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Regarding Extortion …

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As highlighted in this prior post, the FCPA Blog recently posed the silly question “are agents ever ‘legal’ under the FCPA?”

Now the FCPA Blog is asking why “nobody talks about the FCPA extortion defense”?

It is likewise a silly question because the Foreign Corrupt Practices Act doesn’t even have an extortion defense. The only two defenses in the FCPA are the so-called local law affirmative defense and the so-called reasonable and bona fide expenditures directly connected to a business purpose affirmative defense. (The FCPA also has a facilitation payment exception which the government has the burden of negating – see here).

Even though the FCPA does not have an extortion defense, extortion issues are relevant to corrupt intent – a prima facie element of an FCPA anti-bribery violation that the government must prove.

During its multi-year deliberation of the so-called foreign corporate payments problem in the mid-1970’s Congress was made aware that certain of the problematic payments involved extortion.

Senator Frank Church was a leader on the issue and stated during a Senate hearing:

“[A] number of the corporate executives who have appeared before this Subcommittee . . . asked for the enactment of such laws, because they find themselves under great pressure from time to time. They felt that if our law prohibited the practice, they then could stand up to that pressure and say, “Look, we cannot do it, because regardless of whether or not we will be penalized in Korea for doing it, we would be violating American law, and we would be subject to the penalties that are prescribed under American law for this action.” I think such a law would give these corporate executives a measure of protection in dealing with the pressures of extortion in foreign countries.”

During a House hearing, Representative Stephen Solarz has the following exchange with Philip Loomis (SEC Commissioner):

MR. SOLARZ. . . . I want to pursue one other matter here. I suppose it is related to this. You make the point that your disclosure requirements are designed to protect the interest of the stockholders of these corporations. Isn’t it conceivable you can have situations abroad where the executive officers of an American corporation in effect are put in a position by the officials of a foreign government where the interests of the corporation, and thereby the interests of the stockholders, become perhaps dependent upon the willingness of the officials of that corporation to engage in what we would know and term as bribery? . . . .

MR. LOOMIS. That is a very good point.

MR. SOLARZ. . . . For instance, what do you think the officials of an American corporation should do if they are doing business abroad and an individual in a position of authority in that country says to them in effect: “Unless you are prepared to pay me such-and-such, your installations will be nationalized or they will be taxed excessively,” or what-have-you, and where the officer of the American corporation comes to a reasonable conclusion that in the absence of his willingness to make such a payment that his corporation will suffer from significant and substantial financial losses? I don’t know that that is inconceivable.

MR. LOOMIS. It is certainly not inconceivable.

MR. SOLARZ. It has probably happened. Now, we are concerned about the interests of American stockholders, and one way to secure that interest is through disclosure. Is there another way to secure their interest through paying these bribes, or do you think that regardless of those considerations there are countervailing considerations which militate against it?

MR. LOOMIS. It is because of that kind of problem which you very carefully described and which we have been wrestling with that this is a difficult area for us. In that type of situation, do you say to the company that they have got to disclose that they made this payment, when, if they do disclose it, that may cause all these adverse consequences to occur? It is not easy.

MR. SOLARZ. Sort of defensive bribery.

MR. LOOMIS. Yes. Extortion, we call it.”

A representative of the New York City Bar who testified at a House hearing stated:

“Without in any way excusing the failures of U.S. business that have been exposed over the last 2 years – and I don’t think they can be excused – the problem goes beyond those failures. It is not really addressing the whole problem to say that we need only look at the failure of U.S. business and not look at the context in which those failures occurred. We know from the evidence that has been exposed so far that in many cases the bribes were solicited, not volunteered. We know that there were cases of extortion. […] We know, beyond that, from some of the filings with the SEC and from other sources, that it wasn’t just U.S. business that was involved, and we certainly have reason to say that perhaps these practices in other countries were tolerated there.”

During the legislative process, two approaches to the foreign corporate payments problem emerged: a prohibition approach (which the FCPA adopted) and a disclosure approach (which was favored by the Ford administration).

