision by Judge Scheindlin (see 582 F.Supp.2d 535) – a case of first impression on the FCPA’s local law defense.

Bourke argued that the FCPA’s local law affirmative defense was applicable because, under Azeri law even though the payments were illegal, he was relieved from criminal responsibility when he reported the payments at issue to the President of Azerbaijan.

Judge Scheindlin disagreed, drawing a hard line between payments – the focus of the FCPA’s local law affirmative defense in her mind – and the related issue of whether a person could not be prosecuted in the foreign country because a provision may relieve that person from criminal responsibility.

Judge Scheindlin concluded that “an individual may be prosecuted under the FCPA for a payment that violates foreign law even if the individual is relieved of criminal responsibility for his actions by a provision of the foreign law.”

I agree with Sheahen’s statement that Judge Scheindlin’s decision of first impression narrowed the FCPA’s local law defense “to the point of extinction.”

I would go a step further and argue that Judge Scheindlin’s decision would seem to violate the basic axiom that a statute should be construed so that effect is given to all of its provisions, so that no part will be inoperative or superfluous, void or insignificant.

In other words, courts should not suppose that Congress intended to enact unnecessary statutes and there is a presumption against interpreting a statute in a way that renders it ineffective.

The local law affirmative defense was added to the FCPA in 1988 and we must presume that Congress intended to enact the affirmative defense for some reason.

It was widely assumed by Congress in 1977 (when the FCPA was enacted), and by the Congress that amended the FCPA in 1988 to include the local law defense as well, that no nation’s written law permitted bribery of its officials.

Yet, given Judge Scheindlin’s narrow construction of the local law defense, the decision would appear to render the local-law defense (a statutory term that must have some meaning) inoperative, superfluous and insignificant.

As to the promotional expense defense, I would respectfully disagree with Sheahen’s apparent conclusion that the defense is meaningless just because it has never been successfully invoked by an FCPA defendant at trial.

Because of the “carrots” and “sticks” the DOJ and SEC possess in an FCPA enforcement action, and because of the resolution vehicles typically offered to FCPA defendants to resolve an FCPA enforcement action (such as non and deferred prosecution agreements) there is much about the FCPA that has never been subjected to judicial scrutiny.

That does not mean however that an element or defense not successfully invoked at trial renders that element or defense meaningless or hallow.

Indeed, Sheahen discusses the FCPA Opinion Procedure Release process. Through this mechanism, those subject to the FCPA have gained degrees of comfort from DOJ “no enforcement” opinions that are based on the promotional expense defense.

Although the Opinion Procedure Releases are not precedent, countless others in the legal, business, and compliance communities find comfort in these releases, as well as the statute itself, when analyzing real-world conduct for potential FCPA exposure.

FCPA enforcement is in need of many fixes and indeed the Opinion Procedure Release process is likely not the best way for the DOJ to make its enforcement positions known.

However, these structural flaws in FCPA enforcement, coupled with the typical ways in which FCPA enforcement actions are resolved, necessarily leads to the conclusion that the FCPA’s affirmative defenses are “hollow,” “illusory,” and “useless in practice.”

*****

I provided Sheahen with my draft post so that he could respond and here is what he said.

“Professor Koehler,

Thank you for your thorough analysis. Although DOJ’s trial record in FCPA prosecutions is not a clean sheet, the government has still been substantively successful in almost every FCPA case that has gone to trial. Further, the fact remains that no FCPA defendant has successfully invoked either the local law or the promotional expenses defense in an FCPA enforcement action.

Also, while I agree that the promotional expenses defense provides some guidelines for compliance with the FCPA, neither it nor the local law defense provide a meaningful defense to an enforcement action. Accordingly, Congress must take action to ensure that individual and corporate defendants have the actual ability to raise the affirmative defenses contemplated by the statutory scheme.

Thanks again and all the best,

Kyle Sheahen
sheahen2010@lawnet.ucla.edu

Outlining Bourke’s Appeal

The DOJ recently filed its reply brief (here) in Frederic Bourke’s appeal.

A prior post (here) summarized the FCPA related issues in Bourke’s brief and this post summarizes the DOJ’s reply brief.

The DOJ begins with this paragraph:

“The evidence at trial established that Bourke, a successful entrepreneur and multi-millionaire, knowingly backed rogue investor Viktor Kozeny in a corrupt plan to purchase the state-owned Azerbaijani oil industry, in secret partnership with the president of Azerbaijan, Heydar Aliyev, and his family. The corrupt plan included the payment of bribes to Aliyev and other officials.”

