Bad news for anyone worried about violations of the Foreign Corrupt Practices Act: An already tough-to-sell affirmative defense under the law is now even harder to use, thanks to a recent court ruling.
A federal district court judge in New York ruled last month that the FCPA’s local-law defense—where payment to a foreign official is permitted because it is “lawful under the written laws and regulations” of the official’s country—applies primarily to the payment, not the person doing the paying. That distinction narrows the scope of the defense, and leaves U.S. corporations with even fewer options should they find themselves on the wrong end of an FCPA probe.
The ruling, U.S. v. Kozeny, came down from Judge Shira Scheindlin on Oct. 21. Defense lawyers say it is one of the first decisions on how the local-law defense should be interpreted.
Gary DiBianco, a former federal prosecutor now with the law firm Skadden Arps Slate, Meagher & Flom, says the decision “squarely addresses an important question raised by the statute: whether the defense applies to situations in which a person or company is free from criminal liability under local law, although the local law does not stipulate that the payment at issue was specifically permitted.”
The short answer, apparently, is no.
The defendant in question, Frederic Bourke, was on trial for alleged bribes he made to officials in the Central Asian republic of Azerbaijan. The government claims Bourke and others violated the FCPA by making payments to Azeri officials to encourage the privatization of the State Oil Company of the Azerbaijan Republic.
The decision “confirms what we already knew—that economic coercion isn’t a defense under the FCPA.”
— Martin Weinstein,
Willkie Farr & Gallagher
Bourke argued that if he was relieved of criminal responsibility under local Azeri law, his action was lawful and therefore he could use the affirmative local-law defense. Scheindlin disagreed. In a 14-page opinion denying Bourke’s request, Scheindlin noted that for purposes of the affirmative defense, the focus is on the “payment, not the payer.”
Old hands at FCPA prosecutions say the decision is in line with the Justice Department’s historically narrow view of the lawful payments defense and doesn’t significantly change the landscape for compliance with the law. But the decision is notable because few FCPA cases ever go to trial, and judicial rulings on the law are a rarity.
“Opinions on the FCPA are few and far between, so any time there’s a judge opinion on any aspect of the statute, people take notice,” says Wendy Schwartz, a partner in the law firm Reed Smith and a former assistant U.S. attorney.
How the Defense (Doesn’t) Work
A person cannot be convicted of violating the FCPA if the payment in question was lawful under foreign law. But, Scheindlin wrote in her decision, no immunity from prosecution exists “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,” Scheindlin wrote. “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.”
Martin Weinstein, a partner in the law firm Willkie Farr & Gallagher, says the decision “confirms what we already knew: that economic coercion isn’t a defense under the FCPA.” He says the local-law defense “hasn‘t had much traction,” because “as a practical matter, the type of conduct that’s prosecuted is never affirmatively legislated.”
“It’s not an easy argument to make,” Weinstein says. “I don’t expect it to be successful any time soon.” Indeed, hardly any white-collar crime lawyers can recall an instance where the local-law defense has worked.
DiBianco says the Justice Department “will continue to take the position that the lawful payments defense may be raised only when local law specifically, and in writing, permits a payment.” He says a company seeking to rely on such a defense must make sure its understanding of local law is solid and supportable with outside documentation.
Schwartz similarly advises companies not to hinge their FCPA compliance programs on the local-law defense. Many practices in other countries that are not actually permitted by local law “are given a pass or a wink by local authorities,” she says. The Kozeny decision makes clear that if the payment itself is illegal, the local-law defense can’t be used even if the common practice in that country is to forgive the offense; the transaction must be permitted under local law.
Section 30A of the Securities & Exchange Act of 1934. Prohibited foreign trade practices by issuers:
It shall be an affirmative defense to actions under subsection (a) or (g) of this section that:
(1) 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; or
(2) the payment, gift, offer, or promise of anything of value that was made, was a reasonable and bona fide expenditure, such as travel and lodging expenses, incurred by or on behalf of a foreign official, party, party official, or candidate and was directly related to:
(A) the promotion, demonstration, or explanation of products or services; or
(B) the execution or performance of a contract with a foreign government or agency thereof.
Text of the Foreign Corrupt Practices Act (July 22, 2004).
The opinion did provide an exception: the defendant could argue that he was a victim of “true extortion,” and therefore lacked the corrupt intent necessary to violate the FCPA. Scheindlin wrote that if Bourke provides evidence for his claim of “true extortion,” the court would “instruct the jury on what constitutes a ‘true extortion‘ situation such that Bourke wouldn’t be found to possess the corrupt intent required for a violation under the FCPA.”
The ruling gave the example that a payment requested by a government official to keep an oilrig from being dynamited would be an example of true extortion; payment demanded by a government official to gain entry into a market or obtain a contract would not.
Where It Works
DiBianco says the lawful payment defense remains relevant where local law or regulation may permit specific marketing practices, such as allowing gifts to officials below a certain threshold. In such instances, he says, “local law would be a factor in assessing the permissibility of the gift under the FCPA.”
Weinstein says the local-law defense also “still matters” in the campaign finance area. For example, he says, it could matter in situations involving legal payments to local political parties in countries where the campaign finance regime allows for such contributions.
William Jacobson, a partner in the law firm of Fulbright & Jaworski and former FCPA prosecutor with the Justice Department, notes that there’s a movement afoot by other countries to limit or eliminate laws similar to the Azeri statute at issue in the Kozeny case.
A Fulbright & Jaworski client alert on the topic says several European countries provided leniency under circumstances of “effective regret,” a concept that permits an offender to avoid full prosecution for the bribe if the offender reports the payment and can demonstrate some sort of coercion or duress by a public official in making the payment.
But the same alert notes that a January 2008 report by the Organization for Economic Cooperation and Development concluded that while the “effective regret” defense “may serve policy interests in domestic bribery situations, the policy rationale isn’t persuasive in situations of bribery of foreign public officials.”