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First Judicial Construction of the FCPA Local Law Affirmative Defense Raises More Questions than It Answers
November 14, 2008
On October 21, 2008, the US District Court for the Southern District of New York released another opinion in the prosecution of three individuals for payments made, allegedly in violation of the Foreign Corrupt Practices Act (“FCPA”), in connection with the privatization of the State Oil Company of Azerbaijan (“SOCAR”). United States v. Kozeny, et. al., No. 05-518 (S.D.N.Y. filed Oct. 21, 2008) (“Kozeny”). The SDNY’s opinion - the latest in the long-running case1- represents the first time the FCPA’s local law affirmative defense has been judicially construed.2 In its opinion, the court appears to have taken a relatively narrow view, overall more consistent with enforcement officials’ view of the defense yet considerably more nuanced, concerning the FCPA’s affirmative defense for payments “lawful under the written laws and regulations” of the official’s home country. In doing so, however, the opinion appears to have raised more questions than it answered – and provided little useful guidance to corporations - in its discussion, in dicta, of the type of facts that would establish a viable extortion defense.
The Local Law Affirmative Defense
The local law affirmative defense is one of two express statutory defenses added to the FCPA in the 1988 amendments.3 It represents only one of several ways that the FCPA interfaces with local law. The scope of this defense has been the subject of much debate over the years. As its text indicates, it only applies where a payment is permitted by the written law of the host country, not custom or practice. Inasmuch as virtually every country has statutes prohibiting bribery of public officials, some (particularly prosecutors) have viewed the defense as limited to situations where local law mandates a particular payment, while others have argued that it is only necessary that local law not prohibit a particular payment (for example, a permissive statute regarding a political contribution). The OECD, in its reviews of the United States under the OECD Antibribery Convention, has seen the defense as basically an elaboration of the corrupt intent element of the statute’s antibribery prohibitions, but has struggled to identify circumstances in which the defense would apply.4
The Decision
In the long-running Kozeny prosecution, the defendants Victor Kozeny and Frederic Bourke are, and David Pinkerton was,5 charged with making payments to Azeri government officials in order to influence the Azeri government to privatize SOCAR, and to permit them to participate in the privatization on preferential terms. At trial, Bourke argued that the FCPA’s local law affirmative defense, which excludes from criminal sanction payments that are “lawful under the written laws and regulations of the foreign official’s country…”, 15 U.S.C. § 78dd-1(c)(1), applied in his case. Although Article 170 of the Azeri Criminal Code contained a fairly typical anti-bribery provision criminalizing bribes paid to Azeri officials, Bourke argued that the payments in question fell within the FCPA’s local law affirmative defense because Article 171 of the Azeri Criminal Code absolved from criminal liability those persons who had made payments (1) “if with respect to [the payer] there was extortion”, or (2) if the payer reported the fact of the payments to the President of Azerbaijan.
In rejecting Bourke’s arguments, Judge Scheindlin found the fact that Azeri law absolved Bourke from Azeri criminal liability for the alleged bribes, as a result of extortion or Bourke’s having reported them to the authorities, irrelevant to the applicability of the FCPA’s affirmative defense. Citing a 1990 decision of the Supreme Court of the Soviet Union which had employed similar reasoning, Judge Scheindlin held that notwithstanding the absolution of the payer of the bribe from criminal responsibility, this fact did not “retroactively” render the payments themselves lawful under Azeri law. As the FCPA’s local law affirmative defense is focused on the lawfulness of the payments under the “written laws and regulations” of the foreign country at issue – and not the ultimate criminal responsibility of the defendant - Judge Scheindlin found that the defense did not apply.
Judge Scheindlin also emphasized, in dicta, that even though the local law defense was not available to Bourke because Azeri law did not absolve the payments, as opposed to the payer, from criminality, nothing prevented him from arguing at trial that he had made the payments under circumstances of “true extortion”, and consequently did not have the corrupt intent required to violate the FCPA. According to Judge Scheindlin, “true extortion”, citing the FCPA’s legislative history, would include a payment made to an official “to keep an oil rig from being dynamited”, but would not include a “payment demanded on the part of a government official as the price for gaining entry into a market tor to gain a contract”. In other words, the court summarized, in one instance “the payer could have turned his back and walked away – in the latter, he could not.” Kozeny, No. 05-518 at 11-12.
Outstanding Questions
The SDNY’s Kozeny opinion raises more questions than it answers. While it underscores that the defense will not be available where written local law prohibits the specific conduct, and therefore will have limited scope for operation, it does nothing to clarify the mandatory versus permissive issue outlined above.