The DOJ states – “[a]t some point, Bourke learned about Kozeny’s business success and strategies from a December 1996 Fortune magazine article.” The brief states that the article “detailed Kozeny’s insider trading, purchase of state secrets from a government official, and other fraudulent activity.” According to the DOJ, “[h]aving read the article and discussed it with his lawyers, Bourke was aware of Kozeny’s questionable business practices; but Bourke was impressed by the outsized profits Kozeny generated in this scheme, and, as Bourke would later tell a prospective investor, Kozeny had not actually been convicted of a crime.”

Bourke’s trial principally focused on his investments in Oily Rock, a vehicle the government maintains was used to funnel bribe payments to Azerbaijan officials to ensure that the officials would privatize the State Oil Company of the Azerbaijan Republic (SOCAR) in a rigged auction that only the investors, including Bourke, Kozeny and others could win.

The DOJ states that “Bourke made his initial investment in Oily Rock without directing any of his many lawyers to conduct due diligence.”

According to the DOJ:

“Bourke’s interest in the investment was motivated by his knowledge of the corrupt arrangement. Because Bourke knew of the payments to Azerbaijani officials, Bourke demonstrated an assured confidence in the success of the privatization, even though most of the investors who were not privy to the details of the conspiracy viewed it as extremely risky. The inherent risk in the investment arose from the fact that the privatization of SOCAR required a presidential decree.”

The DOJ nevertheless acknowledges that many others invested, directly or indirectly, in Oily Rock including former U.S. Senator George Mitchell and other individuals, institutional investors and hedge funds, AIG and Columbia University.

Bourke’s appellate brief argued that the district court “committed a series of errors that crippled Bourke’s mens rea defense.”

Below is a summary of Bourke’s arguments along with the DOJ’s response as set forth in its reply brief.

Bourke

“The district court improperly instructed on conscious avoidance, despite the absence of evidence that Bourke deliberately avoided knowledge of Kozeny’s bribes.” According to Bourke, this instruction was error “because there was no evidence that Bourke deliberately avoided learning about Kozeny’s bribery.” Bourke states that the conscious avoidance instruction “was particularly damaging because the government presented evidence and argued that Bourke failed to exercise adequate due diligence, thus exacerbating the risk inherent in the conscious avoidance instruction that the jury would convict for negligence or recklessness.

DOJ

“There was an ample factual basis for a conscious avoidance charge in this case. To be sure, the Government’s principal theory at trial was that Bourke had actual knowledge of the bribery scheme. But the jury easily could have found, in the alternative, that Bourke was aware of a high probability of the existence of corrupt arrangements, yet deliberately avoided confirming that fact. Such a finding would have been supported, by, among other things, the following evidence:

• Bourke was aware of the high level of corruption in Azerbaijan generally.

• Bourke had read a Fortune magazine article that described Kozeny’s reliance on illegal business practices, such as insider trading, purchase of state secrets from a government official, and fraud, to accomplish the goals of a privatization scheme. This article alerted Bourke that there was a high probability that Kozeny’s latest scheme involving Azerbaijan also included corrupt arrangements, such as bribe payments or offers to pay bribes.

• Bourke defended Kozeny by stating that he had not actually been convicted of a crime.

• Bourke expressed concern to other investors and their attorneys that Kozeny and his employees were paying bribes.

• Bourke proposed the formation of separate companies affiliated with Oily Rock and Minaret to shield Bourke and other American investors from liability from any corrupt payments.

• Bourke played a role in coordinating United States medical treatments, combined with tourism and shopping excursions, for Azerbaijani officials.

From these facts, among others, a rational juror could have concluded that Bourke was aware of a high probability of the existence of corrupt arrangements, yet deliberately avoided confirming that fact. Accordingly, Bourke is wrong when he suggests that a conscious avoidance was inappropriate because ‘the trial record contains no evidence that Bourke ‘decided not to learn’ about Kozeny’s bribery.’ In fact, a conscious avoidance instruction was particularly appropriate in this case, because Bourke’s corporate attorney had actually cautioned him that, if he thought there might be bribes paid, he could not just look the other way.”

