International Law Advisory - Private Investor Convicted for Involvement in Scheme to Bribe Officials in the Republic of Azerbaijan

On July 10, a jury in federal court in New York City convicted Frederic Bourke, a businessman and private investor, on one count of conspiracy to violate the Foreign Corrupt Practices Act (FCPA) and the Travel Act, and one count of making false statements to federal agents.  Bourke was acquitted of the charge of engaging in a money laundering conspiracy.  According to the Department of Justice (“DoJ”), for each of the two counts on which he was convicted, he faces a maximum penalty of five years in prison and a maximum fine of $250,000 or twice the gross gain or loss resulting from the alleged violations.¹

The case is a substantial breakthrough in U.S. prosecution under the FCPA, marking the first time U.S. authorities may have convicted an individual at trial for conspiracy to make payments to a third party while “willfully blind” to factors indicating a high probability that the third party would use the funds to pay bribes to an official.  Bourke’s trial produced a rare occurrence in the history of the FCPA – several judicial opinions interpreting the statute, including its knowledge requirement.  The case represented an aggressive theory of prosecution by the government, and has significant implications for portfolio investors and consortium partners as well as companies dealing with third parties more generally.

Case History

Mr. Bourke faced criminal charges associated with investments he made in Oily Rock Ltd. (“Oily Rock”) for himself and family members.  According to the indictment, the Oily Rock investment promoter Viktor Kozeny, the so-called “Pirate of Prague”, used the investments to pay bribes to officials in Azerbaijan in the 1990s to encourage the privatization of the State Oil Company of the Azerbaijan Republic (“SOCAR”) and to permit Oily Rock to participate in that privatization.

The DoJ accused Mr. Bourke of investing approximately US$8 million in Oily Rock while knowing that the money would be used to bribe foreign officials.²  Based on these allegations, Mr. Bourke was charged with conspiracy to pay bribes in violation of the FCPA, among other violations.  Bourke also was charged with making false statements to FBI agents during the government investigation of the scheme, including statements that he was not aware that Kozeny had made corrupt payments to Azeri officials.

Before the trial, Judge Shira Scheindlin of the Southern District of New York issued several significant opinions interpreting the FCPA in matters of first impression.  The first opinion construed a federal statute permitting the tolling of the statute of limitations while the government awaited information requested from foreign governments.³  The second opinion was the first judicial interpretation of the FCPA’s local law affirmative defense.⁴  The weeks leading up to the trial produced two substantive opinions on significant legal issues under the statute.⁵

What You Don’t Know Actually Can Still Hurt You: Conscious Avoidance and the FCPA

On May 29, 2009, Judge Shira Scheindlin of the Southern District of New York issued an Opinion and Order permitting the Government to introduce certain circumstantial evidence to establish Mr. Bourke’s knowledge of a bribery scheme carried out by Mr. Kozeny using Oily Rock funds.⁶  Given the scarcity of judicial constructions of the FCPA, any opinion interpreting the statute is significant.  This decision is particularly important, however, because it addresses an issue that lies at the heart of the statute – what constitutes “conscious avoidance” or “willful blindness”.

In its pretrial submissions, the Government argued that Bourke was “aware of a high probability” that his investment would be used for bribery, by virtue of an unrelated report of corruption by the investment promoter (Kozeny) and a reputation for corruption in that type of investment (privatized assets of former Soviet Bloc countries) and in the host country in particular (Azerbaijan), coupled with an unusually low price achieved for the foreign investment.  To make this argument, prosecutors sought to introduce evidence that (1) “Azerbaijan in the late 90s was one of the most corrupt nations in the world”, (2) it was “well-known that post-Communist privatization of state-owned assets was particularly plagued by corruption, not only in Azerbaijan, but in many other former Soviet states”, (3) “SOCAR was Azerbaijan’s most important economic and strategic asset:  it was highly unlikely that the president of Azerbaijan would permit it to be privatized and acquired at an outrageously low price by a group of foreign investors, absent some corrupt arrangement with the Azeri leadership”, and (4) “Bourke invested because of his great faith in co-defendant Kozeny, whose notoriety as the ‘Pirate of Prague’ arose from his prior corrupt dealings in privatization in the Czech Republic …”⁷