Similarly, the court’s discussion of the circumstances in which a defense of extortion would apply leaves many practical questions unanswered. It is, of course, commonly understood that the antibribery provisions of the FCPA prohibit payments to government officials “as a price of gaining entry into a market or to obtain a contract”, and that the extortion defense does not apply to such a situation. Likewise, it is also commonly understood that a payment made to prevent an “oil rig from being dynamited” would be an example of “true extortion”, as both are set out in the FCPA’s legislative history.
However, the standard the court apparently adopted as its test for extortion – whether the payer made a "conscious decision" to pay the official in question, and whether the payer "could have walked away", id. – provides little or no guidance on the significant grey areas surrounding lower-level payments arising in the course of companies' operations. To take a common example, it is not clear how the court would address the situation where an immigration official asserts trivial or even trumped-up defects in an entry visa as the basis for refusing a person’s entry into the country in question. Similarly, it is not clear how the court would address the situation where customs officials assert trivial or non-existent defects in customs clearance paperwork as a basis for refusing to clear the goods, and demand payments instead.
In short, the SDNY’s recent Kozeny opinion represents a continuation of recent trends in FCPA enforcement and litigation: very few cases are being litigated, even on the most basic aspects of the statute, and the only defendants willing to do so are individuals, not corporations. Nonetheless, such litigation, albeit sparse, has produced new insights into the provisions at issue, in this case, a nuanced parsing of the defense in relation to the workings of local law. The result does not restrict a defense previously thought to be broad, but still leaves significant questions about the defense open. Moreover, the opinion raises additional questions regarding potential defenses not specifically enumerated in the statute but arising from the general criminal law, namely extortion, especially when applied in day-to-day operating contexts.
For further information on this case, see the advisories cited at note 1 above, or contact Lucinda Low at 202.429.8051, Ed Krauland at 202.429.8083, Pat Norton at 202.429.8034, Erik Kitchen at 202.429.8132, Andrew Irwin at 202.429.8177, David Lorello at +44(0)20.7367.8007, Tom Best at 202.429.8079, Owen Bonheimer at 202.429.6266 or Vincenza Rabenn at 202.429.1305. Read more about our FCPA/Anti-Corruption Practice.
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Join Us at the 20th Anniversary of the FCPA Conference in Washington, DC Next Week
Presentations. On Tuesday, November 18, Lucinda Low will present, "Facilitating Payments, Small Bribes and Extortion: How To Distinguish Them, and The Management Problems They Cause" and on Thursday, November 20, Matt Herrington will lead a workshop on, "Overcoming FCPA Compliance Challenges in West Africa." For more information about the conference, visit: http://www.americanconference.com/fcpa.htm.
Cocktail Reception. If you will be at the conference, please plan to join us for the Steptoe-sponsored cocktail reception on Tuesday, November 18 at 5:30 pm immediately following the conference.
If you are unable to attend the conference and would like a copy of either presentation, please email: information@steptoe.com.
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1 See International Law Advisory - US Government Aggressively Prosecutes Individuals Allegedly Involved in Bribery Tied to Foreign Investment in Azerbaijan (November 8, 2005) available at http://www.steptoe.com/publications-3082.html; International Law Advisory - The Kozeny Saga Continues (October 27, 2007) available at http://www.steptoe.com/publications-5002.html
2 The lack of judicial construction reflects the fact that the only litigated FCPA cases in recent years are from individuals. The Kozeny decision is the first judicial opinion released interpreting the FCPA in nearly a year, and the second of only three in calendar 2008. The first was United States v. David Kay, 513 F.3d 461 (5th Cir. 2007), in which the Fifth Circuit Court of Appeals rejected defendants Kay’s and Murphy’s petition for rehearing en banc in January 2008 (the Supreme Court denied certiorari this fall. Kay v. United States, No. 07-1281, 2008 WL 1710788 (U.S., Oct. 6, 2008)). The most recent was United States v. Jefferson, 2008 WL 4868411 (4th Cir. Nov. 13, 2008), released on November 13, 2008, in which the Fourth Circuit Court of Appeals affirmed the US District Court for the Eastern District of Virginia's denial of a motion to dismiss Congressman Jefferson's indictment.
3 The other covers sponsorship and hosting of foreign officials’ travel and other expenses in certain contexts. 15 U.S.C. §§ 78dd-1(c)(2), 78dd-2(c)(2), 78dd-3(c)(2).
4 OECD Working Group on Bribery in International Business Transactions, United States: Phase 2: Report on the Application of the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions and the 1977 Recommendation on Combating Bribery in International Business Transactions, para. 117 (October 2002).
5 Charges against Pinkerton were dropped in early July 2008.