“Bourke’s assertion that the conscious avoidance instruction allowed the jury to convict on a negligence theory is mistaken. To the contrary, the District Court told the jury that it could not find Bourke guilty merely because he was negligent. The Government did not argue that the jury should convict because Bourke was negligent in failing to ask his lawyers to conduct due diligence. Rather, the Government argued that Bourke refrained from asking his lawyers to conduct due diligence either because he was consciously avoiding learning about the bribes or because he did not want his lawyers to learn the true facts of his corrupt investment.”

“In sum, a rational juror could have concluded based on, among other things, Bourke’s close relationship to Kozeny and other co-conspirators, Bourke’s understanding of the Azerbaijan investment and the Azerbaijani government, and Bourke’s previously expressed concerns about Kozeny’s paying of bribes, that Bourke was aware of a high probability that Kozeny was paying bribes but deliberately avoided confirming that fact. Accordingly, the District Court properly instructed the jury on the doctrine of conscious avoidance.”

“Even if the District Court erred in instructing the jury on the doctrine of conscious avoidance (and it did not), the error would provide no basis for vacating Bourke’s conviction. This Court has repeatedly ruled that a conscious avoidance instruction is harmless in cases where, as here, there was sufficient evidence of the defendant’s actual knowledge to support the jury’s verdict.”

“Moreover, conscious avoidance was not a prominent feature of the Government’s arguments to the jury. Although the Government did refer to evidence of Bourke’s conscious avoidance, the Government’s primary argument was that Bourke had actual knowledge of the bribes.”

Bourke

The district court erred in admitting testimony about the due diligence performed by Texas Pacific Group (“TPG”), an investment fund that did not make the same investment as Bourke, because its lawyers advised of the FCPA risk.

According to Bourke, because he knew nothing about their work, their testimony was irrelevant to his state of mind particularly since the results were never shared or communicated with him.

Bourke states that “the government offered the testimony […] solely as a contrast with the comparatively skimpy inquiry that Bourke and his lawyers performed” and that this testimony “increased the risk, created by the conscious avoidance instruction and heightened by the government’s closing, that the jury would convict Bourke based on his negligence or recklessness — what he should have known, rather than what he actually knew.”

Bourke further argues that having admitted the TPG testimony, “the district court should at least have permitted Bourke to present the contrasting testimony” of the head of investments for Columbia University that would have established that “Columbia invested $15 million with Kozeny in Azeri privatization after due diligence comparable to Bourke’s.”

According to Bourke, this excluded testimony “would have rebutted the government’s claim that his lack of due diligence compared to TPG established his culpability.”

Bourke argues that “once the district court permitted the government to present TPG’s due diligence as a benchmark for measuring [his] inquiry, fairness demanded that [he] be allowed to present the contrasting picture of Columbia’s due diligence, which resembled his own.”

DOJ

“The testimony of Wheeler and Rossman [individuals who conducted due diligence for potential Oily Rock investor David Bonderman of TPG] was not offered to show Bourke was negligent; the purpose was to show that Kozeny had not concealed evidence of the corrupt arrangements from potential investors in Oily Rock. Given that Bourke was much closer to Kozeny than Bonderman was, this was important circumstantial evidence of Bourke’s knowledge. As such, the testimony was relevant and appropriately admitted by the District Court.”

“To conduct due diligence on the Oily Rock investment, at Kozeny’s invitation, Wheeler traveled to Baku with Bourke and several other potential investors; together, they toured Kozeny’s operations and were introduced to Azerbaijani government officials. Based on what she saw during her visit and her assessment that the investment was “risky [in] nature”, Wheeler and Bonderman brought in TPG’s outside counsel, Cleary Gottlieb, to perform due diligence. Rossman testified that, in 1998, he was a Cleary Gottlieb attorney. During that time, he was asked to conduct due diligence on the Oily Rock investment for TPG. As a part of due diligence, Rossman met with Bodmer at Bodmer’s law offices. During this meeting, Bodmer provided Rossman with various documents related to the Oily Rock investment, and Bodmer and Rossman discussed various details regarding the investment, including the involvement of Azerbaijani investors. Based on his review of documents, his understanding of the investment thesis, and Kozeny’s reputation, which he researched from news coverage, Rossman concluded that this proposed investment could violate the FCPA, and he advised his client not to make the investment. TPG did not invest in Oily Rock.”

“… Wheeler and Rossman’s testimony was appropriately admitted, because Bourke was exposed at minimum to the same sources of information as Wheeler and Rossman — Wheeler and Bourke took the same factfinding trip to Baku in January 1998, and Rossman, like Bourke, learned of the investment structure from Bodmer. Accordingly, this testimony was probative of Bourke’s knowledge.”