In a 1976 letter to Senator Proxmire, the Secretary of Commerce set forth the views of President Ford’s Task Force on “proposed legislation concerning questionable corporate payments abroad.” The letter stated:

“There are two principal competing general legislative approaches – a disclosure approach or a criminal approach. While it is possible to design legislation […] which requires disclosure of foreign payments and makes certain payments criminal under U.S. law, the Task Force has unanimously rejected this approach. The disclosure-plus-criminalization scheme would, by its very ambition, be ineffective. The existence of criminal penalties for certain questionable payments would deter their disclosure and thus the positive value of the disclosure provisions would be reduced. In our opinion the two approaches cannot be compatibly joined.  The Task Force has given considerable scrutiny to the option of ‘criminalizing’ under U.S. law improper payments made to foreign officials by U.S. corporations. Such legislation would represent the most forceful possible rhetorical assertion by the President and the Congress of our abhorrence of such conduct. It would place business executives on clear and unequivocal notice that such practices should stop. It would make it easier for some corporations to resist pressures to make questionable payments. 

The Task Force has concluded, however, that the criminalization approach would represent little more than a policy assertion, for the enforcement of such a law would be very difficult it not impossible. Successful prosecution of offenses would typically depend upon witnesses and information beyond the reach of U.S. judicial process. Other nations, rather than assisting in such prosecutions, might resist cooperation because of considerations of national preference or sovereignty. Other nations might be especially offended if we sought to apply criminal sanctions to foreign-incorporated and/or foreign-managed subsidiaries of American corporations.

The Task Force has concluded that unless reasonably enforceable criminal sanctions were devised, the criminal approach would represent poor public policy. The Task Force has similarly analyzed the desirability of new legislation to require more systematic and informative reporting and disclosure than is provided by current law. The Task Force recognized that additional disclosure requirements could expand the paperwork burden of American businesses … and that they might, in some cases, result in foreign relations problems – to the extent the systematic reporting and disclosure failed to deter questionable payments and their publication provided embarrassing to friendly governments. 

At the same time the Task Force perceived several very positive attributes of systematic disclosure. First, it deemed such disclosure necessary to supplement current SEC disclosure, which as noted already covers only issuers of securities making ‘material’ payments, and does not normally include the name of the payee. Such disclosure would provide protection for U.S. businessmen from extortion and other improper pressures, since would-be extorters would have to be willing to risk the pressures which would result from disclosure of their actions to the U.S. public and to their own governments. It would avoid the difficult problems of defining and proving ‘bribery.’ It would offer a means to give public reassurance of the essential accountability of multinational corporations. ….

The President has decided to recommend that the Congress enact legislation providing for full and systematic reporting and disclosure of payments made by American businesses with the intent of influencing, directly or indirectly, the conduct of foreign governmental officials. At the same time, the President has decided to oppose, as essentially unenforceable, legislation which would seek broad criminal proscription of improper payments made in foreign jurisdictions.”

President Ford also urged enactment of the disclosure legislation and stated:

“I am transmitting to the Congress my specific proposal for a Foreign Payments Disclosure Act. This proposal will contribute significantly to the deterrence of future improper practices and to the restoration of confidence in American business standards.  This legislation represents a measured but effective approach to the problem of questionable corporate payments abroad:  It will help deter improper payments in international commerce by American corporations and their officers. It will help reverse the trend toward allegations or assumptions of guilt-by-association impugning the integrity of American business generally. It will help deter would-be foreign extorters from seeking improper payments from American businessmen. It will allow the United States to set a forceful example to our trading partners and competitors regarding the imperative need to end improper business practices. It does not attempt to apply directly United States criminal statutes in foreign states and thus does not promise more than can be enforced. Finally, it will help restore the confidence of the American people and our trading partners in the ethical standards of the American business community.”

Bills based on the Task Force’s recommendations were soon introduced in Congress and at Congressional hearings that followed a Department of Commerce official stated as follows in advocating the Ford administration position:

“The existence of the criminal prosecution would be of some value to an American businessman in resisting improper requests for payments abroad. I don’t believe, however, that it would have as much value as the disclosure requirements, for the following reasons. A would-be foreign extorter who asks for $50,000 to do something of importance to the American company, on the one hand would be told, ‘I can’t give you that money because if I do I might have to go to jail,’ and the extorter says, ‘That is your problem, bud, but there is no way, your law can reach me.’ If you have a disclosure provision and the American businessman says, ‘If I give you that money, I am going to have to report the payment to the Department of Commerce, possibly to the SEC, and it will therefore be in the public record, and your name will be in the public record.’  If we are right that every other country in the world, virtually every other country, has laws against public bribery and extortion, then it is our guess that the extorter will be substantially deterred.  We believe that a combination of sunlight and encouragement of other nations to enforce their own laws represents a much more effective way to end corrupt payments than does direct, unilateral criminalization by this country of actions taking place in foreign jurisdictions.  We urge the Congress not to substitute tokenism for real action to deal with the questionable payments problem. The danger in such tokenism is that it will create complacency. Congress will wash its hands of an important problem without having taken meaningful, enforceable action.”

