Private investor convicted for involvement in scheme to bribe officials in the Republic of Azerbaijan

On July 10, a jury in U.S. federal court convicted Frederic Bourke, a businessman and private investor, on one count of conspiracy to violate the U.S. Foreign Corrupt Practices Act (FCPA) and the U.S. Travel Act, and one count of making false statements to federal agents regarding bribes to officials in Azerbaijan.  Bourke was acquitted of the charge of engaging in a money laundering conspiracy.  According to the U.S. 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.

The case marked the first time U.S. authorities 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.  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.  Based on these allegations, Mr. Bourke was charged with conspiracy to pay bribes in violation of the FCPA, among other violations. 

Conscious Avoidance and the FCPA

During the case, Judge Shira Scheindlin of the Southern District of New York permitted 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.  This decision is particularly important because it addresses an issue that lies at the heart of the statute – what constitutes “conscious avoidance” or “willful blindness”.

The Government argued that Bourke was “aware of a high probability” that his investment would be used for bribery.  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 …”

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”.  

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.  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.”  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” that Mr. Bourke was aware of a “high probability” of bribery.

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.  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.  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 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.