“… the District Court’s decision to admit Wheeler and Rossman’s testimony was entirely appropriate. Moreover, given the volume of direct and circumstantial evidence of Bourke’s knowledge of the conspiracy’s objectives, any conceivable error was harmless.”

“Bourke also contends that the District Court erred in barring the testimony of Bruce Dresner, who served as Columbia University’s Vice President for Investments in 1998, and, in that capacity, based on representations by Omega’s Clayton Lewis and Leon Cooperman, recommended that Columbia invest $15 million in privatization vouchers through Omega. Bourke complains that, although the Government was permitted to call Wheeler and Rossman to contrast their due diligence with Bourke’s, he was not permitted to contrast his due diligence with Columbia’s. The comparison is inapt. Unlike Wheeler and Rossman, who testified about a potential investment in Oily Rock itself, Columbia University was a potential investor in Omega, which was merely planning to invest alongside Oily Rock. The District Court did not abuse its discretion in excluding this proposed testimony.”

“The District Court properly precluded Dresner’s testimony because it was not relevant. As the District Court stated, Dresner’s state of mind “has nothing to do with the defendant on trial.” Unlike other defense witnesses and Government witnesses who were present in Baku with Bourke to consider an investment in Oily Rock and therefore possessed relevant information regarding Bourke’s knowledge, Dresner had no contact with Bourke and was considering investing in Omega, not Oily Rock. Dresner never traveled to Azerbaijan to investigate the investment opportunity, relying instead on the recommendation of Omega. Dresner never met Kozeny, Farrell, or Bodmer — the individuals who discussed the FCPA violations with Bourke.”

“In addition, Dresner’s testimony would not have been particularly helpful to Bourke, and therefore any error in excluding the testimony would have been harmless. Notwithstanding Dresner’s exclusion, Bourke offered evidence through several Government and defense witnesses that Columbia University had invested in the same project, and there was no suggestion in any of that testimony or in arguments that Columbia University was aware of bribes or was prosecuted. Thus, Bourke was able to establish that some investors in the Azerbaijani vouchers were not aware of the bribes. Had Dresner actually testified, he would have revealed that Columbia and Bourke were not similarly situated and that Columbia had much less information about the investment than Bourke did.”

“In sum, the District Court acted within its discretion in excluding Dresner’s testimony, and this ruling does not warrant a new trial.”

Bourke

The district court “refused to instruct that conviction for conspiracy requires the same mens rea as the underlying FCPA offense — meaning (among other things) a bad purpose to disobey or disregard the law.”

According to Bourke, “the district court compounded its error in giving the conscious avoidance instruction by rejecting [his] requested instruction [as to the conspiracy charge] that the government had to prove that he acted corruptly and willfully.”

Bourke argued that “when the district court turned to the mens rea required for the conspiracy offense, rather than for a substantive FCPA offense, it omitted the requirement that the defendant act corruptly” and that this “watering-down of the mens rea requirement for the conspiracy charged […] undermined [his] defense, which rested on his state of mind.”

DOJ

“Bourke did not lodge this objection in this District Court, and therefore, this part of the charge is reviewed for plain error. The District Court’s mens rea instruction was correct and was certainly not plainly erroneous.”

“The District Court instructed the jury on all the elements of a substantive FCPA violation, including the requirement that the defendant act “willfully” and “corruptly,” terms which the Court defined for the jury.”

“The District Court’s charge encompassed the mens rea elements of the FCPA and was not plainly erroneous. The “word ‘corruptly’ in the FCPA signifies . . . a bad or wrongful purpose and an intent to influence a foreign official to misuse his official position. But there is nothing in the word or any thing else in the FCPA that indicates that the government must establish that the defendant in fact knew that his or her conduct violated the FCPA to be guilty.”

“The District Court’s extensive instructions on mens rea included the instruction that Bourke had to act “with the specific intention of furthering [the conspiracy’s] business or objective” and “for the purpose of furthering the illegal undertaking.” It is simply not possible to conspire to act corruptly without acting corruptly.”

“Finally, Bourke failed to raise this highly abstract objection during any of the several conferences on the jury charge.”

“Accordingly, the charge is subject to review only for plain error. There was no error, much less plain error, in this case.”

