In late February, the Justice Department and Securities and Exchange Commission announced a resolution of a longstanding FCPA probe into the Dutch telecom giant VimpelCom for a spectacular, longstanding bribery scheme where the company garnered the rights to the mobile communications business in Uzbekistan. The multiple bribery schemes used appear to have been approved at the highest levels of the company and should provide a wealth of case studies on bribery schemes for the compliance professional going forward. Indeed, the total fines and penalties exceeded $795 million.
This is one of the very few FCPA enforcement actions that rose to the level of a company’s board of directors. Given the requirements of the Yates Memo and the legal concept of conscious avoidance, I wonder how long it will be before the Justice Department begins to look at board members who not only failed to ask the right compliance questions but also failed to follow up when they asked the right questions initially.
Board of director involvement
VimpelCom sought to enter the telecom market through the acquisition of a local player, Unitel, as an entrée into the Uzbekistan market, as well as another company Barkie Uzbekistan Telecom. Butzel was partially owned by an Uzbeki government official, who hid his interest through a shell company, all of which was known to VimpelCom.
As laid out in VimpleCom’s Criminal Information, its senior management was well aware of the potential FCPA risk. The Information stated, “From the beginning of VimpleCom’s deliberations concerning its entry into Uzbekistan, there was an acknowledgment of the serious FCPA risks associated with certain VimpelCom management’s recommendation to purchase Buztel in addition to Unitel … Documents prepared for the December 13, 2005 Finance Committee meeting explained that Buztel was owned by a Russian company ‘and a partner’ without further detailing the identity of the ‘partner.’ The materials documented that ‘[t]hrough a local partner, [VimpelCom was] in a preferred position to purchase both assets ...’ ” The Finance Committee “identified the likelihood of corruption and expressed concerns.” Even with these reservations, the Finance Committee failed to identify the local partners.
But there were even more specific cautions around an FCPA violation when one Finance Committee member “expressed concern on the structure of the deal and FCPA issues” and noted “that if [VimpelCom] goes into this deal under this structure and if the structure violates the FCPA picture, [VimpelCom’s] name could be damaged.” The Finance Committee voted to move forward with the Buztel portion of the transaction “provided that all issues related to the FCPA should be resolved.”
If your board of directors, with ultimate oversight of your compliance program, knows enough to ask questions about possible FCPA violations in a transaction but does not follow through to obtain answers which it can certify to; it may be the board has engaged in the conscious indifference standard that brought Frederic Bourke to grief.
These concerns moved up to the VimpelCom board of directors. In a December 2005 board meeting, “the likelihood of corruption was further discussed” and that “there was a recognition that a thorough analysis was needed to ensure that the Buztel payment was not merely a corrupt pretext for other services and favors. There were also numerous requests to ensure that the deal complied with the FCPA. Ultimately, VimpelCom’s board approved the Buztel and Unitel acquisitions, with a condition that FCPA analysis from an international law firm be provided to VimpelCom.”
Here VimpelCom management apparently worked to defraud its own board of directors. The Information states, “VimpelCom’s management then sought FCPA advice that could be used to satisfy the board’s requirement while allowing VimpelCom to proceed with a knowingly corrupt deal. Despite the known risks of Foreign Official’s involvement in Buztel, certain VimpelCom management obtained FCPA legal opinions from an international law firm supporting the acquisition of Unitel and Buztel; however, certain VimpelCom management did not disclose to the law firm Foreign Official’s known association with Buztel. As a result, the legal opinion did not address the critical issue identified by the VimpelCom board as a prerequisite to the acquisition. Management limited the law firm’s FCPA review of the transaction to ensure that the legal opinion would be favorable. Having obtained a limited FCPA legal opinion designed to ostensibly satisfy the board’s requirement, certain VimpelCom management then proceeded with the Buztel acquisition and corrupt entry into the Uzbek market.”
VimpelCom’s board accepted this recommendation without any independent review or judgment.
