Bribing your way into trouble: competitiveness, criminality and the foreign corrupt practices act.

• Author: Fitzpatrick, William M.

INTRODUCTION

Victor Kozeny, an expatriate Czechoslovakian businessman, saw an opportunity for earning massive profits in the Azerbaijani oil industry. This industry was controlled by the State Oil Company of the Azerbaijan Republic (SOCAR). During the 1990s, many state-controlled enterprises in Azerbaijan were in the process of being privatized (United States of America--against--Viktor Kozeny and Frederic Bourke, Jr., 2009). The privatization methodology used by the government issued vouchers to Azerbaijani citizens. Citizens could then use these vouchers to bid for shares in companies that were divesting themselves of government ownership. These vouchers were traded publically by their owners and could also be sold to foreign investors/companies. However, to utilize these vouchers to buy shares of newly privatized firms, foreign investors would first have to purchase a government-issued "option" for each of the vouchers they acquired from citizens of the country (Department of Justice, 2009c; United States of America v. Victor Kozeny, Frederic Bourke, Jr. and David Pinkerton, 2005).

Pending a privatization order from the government, vouchers for the sale of SOCAR stock were made available to the Azerbaijani public. Kozeny began to acquire these vouchers/government "options" which would permit him to obtain a controlling interest in a "privatized" oil industry and its oil reserves. To secure capital for acquisition of these vouchers, Kozeny approached a variety of individual and institutional investors. Two of these investors, Frederic Bourke and David Pinkerton, contributed $8 million and $15 million respectively. The Bourke investment was compiled from personal funds and monetary contributions from friends. Pinkerton, an AIG employee, invested company funds in the venture (Marceau, 2007). These funds were transferred to Azerbaijan and used by Kozeny's company (Oily Rock, Ltd.) in order to acquire the vouchers/government options (Department of Justice, 2009c; Marceau, 2007).

Kozeny's plan depended on the President of Azerbaijan issuing a directive that would authorize privatization of SOCAR. In order to facilitate and influence this privatization decision/process, Kozeny began to distribute Oily Rock vouchers/options to various government officials. During 1997 and 1998, Azeri officials were (a) given 2/3 of Oily Rock's vouchers/options; and (b) promised 2/3 of the profits that Kozeny's investment consortium would earn in the event of SOCAR's privatization (Department of Justice, 2009c). To further "induce" cooperation with this scheme, Bourke arranged for two of the corrupt Azeri officials to receive medical treatment in New York. These medical treatments were paid for by Oily Rock, Ltd. (Department of Justice, 2009c)

These business development activities resulted in a 2005 indictment against Kozeny, Bourke, and Pinkerton for violation of the Foreign Corrupt Practices Act (1997). This anti-corruption statute makes it illegal for U.S. nationals, U.S. corporations/issuers, subsidiaries and their agents to seek competitive gain or opportunities through the bribery of foreign officials. Individuals/corporations can also be held liable for violating the law if they have knowledge of the bribery activity or participated in originating the bribery conspiracy while resident in the United States. In 2009, Bourke was convicted of FCPA violations due to his knowledge of Kozeny's bribery of foreign officials and subsequent gifts he provided to these officials to induce their cooperation. He was also found guilty of making false statements to federal authorities in an effort to "cover -up" his participation in this bribery conspiracy (United States of America--against--Viktor Kozeny and Frederic Bourke, Jr., 2009). Bourke was sentenced to a prison term of one year (Clark, Davis, Reider-Gordon, & Wrange, 2010). Victor Kozeny, now both a permanent resident in the Bahamas and fugitive from justice, has been involved in a 6 year legal contest to avoid extradition to the United States.

The Kozeny/Bourke case represents a litigation trend in both the United States and world community for purposes of eradicating the bribery/corruption of government officials (Department of Justice, 2008; Department of Justice, 2010a; 2010b; Tarun & Tomczak, 2010; Santangelo, Stein, & Jacob, 2007; Hinchey, 2011). Passage of the FCPA by the United States has stimulated the development of a variety of international conventions and country-level statutes in order to prevent continuation of these illicit activities (Darrough, 2010; Clark, Davis, Reider-Gordon, & Wrange, 2010). Emboldened by this legislation, law enforcement agencies have cooperated in investigating and initiating multi-jurisdictional prosecution of individuals/firms involved in these criminal actions (Marceau, 2007). These prosecutions have resulted in legal settlements costing firms hundreds of millions of dollars in both fines and other financial penalties (Department of Justice, 2010a; 2010b Tarun & Tomczak, 2010; Santangelo, Stein, & Jacob, 2007). Therefore, knowledge of the FCPA and the foreign laws/conventions modeled after this statute, are critical in assisting corporations in lessening their legal/financial liability when dealing with the officials of foreign governments (Clark, Davis, Reider-Gordon, & Wrange, 2010).