Bourke

The district court “rejected Bourke’s proposed good faith instructions, even though [he] produced ample evidence to warrant the instructions and no other instruction covered the point.”

Bourke argued that his proposed instruction “accurately reflected the principle that a defendant’s good faith belief that he acted lawfully negates the mens rea for specific intent offenses.”

While Bourke concedes that his efforts to investigate the investment “were not as extensive” as others, his efforts “suffice for a good faith instruction.” Because the case turned on his state of mind, Bourke states that “there is no doubt that the good faith defense, if accepted by the jury, would have produced an acquittal.”

DOJ

“Bourke’s contention is without merit. A separate good faith instruction was not necessary in this case, as the relevant jury instructions effectively communicated the essence of a good faith defense in its discussion of the elements of knowledge and willfulness.”

“Indeed, the District Court’s instructions that an FCPA violation required a defendant to act “with a bad purpose to disobey or disregard the law” and that the Government could not meet its burden of proof by showing that the defendant’s actions were the result of “mere negligence or some other innocent explanation” captured the concepts identified in Bourke’s proposed charge — that Bourke could not be convicted of Count One if he believed he “was acting properly in connection with the matters alleged in [Count One], even if he was mistaken in that belief, and even if others were injured by his conduct.” […] Thus, the good faith instructions Bourke requested were “effectively presented elsewhere in the charge.” Accordingly, the District Court’s decision not to deliver a separate good faith charge was appropriate and does not provide a basis for a new trial.”

Bourke

“Any one of the errors concerning [his] knowledge of Kozeny’s bribes and his specific criminal intent, standing alone, warrants reversal” and if any one error is harmless in isolation, then their “cumulative effect profoundly damaged [his] defense.”

DOJ

“Bourke contends correctly that the cumulative effect of errors that are individually harmless can cast doubt upon the fairness of a conviction. For the reasons set forth above, there were no such errors. Accordingly, Bourke’s “cumulative effect” argument provides no basis for granting a new trial.”

The Giffen Gaffe

Perhaps one day the true story will be told about the DOJ’s prosecution of James Giffen.

I don’t pretend to know what happened behind the scene other than to know that something significant occurred behind the scene.

That conclusion is compelled when an original indictment (see here) charging “Giffen with making more than $78 million in unlawful payments to two senior officials of the Republic of Kazakhstan in connection with six separate oil transactions, in which the American oil companies Mobil Oil, Amoco, Texaco and Phillips Petroleum acquired valuable oil and gas rights in Kazakhstan” is resolved via a one-paragraph superseding information (see here) charging a misdemeanor tax violation.

Sure, DOJ can say that it prosecuted a functionally defunct entity, The Mercator Corporation – in which Giffen was the principal shareholder, board chairman, and chief executive officer – with violating the FCPA’s anti-bribery provisions. Yet that criminal information (see here) merely alleges that “Mercator caused the purchase of two snowmobiles that were shipped to Kazakhstan for delivery to KO-2” (a senior official of the Kazakh Government).

You read that correctly.

From an FCPA perspective this entire, nearly decade-long prosecution, was reduced to allegations about two snowmobiles for a Kazakh official.

So what was that something significant that occurred behind the scene?

I don’t know.

But I do know this.

Part of Giffen’s defense was that his actions were taken with the knowledge and support of the Central Intelligence Agency, the National Security Council, the Department of State and the White House. The DOJ did not dispute the fact that Giffen had frequent contacts with senior U.S. intelligence officials or that he used his ties within the Kazakh government to assist the United States. With the court’s approval, Giffen sought discovery from the government to support such a public authority defense and much of the delay in the case was due to the government’s resistance to such discovery and who was entitled to see such discovery.

Perhaps it was that public airing of the information in these documents would be embarrassing to the U.S. government or impact U.S. foreign relations with a key oil and gas producing country.

If so, it is troubling to think that our government condones bribery, when done with the approval or the wink and nod of government officials, while aggressively prosecuting commercial actors – often times based on untested and dubious legal theories.

For the record, Giffen pleaded guilty (see here) last Friday to a one-count criminal information charging him with willfully failing to supply information on tax returns regarding foreign bank accounts in violation of 26 USC 7203. The information charges, and Giffen pleaded guilty to, filing a U.S. individual income tax return which failed to report that he maintained an interest in, and signature and other authority over, a bank account in Switzerland in the name of Condor Capital Management, a British Virgin Islands corporation he controlled. In pleading guilty, Giffen also relinquished right, title and interest he may have had, directly or indirectly, in several named Swiss bank accounts.