After Jimmy Carter defeated President Ford in the 1976 election, the disclosure approach fell by the wayside as the new Carter administration (as well as Congressional leaders) favored a prohibition approach to address the foreign corrupt payments problem.

In crafting the FCPA’s anti-bribery provisions, a Senate report stated as follows regarding corrupt intent:

“[The anti-bribery provisions] cover payments and gifts intended to influence the recipient, regardless of who first suggested the payment or gift.  The defense that the payment was demanded on the part of a government official as a price for gaining entry into a market or to obtain a contract would not suffice since at some point the U.S. company would make a conscious decision whether or not to pay a bribe.  That the payment may have been first proposed by the recipient rather than the U.S. company does not alter the corrupt purpose on the part of the person paying the bribe.  On the other hand extortion situations would not be covered by this provision since a payment to an official to keep an oil rig from being dynamited should not be held to be made with the requisite corrupt purpose.”

Extortion was even mentioned in President Carter’s 1977 FCPA signing statement as he stated:

“I am pleased to sign into law […] the Foreign Corrupt Practices Act of 1977 and the Domestic and Foreign Investment Improved Disclosure Act of 1977. During my campaign for the Presidency, I repeatedly stressed the need for tough legislation to prohibit corporate bribery. [This bill] provides that necessary sanction. I share Congress’ belief that bribery is ethically repugnant and competitively unnecessary. Corrupt practices between corporations and public officials overseas undermine the integrity and stability of governments and harm our relations with other countries. Recent revelations of widespread overseas bribery have eroded public confidence in our basic institutions. This law makes corrupt payments to foreign officials illegal under United States law. It requires publicly held corporations to keep accurate books and records and establish accounting controls to prevent the use of ‘off the-books’ devices, which have been used to disguise corporate bribes in the past. […] These efforts, however, can only be fully successful in combating bribery and extortion if other countries and business itself take comparable action. Therefore, I hope progress will continue in the United Nations toward the negotiation of a treaty on illicit payments.”

In short, as the above legislative history makes clear, Congress was made aware that certain of the problematic payments at issue involved extortion and chose to address the topic through the FCPA’s corrupt intent element.

As next highlighted, extortion was one of many issues subjected to judicial scrutiny in the DOJ’s prosecution of Frederic Bourke.

In the case, Judge Shira Scheindlin was placed in the position of deciding an issue of first impression under the FCPA—specifically the meaning of the FCPA’s “local law” affirmative defense which states that it shall be an affirmative defense to actions under the FCPA’s anti-bribery provisions if “the payment, gift, offer, or promise of anything of value that was made, was lawful under the written laws and regulations of the foreign official’s, political party’s, party official’s, or candidate’s country.”

As summarized by Judge Scheindlin:

“Bourke has requested that the Court make determinations as to the content of applicable law in Azerbaijan and instruct the jury on certain defenses that might be available under the law of Azerbaijan. The Government and Bourke were unable to agree on the contents or applicability of that law. . . . . . . Bourke argues that the alleged payments were legal under Azeri law and thus under the FCPA . . . because they were the product of extortion. He also argues that pursuant to Azeri law, any criminality associated with the payments was excused when he reported them to the President of Azerbaijan.”

Judge Scheindlin summarized the relevant Azeri law—relevant to the FCPA’s affirmative defense—as follows:

“During the relevant period, Article 170 of the Azerbaijan Criminal Code (“ACC”) provided that “[the] receiving by an official . . . of a bribe in any form whatsoever for the fulfillment or the failure to fulfill any action in the interest of the person giving the bribe which the official should have or might perform with the use of his employment position . . . shall be punished by deprivation of freedom . . .” Professor Stephan [(Bourke’s expert)] asserts that during the same period, Article 171 of the ACC provided that “[g]iving a bribe shall be punished by deprivation of freedom for a term of from three to eight years. . . . A person who has given a bribe shall be free from criminal responsibility if with respect to him there was extortion of the bribe or if that person after giving the bribe voluntarily made a report of the occurrence.” Professor Butler [(the government’s expert)] believes that a more accurate translation of the last clause is “[a] person who has given a bribe shall be relieved from criminal responsibility if extortion of the bribe occurred with respect to him or if this person after giving the bribe voluntarily stated what happened.”