To make its case, the Government proposed to call an expert to testify regarding corruption in Azerbaijan, coupled with other facts allegedly showing Mr. Bourke was aware of (or willfully blind to) those facts.  The facts allegedly showing Mr. Bourke’s awareness include conversations in which Bourke allegedly was warned by his counsel that Azerbaijan was the “Wild West” and that doing business there was like the movie “Chinatown” where there are “no rules”.⁸   The Government also sought to introduce tape recordings in which Mr. Bourke allegedly said “I don’t know how you conduct business in Kazakhstan or Georgia or Iran, or Azerbaijan, and if they’re bribing officials and that comes out . . . Let’s say . . . one of the guys at Minaret says to you, Dick, you know, we know we’re going to get this deal.  We’ve taken care of this minister of finance, or this minister of this or that.  What are you going to do with that information?”⁹

Attorneys for Mr. Bourke moved to exclude the evidence on the grounds that it was not relevant to Mr. Bourke’s knowledge, and was confusing and unduly prejudicial.  Mr. Bourke advanced two arguments.  First he argued that an objective standard, such as the “reasonable person” standard, cannot be used to establish willful blindness.  Second, he argued that other individuals’ knowledge of the reputation for corruption in Azerbaijan could not be used to establish that Mr. Bourke had the same knowledge.  The Government responded that the proffered evidence – taken “together” – would allow a jury to conclude there was a high probability of bribery, and that Mr. Bourke was aware of that probability through his close association with co-conspirators who were aware of that probability.

Siding with the Government, Judge Scheindlin concluded that the proffered evidence “makes it probable that Bourke was aware that Azeri officials were being bribed in order to ensure the privatization of SOCAR.”¹⁰  In particular, the court noted that the tape recording showed Bourke was “concerned about what he might discover”, and that a jury could conclude that they show he knew of a high probability of bribery.¹¹  Accordingly, the court denied the motion to exclude the evidence, holding that a jury could find the evidence had a “tendency” to make it “more probable” under Rule 402 of the Federal Rules of Evidence that Mr. Bourke was aware of a “high probability” of bribery.

Court Finds Sufficient Evidence to Support Money Laundering Conspiracy Conviction and Rejects Statute of Limitations Defense to FCPA Conspiracy Charge

After the close of presentation of evidence at the trial, Bourke moved the court to enter a judgment acquitting him of the charges.  Bourke argued that each count in the indictment had fatal defects.  The court rejected all of his arguments.¹²

For the money laundering conspiracy charge, Bourke argued that the government did not prove that he transferred money overseas with an intent to violate the FCPA or that any conspiracy to do so extended into the statute of limitations period.  Judge Scheindlin rejected both arguments.  The court pointed to testimony at trial that Bourke had conversations with a witness regarding the “arrangements” for the investment, including the involvement of Azeri officials.  Another witness testified to a conversation with Bourke where he allegedly asked, “Has [Kozeny] given them [the officials] enough money?”¹³  The judge held that the combination of testimony from the two witnesses allowed the jury not only to find that Bourke had knowledge of the bribery arrangements, but also that from his statements Bourke intended that his investment be used to bribe officials.¹⁴  Judge Scheindlin rejected Bourke’s arguments that the money laundering conspiracy was time-barred because there were no payments within the statute of limitations.  The court held that because the object of the conspiracy was economic benefit, the conspiracy continued until “the conspirators receive their anticipated economic benefit.”¹⁵  Because the co-conspirators had ambitions to win the privatization of SOCAR during the limitations period, the money laundering conspiracy charge was viable.¹⁶  (However, as noted earlier, the jury ultimately acquitted Mr. Bourke of this charge.)¹⁷

Challenging the evidentiary basis for the charge of conspiracy to violate the FCPA, Bourke argued that there was no proof that the conspiracy continued into the statute of limitations period.  The court rejected that argument, citing testimony that there were bribes within the limitations period that could be construed to be in furtherance of violating the FCPA, and that Bourke also secured a doctor’s appointment and travel visa for an Azeri official within the limitations period.¹⁸

