International Law Advisory - US Government Aggressively Prosecutes Individuals Allegedly Involved in Bribery Tied to Foreign Investment in Azerbaijan

Last month, the Department of Justice and the US Attorney for the Southern District of New York announced another chapter in a series of Foreign Corrupt Practices Act (FCPA) prosecutions arising from a scheme to bribe foreign officials in Azerbaijan1 .   The recently-unsealed grand jury indictment levels charges against Viktor Kozeny, a Czech national resident in the Bahamas, and two US nationals who allegedly coordinated investments in a consortium managed by Mr. Kozeny.  The Government previously had obtained guilty pleas from three other individuals involved in the alleged scheme.

Mr. Kozeny allegedly orchestrated the multimillion-dollar bribery scheme in connection with an unsuccessful effort in the 1990s to secure a controlling interest in the privatization of the State Oil Company of the Azerbaijan Republic (SOCAR).  The Government alleges that Mr. Kozeny used funds raised from private parties to bribe four senior Azeri officials between 1997 and 1998, as part of a conspiracy that extended into 1999.  The Government alleges that the bribes took a variety of forms, including cash payments in excess of US$ 11 million, payment of medical, travel and other expenses, and luxury gifts.  In addition, notably, two of the bribery counts are based upon alleged offers of "investment benefits" to officials, consisting of (1) two-thirds of the participation rights in, and profits obtained from, the proposed investment in SOCAR; and (2) a $300 million par-value equity interest in the British Virgin Islands entity that was to invest in SOCAR.  Despite the alleged bribes, the privatization did not occur.

The consortium reportedly raised funds from prominent investors, such as funds linked to Columbia University, The Goldman Sachs Group, Inc., and American International Group, Inc. (AIG), as well as former US Senator George Mitchell.  While the indictment does not charge the institutional investors with FCPA violations arising from the alleged scheme, the Government has charged both Frederic Bourke, who made investments in the consortium on his own behalf and on behalf of other individuals, and David Pinkerton, a manager of the private equity arm of AIG that invested in the consortium. 

Messrs. Kozeny, Bourke, and Pinkerton are charged with violation of the FCPA and anti-money laundering laws, conspiracy to violate the FCPA and anti-money laundering laws, and violation of the Travel Act (which prohibits interstate or foreign travel in aid of racketeering activity).  Messrs. Bourke and Pinkerton are also charged with making false statements to the Government by denying knowledge of certain facts relating to the alleged scheme in FBI interviews2.

Mr. Kozeny has been arrested in the Bahamas, and the US Government has announced that it is seeking to extradite him from the Bahamas.  Messrs. Bourke and Pinkerton have been arrested in the United States.

This prosecution illustrates several significant aspects of a continuing trend of more aggressive FCPA enforcement by US authorities:  (1) FCPA charges arising from foreign investment transactions; (2) inclusion of money laundering charges in FCPA enforcement actions; (3) cooperation by foreign governments in US FCPA investigations and enforcement actions; and (4) prosecution of FCPA charges based upon acts occurring more than five years earlier. 