Pursuant to the plea agreement, Giffen’s sentencing range will be 0 to 6 months and the applicable fine range will be $250 to $5,000.

For the record, Mercator also pleaded guilty (see here) last Friday to a one-count criminal information charging it with violating the FCPA’s anti-bribery provisions. According to the information, Mercator “advised Kazakhstan in connection with various transactions related to the sale by Kazakhstan of portions of its oil and gas wealth.” The information alleges that between 1995 and 2000 Mercator was paid approximately $67 million in success fees for its work in assisting the Kazakh Ministry of Oil and Gas Industries develop a strategy for foreign investment in the oil and gas sector and coordinating the negotiation of numerous oil and gas transactions. The information charges that certain senior officials of the Kazakh government (including KO-2) had the authority to hire and pay Mercator and that Mercator was therefore “dependant upon the goodwill” of the officials. The one-paragraph statutory allegation merely states that Mercator “caused the purchase of two snowmobiles that were shipped to Kazakhstan for delivery to KO-2.”

As indicated in the plea agreement, the DOJ and Mercator could not agree on whether the 1998 Sentencing Guidelines or the 2009 Sentencing Guidelines apply – an issue that will be left for the court to decide. If the 2009 guidelines apply, the plea agreement sets forth a fine range of $650,000 to $1.3 million. If the 1998 guidelines apply, the plea agreement sets forth a fine range of $30,000 to $60,000.

Whether Mercator’s and/or Giffen’s actions were indeed taken with the knowledge and support of the Central Intelligence Agency, the National Security Council, the Department of State and the White House, the following paragraph from the Mercator plea agreement would seem relevant:

“Because the offense involved an elected official or a public official in a high-level decision-making or sensitive position, the offense level is increased 4 levels pursuant to U.S.S.G. 2C1.1(b)(3).”

That provision (see here) defines “public official” to include, among other categories, an individual “in a position of public trust with official responsibility for carrying out a government program or policy; acts under color of law or official right; or participates so substantially in government operations as to possess de facto authority to make governmental decisions.”

DOJ releases in FCPA enforcement actions are typically peppered with get-tough, this sends a message type of language. The release (see here) in the Giffen / Mercator enforcement action does not contain any quotes from DOJ officials.

William Schwartz of Cooley Godward Kronish LLP (here), a former Assistant United States Attorney in the United States Attorney’s Office for the Southern District of New York where he was Deputy Chief of the Criminal Division, represented both Giffen and Mercator.

So, what to make of the Giffen Gaffe.

It seems that Giffen prevailed not because of the facts or the law, but because he possessed significant leverage over the government in that he asserted his actions were taken with the knowledge and support of the Central Intelligence Agency, the National Security Council, the State Department and the White House.

Few FCPA defendants can make a similar claim. Thus, resolution of the Giffen case would seem to have little or no effect on the nuts and bolts of future FCPA enforcement actions.

Yet, resolution of the Giffen case does raise some troubling issues as to the DOJ’s enforcement of the Foreign Corrupt Practices Act.

For starters, the Giffen case and the Frederick Bourke case (see here for prior posts) generally marked the beginning of the FCPA’s resurgence. Regardless of the outcome of Bourke’s Second Circuit appeal, the trial phase ended with the sentencing judge saying:

“After years of supervising this case, it’s still not entirely clear to me whether Mr. Bourke is a victim or a crook or a little bit of both.”

In both the Giffen and Bourke cases, the DOJ made spectacular allegations only to see these enforcement actions end with a whimper.

The Giffen resolution would also seem embarrassing for the Justice Department which actively preaches the transparency and anti-corruption gospel message around the world while calling on other countries to increase enforcement of their own bribery laws.

However, what does it say about transparency in our country when a case that begins with criminal allegations of more than $78 million in unlawful payments to senior Kazakh officials ends with a misdemeanor tax violation and a largely meaningless FCPA enforcement action against a functionally defunct entity focused merely on two snowmobiles?

The Giffen resolution should further enrage segments of the business community that justifiably see a double standard in that certain business practices seem tolerated when done in connection with government business or policy, yet aggressively prosecuted, often times based on untested and dubious legal theories, when done in connection with a purely commercial transaction.

The Giffen Gaffe is troubling enough in isolation.