These decisions may have been critical to the outcome of the trial.  In particular, the jury charge allowed the jury to convict on either actual knowledge or willful ignorance.¹⁹  It is not clear at this writing precisely what the jury found in this regard; a reported statement by the jury foreperson is ambiguous: “We thought [Bourke] knew and definitely could have known.”²⁰   

Implications of the Case and the Conviction

Conscious Avoidance and Country Risk: a Low Standard for Determining Admissibility of Evidence.  The so-called “vicarious liability” provision of the FCPA criminalizes willful blindness to bribery when making payments to third parties.  Most of the FCPA prosecutions brought in the past five years involve payments to third parties.²¹ Few cases, however, have been brought based on a theory of willful ignorance.  Bourke may be one of the first where a conviction was secured of a party who was not directly a party to any bribery activity.  If the court’s decision is not successfully appealed, then companies may expect future criminal FCPA prosecutions based largely on circumstantial evidence.  The judge's May 2009 decision suggests there is a low standard for what evidence can be used to establish knowledge under the vicarious liability provisions of the FCPA.  Under this decision, all that is needed is that the evidence makes it “more probable” that the defendant was aware of a “high probability” that funds would be used for bribery.  In Bourke, in addition to the country and industry risk, the DoJ introduced evidence specific to the transaction, including reports that Mr. Kozeny had engaged in corruption in the past and statements of the defendant to his attorneys regarding hypothetical corruption scenarios.  Thus Bourke shows how prosecutors can use country and industry risk against defendants, where there are other red flags in a transaction that have been ignored or have not been addressed.

Need for Heightened FCPA Due Diligence by Portfolio Investors.  In their closing arguments, prosecutors emphasized that Mr. Bourke “didn’t ask any of his lawyers to do due diligence.”  This point highlights the due diligence expectations created by the FCPA and their application, even to portfolio investors.  Indeed, a hedge fund, Omega Advisors, previously resolved its exposure in this case with a non-prosecution agreement.  By contrast, one of the witnesses put forth by the Government in Bourke was a representative of a major investment firm that had decided not to invest in the scheme after attempting to conduct due diligence.  This prosecution highlights that enforcement authorities expect portfolio investors to conduct FCPA due diligence in connection with their investments, and that proceeding with a transaction in the face of unsatisfactory due diligence results (or red flags that are not resolved) can lead to criminal prosecution and conviction.

False Statements To Law Enforcement Are Likely To Be Prosecuted.  Bourke was convicted for making false statements to law enforcement officers denying his knowledge of Kozeny’s SOCAR scheme.  This conviction underscores the risks that witnesses face when speaking to the DoJ and FBI in an FCPA investigation.  Even when a witness has no direct involvement in the bribes, where the government’s case is based on willful ignorance, there may be the potential to be charged with making false statements to authorities for saying they were unaware of bribes.

Use of Conspiracy Statute to Reach Back and Charge Payments Occurring More Than Five Years Earlier.  Although Bourke was ultimately acquitted of participation in a money laundering conspiracy, the court allowed the charge to go to the jury even though all payments were outside of the limitations period.  This underscores that conspiracy is a powerful tool in the prosecutor’s arsenal.  For conspiracy, long a favored tool of prosecutors in FCPA cases, if overt acts are performed within the limitations period, the charge can reach back to cover earlier conduct.  In the Second Circuit, if the conspiracy is deemed to have an economic object (which would undoubtedly include FCPA and money laundering conspiracies), the limitations period can be extended to include the receipt of any economic benefits to the conspirators.  In addition to the FCPA, the DoJ also included violation of the Travel Act as an object of the conspiracy.  The Travel Act is just one among many potential derivative violations that occurs when one travels across state lines or takes other acts in interstate commerce in furtherance of foreign bribery.  Its use here, as an add-on charge, further underscores the aggressiveness of the prosecution.