• FCPA charges arising from foreign investment transactions.  By charging FCPA anti-bribery violations based upon the offering of an interest in an investment to officials, the Government is signaling that the FCPA will be used to more closely regulate foreign investment.  In particular, enforcement officials will view the offer of an "investment benefit" as a "thing of value" for purposes of establishing an FCPA anti-bribery violation.  15 USC. §§ 78dd-1(a), 78dd-2(a), 78dd-3(a).  The charges against an executive of one of the institutional investors in the consortium, and the pendency of other US investigations relating to foreign investment transactions, illustrate the heightened need for institutional investors to conduct due diligence to evaluate the foreign bribery risk in such transactions.  This need is especially acute for transactions contingent upon government decisions in countries with a reputation for corruption3.
• Prosecution of money laundering charges in FCPA enforcement actions.  Since the US anti-money laundering law was amended to make FCPA anti-bribery violations a potential basis for a money laundering offense, money laundering charges have quickly become a mainstay of FCPA prosecutions.  Money laundering charges were brought against all three individuals charged in the May 2005 indictment, and also in an earlier case against the lawyer to the consortium4.   Money laundering charges are popular with enforcement authorities, in part because they can enhance the ability of the Government to obtain forfeiture of the assets involved in a bribe scheme.  For example, in the Kozeny case, the Government is seeking forfeiture of the $174 million invested in the consortium.  This powerful remedy available to the Government underscores the need for institutional investors to undertake FCPA due diligence.
• Cooperation by foreign governments in US FCPA investigations and enforcement actions.  The Kozeny case also evidences significant cooperation by foreign governments with US authorities.  In 2000, the FBI interviewed Mr. Kozeny in the Bahamas, outside US territory.  Interviews of witnesses abroad by US investigators typically require permission of the foreign government, which the FBI reportedly obtained in this case5.   Now that Mr. Kozeny has been indicted, the United States has initiated a proceeding to extradite him from the Bahamas to the United States6.   Such cooperation is becoming more common in FCPA investigations and enforcement actions, due in large part to an expanding network of treaties providing for cooperation among governments in anti-corruption cases.
• Prosecution of FCPA charges based upon acts occurring more than five years earlier.  It is also noteworthy that the indictment charges Mr. Kozeny and others with FCPA violations for acts that occurred more than five years before the indictment.  The May 2005 indictment alleges that the last act relating to the FCPA conspiracy took place in February 1999, and that the last payment in violation of the FCPA was made in July 1998.  The timing of the indictment is significant because the general five-year statute of limitations for federal crimes, 18 USC. § 3282(a), typically applies to FCPA violations.  Although it is not clear from the public record how the statute of limitations issue was addressed in this case, federal law does provide for tolling of the limitations period for up to three years for the Government to gather foreign evidence.  Id ., at § 3292.

We will continue to keep you apprised of developments related to FCPA enforcement.  If you have any questions or for further information, please feel free to contact Lucinda Low at 202.429.8051, Erik Kitchen at 202.429.8132, Ed Krauland at 202.429.8083, or Owen Bonheimer at 202.429.6266.

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 1See US Announces Charges in Massive Scheme to Bribe Senior Government Officials in the Republic of Azerbaijan, Press Release from US Att’y, S.D.N.Y., Oct. 6, 2005; Indictment in United States v. Kozeny et al., Case No. 05-CR-518, S.D.N.Y., filed under seal May 12, 2005.
 2This indictment follows a 2003 indictment of Mr. Kozeny in New York State for allegedly defrauding the consortium and earlier civil litigation against Mr. Kozeny in the United States and United Kingdom by investors.
3 When so-called FCPA “red flags” (indications of potential bribery risk) are present, due diligence becomes especially important.  Prior improper activities by an individual involved in a foreign investment transaction may raise a red flag.  For example, foreign press reports from the 1990s suggest there may have been red flags surrounding certain dealings of Mr. Kozeny.  See, e.g., Patrick Blum, Secret service scandal seizes the Czech imagination:  Patrick Blum on charges of the sale of confidential information, Financial Times (London), Aug. 5, 1993, p. 2 (reporting that Mr. Kozeny admitted making a payment to a Czech official).
 4In 2003, the Government charged Hans Bodmer, a Swiss lawyer who represented Mr. Kozeny and others, with conspiracy to violate the FCPA and conspiracy to engage in money laundering in connection with this alleged bribery scheme.  United States v. Bodmer, No. 03-Crim. 947, S.D.N.Y., 2003.
 5Steve LeVine, FBI Questions Czech Promoter in Caspian Oil Deal, Wall St. J., Nov. 22, 2000, p. A17.
 6 In the earlier prosecution, Mr. Bodmer was detained abroad and transferred to the United States.  In dismissing the FCPA charge against Mr. Bodmer, the court suggested that transfer of Mr. Bodmer from Korea had been improperly procured through denial of his right to counsel, and concluded that Mr. Bodmer lacked notice that the FCPA (prior to the effective date of certain 1998 amendments) applied to his conduct as a non-resident foreign national.  United States v. Bodmer, 342 F.Supp. 2d 176, 189, 192-93 (S.D.N.Y. 2004).  Mr. Bodmer later entered a guilty plea to the charge of conspiracy to launder money.