The Supreme Court of the U.S.S.R. interpreted Article 171 in a Resolution published in 1990. The parties agree that the Resolution is relevant to the Azeri courts’ interpretation of the Article. It defines extortion as “a demand by an official for a bribe under the threat of carrying out actions that could do damage to the legal interests of the briber . . . .” The Resolution further explains that “a voluntary declaration of having committed the crime absolves from criminal responsibility not only the bribe giver but his accomplices.” Finally, the Resolution provides that “[t]he absolution of a bribe-giver from criminal responsibility because of extortion of the bribe or the voluntary declaration of the giving of the bribe . . . does not signify an absence in the actions of such persons of the elements of an offense. For that reason, they cannot be considered victims and are not entitled to claim restitution of the items of value given as bribes.”

Judge Scheindlin concluded that “[f]or purposes of the FCPA’s affirmative defense, the focus is on the payment, not the payer.” In a footnote, Judge Scheindlin continued:

“The FCPA focuses on payments, not payers, throughout its structure. For example, it provides that there is no liability for “any facilitating or expediting payment to a foreign official . . . the purpose of which is to expedite or to secure the performance of a routine governmental action by a foreign official . . . .” The purpose of this subsection was to “acknowledge[] . . . that some payments that would be unethical or even illegal within the United States might not be perceived similarly in foreign countries, and those payments should not be criminalized.”

Judge Scheindlin further elaborated:

“A person cannot be guilty of violating the FCPA if the payment was lawful under foreign law. But there is no immunity from prosecution under the FCPA if a person could not have been prosecuted in the foreign country due to a technicality (e.g., time-barred) or because a provision in the foreign law “relieves” a person of criminal responsibility. 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. As Professor Butler observes, the structure of the reporting exception to liability in Article 171 illustrates that the initial payment of a bribe was certainly not lawful. The ACC relieves the payer of a bribe from criminal liability if the bribe is properly reporated not because such an action retroactively erases the stain of criminality, but because the state has a strong interest in prosecuting the government official who received the bribe. By waiving liability for reporting payers, the state increases the likelihood that it will learn of the bribery. But at the moment that an individual pays a bribe, the individual has violated Article 171. At that time, the payment was clearly not “lawful under the written laws” of Azerbaijan. If the individual later reports the bribe, she can no longer be prosecuted for that payment. But it is inaccurate to suggest that the payment itself suddenly became “lawful”—on the contrary, the payment was unlawful, though the payer is relieved of responsibility for it. This is why the Resolution provides that the payer cannot receive restitution. Further, if the payment were retroactively lawful, the official who received the payment could not be prosecuted for receiving it. This cannot be correct because the purpose of the reporting exception is to enable the government to pursue the official. Thus, the relief from liability in Article 171 operates to excuse the payer, not the payment. The exception for extortion contained in the same sentence must operate in the same manner. A payment to an Azeri official that is made under threat to the payer’s legal interests is still an illegal payment, though the payer cannot be prosecuted for the payment.”

Notwithstanding the above conclusion, Judge Scheindlin emphasized that Bourke would not be precluded “from arguing that he cannot be guilty of violating the FCPA by making a payment to an official who extorted the payment because he lacked the requisite corrupt intent to make [the] bribe.”

Judge Scheindlin explained:

“The legislative history of the FCPA makes clear that “true extortion situations would not be covered by this provision.” Thus, while the FCPA would apply to a situation in which a “payment [is] demanded on the part of a government official as a price for gaining entry into a market or to obtain a contract,” it would not apply to one in which payment is made to an official “to keep an oil rig from being dynamited,” an example of “true extortion.” The reason is that in the former situation, the bribe payer cannot argue that he lacked the intent to bribe the official because he made the “conscious decision” to pay the official. In other words, in the first example, the payer could have turned his back and walked away—in the latter example, he could not. If Bourke provides an evidentiary foundation for the claim that he was the victim of “true extortion,” I will instruct the jury on what constitutes a situation of “true extortion” such that Bourke would not be found to have possessed the “corrupt” intent required for a violation under the FCPA. In any event, the jury will be instructed regarding the “corrupt” intent that the Government must prove he possessed beyond a reasonable doubt he possessed. Such instruction will define “corrupt” intent as “having an improper motive or purpose” and will explain that the payment must have been intended to “induce the recipient to misuse his official position” in discharging an official act. The charge will also emphasize that the proper focus is on Bourke’s intent and that the Government is not required to show that “the official accepted the bribe,” that the “official[] had the power or authority to perform the act[] sought” or that the “defendant intended to influence an official act which was lawful.”

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