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; Ed Krauland at 202.429.8083; Pat Norton at 202.429.8034; Erik Kitchen at 202.429.8132; Matt Herrington at 202.429.8164; Brian Heberlig at 202.429.8134; Philip Khinda at 202.429.8189; Andrew Irwin at 202.429.8177; Julia Court Ryan at 202.429.6418; David Lorello at 44(0)20.7367.8007; Alexandra Baj at 202.429.6478; Tom Best at 202.429.8079; Owen Bonheimer at 202.429.6266; Michael Pass at 202.429.8101; Brittany Prelogar at 202.429.5518; Sarah Lamoree at 202.429.6488; William Gordon at 202.429.8013; Vincenza Rabenn at 202.429.1305.

¹ See DoJ Press Release, Connecticut Investor Found Guilty in Massive Scheme to Bribe Senior Government Officials in the Republic of Azerbaijan, July 10, 2009 available at http://www.usdoj.gov/opa/pr/2009/July/09-crm-677.html.

² See generally United States v. Bourke, Case No. 05 CR 518, Second Superseding Indictment (S.D.N.Y.  May 26, 2009).  See also 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.

³ United States v. Kozeny¸ 493 F.Supp.2d 693 (S.D.N.Y. 2007), aff’d, 541 F.3d 166 (2nd Cir. 2008).  See also International Law Advisory - The Kozeny Saga Continues (October 27, 2007) available at http://www.steptoe.com/publications-5002.html.

⁴ United States v. Kozeny¸ 582 F.Supp.2d 535 (S.D.N.Y. 2008), reconsideration denied, 2008 WL 5329960 (S.D.N.Y. Dec 15, 2008).  See also International Law Advisory - First Judicial Construction of the FCPA Local Law Affirmative Defense Raises More Questions than It Answers (November 14, 2008) available at http://www.steptoe.com/publications-5743.html.

⁵ United States v. Kozeny, Case No. 05 Cr. 518, 2009 WL 1514369 (S.D.N.Y. May 29, 2009); United States v. Kozeny, Case No. 05 Cr. 518, 2009 WL 1940897 (S.D.N.Y. July 6, 2009).

⁶ United States v. Kozeny, Case No. 05 Cr. 518, 2009 WL 1514369 (S.D.N.Y. May 29, 2009).

⁷ Id. at *2.

⁸ Id. at *3.

⁹ Id. at *3-*4.  The Government ultimately did present this evidence at trial, arguing that Bourke had actual knowledge of the bribery, and in the alternative, that he consciously avoided learning of the bribery.

¹⁰ Id. at *3.

¹¹ Id. at *4.

¹² United States v. Kozeny, Case No. 05 Cr. 518, 2009 WL 1940897 (S.D.N.Y. July 6, 2009).

¹³ Id. at *2.

¹⁴ Id. at *3.

¹⁵ Id. at *4.

¹⁶ Id.

¹⁷ It is possible the jury acquitted on this charge because they found that the conspiracy to launder money had been abandoned outside of the limitations period. The jury charge included the direction to "[Y]ou must find that the unlawful agreement to [launder money] continued after July 22, 1998. The conspiracy continued past that date if you find that the purpose of the money laundering conspiracy had not been completed as of that date. Alternatively, if you find that all of the conspirators had abandoned their efforts to achieve the purpose of the money laundering conspiracy on or before July 22, 1998, then you must find the defendant not guilty." United States v. Bourke, Case No. 05 CR 518, Jury Charge (S.D.N.Y. July 8, 2009).

¹⁸ Id. at *5.  Bourke also challenged the evidence for the count accusing him of making false statements to federal agents.  The Court also found that statements made by Bourke to federal agents could be interpreted as “flatly contradicted” by testimony at trial. 

¹⁹ The relevant portion of the jury charge stated: “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.”  United States v. Bourke, Case No. 05 CR 518, Jury Charge (S.D.N.Y.  July 8, 2009).

²⁰ David Glovin, Bourke Convicted of Bribery in Kozeny’s Azerbaijan Oil Deal, Bloomberg, July 11, 2009, available at http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aXO.vHLdvbcM (last visited July 20, 2009).

²¹ See generally Lucinda Low and Owen Bonheimer, Reducing Risks Of Third-Party Liability, ACI Canadian Forum on Foreign Corruption Compliance and Enforcement Toronto, Ontario, Canada,  April 28, 2009.