But that was only the start, as VimpelCom then entered into a partnership with the foreign official who was given an ownership interest in Unitel, through the shell corporation. The shell company held an option to sell this interest back to VimpelCom in 2009. It would appear that the owner of the shell corporation was well known within both VimpelCom and Unitel, but both entities referred to this person as the “partner” or “local partner.” VimpelCom set up partnership where, “Shell Company obtained an indirect interest of approximately 7% in Unitel for $20 million, and Shell Company received an option to sell its shares back to Unitel in 2009 for between $57.5 million and $60 million for a guaranteed net profit of at least $37.5 million.”
Once again there was VimpelCom board involvement as it was required to and did approve the partnership but as with the original acquisition, “approval again was conditioned on “FCPA analysis by an international law firm” and required that “the identity of the Partner … [be] presented to and approved by the Finance Committee.” VimpelCom received an FCPA opinion on the sale of the indirect interest in Unitel to Shell Company on or about August 30, 2006. The FCPA advice VimpelCom received was not based on important details that were known to certain VimpelCom management and that certain VimpelCom management failed to provide to outside counsel, including Foreign Official’s control of Shell Company. In addition, documents, including minutes from the Finance Committee’s meeting on August 28, 2006, failed to identify the true identity of the local partner by name while noting the ‘extremely sensitive’ nature of the issue.”
Once again there is no record of any follow-up by the board as to these questions.
Frederic Bourke and the doctrine of conscious indifference
The legislative history of the FCPA makes clear that Congress intended that the so-called “head-in-the-sand” defense¾also described as “conscious disregard,” “willful blindness,” or “deliberate ignorance”¾should be covered so that company officials could not take refuge from the Act’s prohibitions by their unwarranted obliviousness to any action (or inaction), language or other “signaling device” that should reasonably alert them of the “high probability” of an FCPA violation. This interpretation was confirmed, by both a federal district court and court of appeals in the criminal case of Frederic Bourke.
Bourke had invested in an enterprise in Azerbaijan and it later turned out this enterprise was engaged in bribery and corruption to obtain certain oil and gas rights. Bourke was not a part of the management team that engaged in this bribery and corruption, yet at trial, prosecutors contended that Bourke had “stuck his head in the sand” and consciously avoided clear red flags that corruption was going on. Moreover, even if Bourke did not affirmatively know that bribes were being paid, he was aware of a high probability such action was occurring and he consciously and intentionally avoided confirming this fact. In the jury charge, the Court explained this “conscious avoidance” could be equated to actual knowledge under the FCPA.
Bourke argued at the trial there was no criminal intent simply because he had “not tried hard enough to learn the truth.” However, the trial court held the test was not Bourke’s actual knowledge of the payment of bribes, but Bourke’s efforts to avoid acquiring that actual knowledge. In her ruling the court said, “The conscious avoidance doctrine provides that a defendant’s knowledge of a fact required to prove the defendant’s guilt may be found when the jury is persuaded that the defendant consciously avoided learning that fact while aware of high probability of its existence.”
The trial judge went on to state “In addition, the FCPA explicitly permits a finding of knowledge on a conscious avoidance theory. It provides that ‘[w]hen knowledge of the existence of a particular circumstance is required for an offense, such knowledge is established if a person is aware of a high probability of the existence of such circumstance, unless the person actually believes that such circumstance does not exist.’ 15 U.S.C. § 78dd-2(h)(3)(B). Because the defendant must be found to possess the same intent as that required for the substantive offense, the conscious avoidance instruction was particularly appropriate in this case.” Bourke was sentenced to one year in jail for his crimes.
The Second Circuit Court of Appeals upheld the verdict and conviction. The court of appeals rejected Bourke’s contention that the conscious avoidance charge had improperly permitted the jury to convict him based on negligence, explaining that ample evidence in the record showed that the defendant had “serious concerns” about the legality of his partner’s business practices “and worked to avoid learning exactly what [he] was doing,” and noting that the district court had specifically instructed the jury not to convict based on negligence.
The Yates Memo requires companies to investigate and turn over evidence of FCPA violations by individuals. Now companies must also certify in writing that not only have they done full and thorough investigations but they have turned everything over to the Justice Department. If your board of directors, with ultimate oversight of your compliance program, knows enough to ask questions about possible FCPA violations in a transaction but does not follow through to obtain answers which it can certify to; it may be the board has engaged in the conscious indifference standard that brought Frederic Bourke to grief.