Coupled with another bribery blunder from approximately six months ago, it is an open question whether the government’s enforcement of the FCPA, to borrow a parliamentary phrase, would survive a no-confidence vote.

In February, the DOJ alleged (see here) that BAE, the largest defense contractor in Europe and the fifth largest in the U.S. as measured by sales, “provided substantial benefits” “through various payment mechanisms both in the territorial jurisdiction of the U.S. and elsewhere” to a Saudi official “in a position of influence” to award fighter jet deals. The DOJ stated that BAE “provided support services to the [Saudi official] while in the territory of the U.S.” and that these benefits “included the purchase of travel and accommodations, security services, real estate, automobiles and personal items.” The DOJ alleged that over $5 million in invoices for benefits provided to the Saudi official were submitted by just one BAE employee during a one year period. Yet resolution of the BAE enforcement action contained no FCPA charges.

Sure the U.S. may prosecute the most bribery cases in terms of shear numbers compared to other countries.

Yet, as is becoming increasingly obvious, many of those cases are settled via privately negotiated resolution vehicles that are not subjected to any meaningful judicial scrutiny and are based on dubious and untested legal theories.

On the flip side, when allegations of egregious or widespread bribery are alleged, the charges are not even FCPA anti-bribery violations.

Before another U.S. government official goes abroad to spread the anti-corruption gospel, preach transparency, and question other countries commitment to prosecuting bribery, it would seem that our government and Justice Department first need to examine its own enforcement of the FCPA.

James Giffen Update

The FCPA enforcement action against James Giffen goes back a long way.

April 2003 to be precise (see here).

The case concerns allegations that Giffen made approximately $80 million in payments to senior Kazakhstan officials in connection with numerous deals in which American companies acquired oil and gas rights in Kazakhstan. In defense, Giffen has implicated the CIA and much of the delay in prosecuting this case revolves around access to classified documents.

The case is still active as documented in this recent Main Justice piece by Lisa Brennan.

Few have been following the Giffen case closer than Steve LeVine (see here). LeVine is author of The Oil and the Glory (see here).

A key figure in LeVine’s book is James Giffen.

In this guest post, LeVine profiles next Monday’s hearing in the Giffen case.

*****

Next week, James Giffen — the former chief oil adviser to Kazakhstan President Nursultan Nazarbayev — returns to court in New York for the longest-running U.S. foreign bribery case in history. His strategy — to gum up the works in the hope of getting all or most of the charges dropped — has thus far appeared ingenious: Seven years after being led away in handcuffs from JFK Airport, Giffen appears none-too-close to trial. But will it ultimately pay off?

If the strategy does prevail, the Giffen case could send an important signal to bribers with financial wherewithal — you can wait out the Department of Justice.

A key question at the moment is whether Giffen’s lawyers — in the vein of their already-bold, go-for-broke approach — can plausibly, and as early as next Monday, successfully motion for dismissal of the charges on the basis of his Sixth Amendment right to a speedy trial.

William Schwartz, Giffen’s chief lawyer and a former assistant U.S. Attorney in the Southern District where Giffen’s case is being heard, declined to comment on the question of a Sixth Amendment motion when I emailed him. But I rang up lawyers specializing in the Foreign Corrrupt Practices Act — the law applied to foreign bribery cases — and they made the across-the-board observation that Giffen’s strategy may not be strong enough to achieve such a straight-forward victory.

In his defense, Giffen asserts that the Central Intelligence Agency either knew or should have known all along that he was diverting millions of dollars from U.S. oil companies — a total of some $80 million — to Nazarbayev and other powerful Kazakhs. When he advanced the strategy, it was exquisitely timed — in among the strongest periods of the George W. Bush Administration, with its hyper-sensitivity about the release of even unclassified documents — under the premise that the CIA was unlikely to disgorge cables and what-not that would validate Giffen’s claims. And if the CIA did refuse to so cooperate, Giffen could claim compellingly that he couldn’t receive a fair trial.

Up to this point, Giffen has proven correct — the CIA has been as slow as molassas, and has consequently tested the patience of federal Judge William Pauley. Yet, that doesn’t necessarily add up to a successful Sixth Amendment motion, experts tell me. To win, Giffen would have to show an outside reason why the long delay has occurred, and that he is being harmed by it. But as a former U.S. prosecutor who didn’t want to be identified told me, “When much of the litigation is instigated by the defendant, the defense would be hard-pressed to claim that it’s been denied a speedy trial.” As for hardship or harm, Giffen hasn’t been sitting in jail, but rather whiling away his time at home in Westchester County near the Winged Foot Golf Club.

