Insight Center: Publications

Guilty Verdict Highlights the Vital Importance of Due Diligence in International Transactions

White Collar and Corporate Investigations Newsletter

Author: Gregory A. Paw


Handbag Maker Convicted for 'Burying His Head in the Sand'

An important trial under the Foreign Corrupt Practices Act ended with a guilty verdict in a Manhattan federal courtroom last week, providing a powerful reminder of the importance of conducting thorough reviews of foreign business partners and investments.

Background: The 'Pirate of Prague' and Suitcases Stuffed with Cash

A federal jury convicted Frederic Bourke, founder of handbag maker Dooney & Bourke, of conspiring to bribe government leaders in Azerbaijan in a 1998 oil deal, in violation of the Foreign Corrupt Practices Act (FCPA). Bourke invested – and lost – $8 million with a Czech expatriate, Viktor Kozeny, in a bid to buy SOCAR, the state oil company. Dubbed the “Pirate of Prague” by Fortune magazine, Kozney remains a fugitive, avoiding extradition while claiming the FCPA does not apply to him.

Prosecutors charged that Bourke made his investment, knowing that Kozeny gave Azeri public officials millions in cash and a secret two-thirds interest in the deal. Bourke’s defense was that he invested only after his lawyers deemed the deal legal. He later even traveled to alert Azeri officials of the scheme. But prosecutors rebutted this defense with evidence of Bourke’s knowledge, including his own recorded rhetorical question: “Do you think business is done at arm’s length in this part of the world?” Jurors also heard weeks of riveting testimony involving suitcases stuffed with cash and details of secretive walks in a park to discuss the deal.

Prosecutors argued that Bourke consciously avoided learning about the bribes by not asking questions about the deal terms, and “sticking his head in the sand” to avoid learning if his partner paid bribes to government officials. The court’s instructions on willful blindness permitted conviction if jurors found Bourke knew or took steps to avoid learning of payments to Azeri officials. Jurors had to determine if Bourke “deliberately closed his eyes” to what otherwise would have been obvious to him.

The Verdict: 'It’s His Job to Know'

In finding Bourke guilty, jurors emphasized the importance of the court’s “head in the sand” instructions. The foreperson summarized the rationale of his verdict, stating “[i]t was Kozeny, it was Azerbaijan, it was a foreign country. We thought he knew and definitely could have known. He’s an investor. It’s his job to know.” Another juror, recalling a timeline used by prosecutors during closing argument, said there were too many “red flags” for Bourke not to have known. Another felt bad for Bourke, but emphasized that he had put himself in a “bad situation.” A unanimous guilty verdict on the conspiracy to violate the FCPA resulted.

The Lesson: Due Diligence Is More Important than Ever

The Justice Department made clear in aggressively prosecuting Bourke that companies engaged in international business cannot turn a blind eye to “red flags” of improper payments. Claims that business is “always done this way” in other parts of the world, or that a business partner made the payments on his own, simply will not serve as defenses under the Foreign Corrupt Practices Act.

Vigilance about how a company’s international business is conducted, and due diligence on international business partners such as sales agents, consultants and distributors is essential. Requiring business partners to understand and abide by the FCPA and the company’s compliance and ethics culture is a similarly crucial step.

Business executives often regard performing due diligence on business partners as daunting tasks. But the risks are too great to ignore. Companies must make realistic assessments of the risk in doing international business. FCPA audits must be appropriate for the type of risk posed by the transaction, accounting for risks of the particular industry, the prior history of the organizations, the geographic region involved and the nature of the proposed business partner, including its ties to foreign governments and whether it has been subject to prior regulatory or media scrutiny. As these risks or the importance of the business partnership grow, the level of rigor required in the review must expand. For key international business partnerships or acquisitions, nothing can replace the value of an in-country review, including personal interviews of key players, reviews of critical documents and systems, and sampling of various accounting issues, all conducted by experienced U.S. legal and investigative staffs trained on FCPA and other compliance issues and working with local experts.

The Bourke trial and recent statements by federal regulators are reminders of the important role that FCPA compliance plays in helping companies meet their obligations, even in difficult economic times. Indeed, the Justice Department official in charge of FCPA prosecutions said recently that while it is “very tempting for companies to divert resources which are scarce away from compliance” these companies “need to be especially vigilant in this economic climate to not cut back. Our law enforcement efforts are not going to be scaled back, and so it would be, I think, a grave mistake for a company to take that path.”

Gregory A. Paw

Pepper Hamilton’s FCPA Practice

Pepper Hamilton provides deep experience on Foreign Corrupt Practices Act issues. Our staff includes experienced professionals seasoned by years of running law enforcement agencies and prosecutor offices, who have counseled multinational businesses on sophisticated compliance issues, and guided companies through a host of challenges confronted in these business operations. Pepper’s Corporate Investigations and White Collar Practice Group includes lawyers with FCPA experience and business law backgrounds. We often conduct our work in close coordination with former FBI Director Louis Freeh and his consulting company, Freeh Group International. Engaging Pepper and the Freeh Group sends a strong signal of a company’s commitment to conducting its business in an ethical and proper manner.

The material in this publication is based on laws, court decisions, administrative rulings and congressional materials, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.