Consistent with this objective, the present paper formulates the JAIL paradigm as a methodology for better understanding (1) the legal/financial liabilities for firms under the Foreign Corrupt Practices Act; and (2) the organizational risk management strategies needed to deal with both this statute and other international anti-corruption conventions.

BACKGROUND

Bribery and Business Opportunity

The use of financial incentives to enhance the competitiveness of business firms in foreign countries can be traced to the early 1600s where European firms used various incentives to gain trading advantages in a variety of world markets (Levy, 1985). Over the centuries and in different parts of the world, financial inducements in the form of bribes, political contributions, kickbacks/commissions and facilitating payments have often become a customary business practice and method for overcoming entry barriers in foreign ventures (Levy, 1985; Thomas, 2010; Sibelius, 2008).

During the 1970s, Lockheed Corporation used financial incentives to both overcome entry barriers and compete for sales contracts in the Japanese commercial aviation/ military markets. Lockheed transferred $12.6 million from offshore accounts to a Japanese business agent in order to bribe or incentivize Japanese corporate executives and government officials into supporting the purchase of Lockheed aircraft. This business agent even made payments to the Japanese Premier in order to support Lockheed's sales agenda. As a result of this strategy, Lockheed was able to secure military and civilian aircraft sales contracts totaling $783 million. At this point in time, Lockheed executives considered these payments/bribes to be a necessary and customary cost of doing business in Japan (Cleveland, Favo, Frecka, & Owens, 2009).

Bribery and Foreign Business Activities by American Firms

Prior to 1977, these types of illicit financial inducements were commonly used by U.S. corporations in securing business and competitive advantage in foreign markets (U.S. Congress, 1975). In the United States, only the Securities and Exchange Act of 1934 sought to provide any oversight or statutory regulation of these activities. Using its authority under sections 13 (a) and 14 (a) of the Act, the SEC required American corporations to disclose questionable payments to foreign officials that were intended to enhance the firm's competitiveness in foreign countries. In order to discern the level or volume of financial inducements offered to foreign officials from corporate "slush funds", the SEC initiated an amnesty program in 1977. This program indemnified U.S. corporations from prosecution if they voluntarily disclosed evidence of these financial practices with foreign officials. Based upon these voluntary corporate disclosures, the SEC subsequently reported to Congress that 527 U.S. Corporations had expended over $300 million in payments to foreign officials for purposes of enhancing the competitiveness of their international operations (Levy, 1985; Thomas, 2010).

The pervasiveness of these corporate sponsored payments to foreign officials provided an impetus for the drafting of a comprehensive bribery statute by the U.S. Congress (U.S. Senate, 1977a). In response to this Congressional activity, corporations argued that regulation of these types of financial transactions would undermine their commercial effectiveness in developing markets/countries (Securities and Exchange Commission, 1980; Thomas, 2010). According to these arguments, an anti-bribery statute would erode the international competitiveness of American corporations by (1) creating an unequal playing field or competitive environment in foreign markets when business firms from other countries are not subject to similar forms of regulation; (2) making regulated firms appear to be "cheap" or undesirable business partners when they are unable to match the level of financial incentives offered by non-regulated firms; and (3) deterring many firms from seeking export markets for their goods/services (Taylor, 2001; Thomas, 2010; Levy, 1985). However, despite these arguments, Congress enacted the Foreign Corrupt Practices Act in 1977.

Foreign Corrupt Practices Act Of 1977

The Foreign Corrupt Practices Act of 1977 (FCPA, 1977) was enacted as an amendment to the Securities and Exchange Act of 1934. The Act empowered both the U.S. Department of Justice (DOJ) and U.S. Securities and Exchange Commission (SEC) to pursue criminal action against corporations or individuals engaged in the bribery of foreign officials. The FCPA also required corporations to maintain...