Even so, said Richard N. Dean, a Washington-based FCPA lawyer with long experience in the former Soviet Union, that doesn’t mean that Giffen won’t prevail. He sees a more fundamental issue at stake — “I just don’t know if [the prosecution] has a case or not,” says Dean, who is a partner at Baker & McKenzie.

That is, it’s true that the CIA has dragged its heels, but so has the prosecution itself — it hasn’t seemed at all in a rush to bring the case to trial. That makes Dean wonder “how strong they think their case is, whether they believe they can overcome the defense’s assertion” of the CIA defense.

Schwartz, in other words, probably can’t abbreviate the current snail’s-pace pre-trial process: Judge Pauley is unlikely to grant a Sixth Amendment motion.

There’s always the chance that government prosecutors will demonstrate renewed spine in Monday’s hearing, and make it plain that they intend to go to trial soon — the Justice Department certainly doesn’t wish to give bribe-givers or their lawyers the idea that they can use delaying tactics to wiggle out of an FCPA case. In that event, Schwartz would need to prepare for a knock-down, drag-out jury trial that would reveal embarrassing details about his client’s luxurious, heavy-partying life abroad.

Yet, given the case thus far, one gets the impression that one or both sides wish the case would simply go away. If this is in Schwartz’s thinking, he must patiently hope that the prosecution elects to save face by dropping at least some of the more onerous charges, and perhaps then persuade Giffen to plead to lesser violations of the law.

Quiz Time Answer

In a prior post (here), I noted that in 2009 there were three FCPA trials – Frederic Bourke, William Jefferson, and Gerald and Patricia Green.

I then posted the question – what is the common thread in these three FCPA enforcement actions – a fact which speaks to the great difficulty individual FCPA defendants generally have in mounting a legal defense?

Before the answer, the background.

Individual FCPA defendants tend to work for companies. Under respondeat superior theories of liability, the company is going to have a very difficult time “distancing” itself from its employees conduct.

Thus, all corporate FCPA enforcement actions tend to be resolved through a non-prosecution agreement, a deferred prosecution agreement, or a plea. Entering into one of these resolution vehicles is often easier, more cost efficient, and more certain than actually mounting a legal defense based on the FCPA’s statutory elements. Further, because these resolution vehicles are subject to little or no judicial scrutiny and are entered into the context of the DOJ possessing certain “carrots” and “sticks” they do not necessarily reflect the triumph of one party’s legal position over the other.

While these resolution vehicles may indeed avert “another Arthur Anderson” here is the problem.

A key feature of each resolution vehicle is a statement along the following lines:

“[company] admits, accepts, and acknowledges responsibility for the conduct set forth in [the statement of facts] and agrees not to make any public statement contradicting [the statement of facts]” (see UTStarcom NPA here);

“[company] admits, accepts and acknowledges that it is responsible for the acts of its officers, employees and agents as set forth in the Statement of Facts […] and that the facts described […] are true and accurate […] and that should the DOJ initiate prosecution that is deferred by this agreement [company] agrees that it will neither contest the admissibility of, nor contradict, in any such proceeding, the Statement of Facts” (see AGA Medical DPA here); or

“Defendant admits,agrees and stipulates that the factual allegations set forth in the Statement of Facts […] are true and correct, that it is responsible for the acts of its former officers and employees described in the Statement of Facts, and that the Statement of Facts accurately reflects CCI’s criminal conduct” (see Control Components Inc. Plea Agreement here).

So what can you do if you are the targeted employee of such a company?

More likely than not, your employee has already terminated you (even before all the facts may be known) to demonstrate to the DOJ that it is implementing “prompt remedial actions” – a factor DOJ will consider when making its charging decision (see here).

Then, because of the resolution vehicle your employer entered into to make the DOJ go away, you are stuck with your employer admitting and accepting responsibility for your misconduct, even though there has been no finding that your conduct was even misconduct.

Against this backdrop, it is no surprise that nearly all FCPA individual defendants plead. What choice do they really have?

So that brings us back to the quiz answer.

Perhaps it was pure coincidence, perhaps not, but the three individual FCPA trials all occurred in the context of there being no parallel NPA, DPA or plea with a corporate entity.

Powered by WordPress. Designed by WooThemes