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At Large: Is this why nobody talks about the FCPA extortion defense?

Critics and supporters shower attention on the FCPA’s affirmative defenses for local law and promotional expenses. And the facilitating payments exception is a rich vein for the FCPA commentariat. Why, then, is the FCPA extortion defense mostly ignored and neglected? Here are some reasons.

Reason #1: The word “extortion” never appears in the FCPA. Search all 8,000 words of the FCPA and you won’t find “extortion,” or “extort” or “extortionist.” Nor will you find “coerce” or “duress.” So, where does the FCPA extortion defense come from?

It sprang from a discussion on Capitol Hill one day in March 1977 about the bill that would become the FCPA. The report of the Senate Committee on Banking, Housing, and Urban Affairs for that day says:

True extortion situations would not be covered by [the anti-bribery] provision since a payment to an official to keep an oil rig from being dynamited should not be held to be made with the requisite corrupt purposes.

That single, sparse legislative mention is the origin of the FCPA’s extortion defense, and the reason why it’s usually referred to as “true extortion.”

Reason #2: Only one criminal FCPA defendant has publicly raised the “true extortion” defense. During his 2009 trial for conspiracy to violate the FCPA, Frederic Bourke asked Judge Shira Scheindlin for a jury instruction on “true extortion.” She refused to issue the instruction because Bourke didn’t present enough factual evidence to support the defense. Nevertheless, she gave the jury a general (but comprehensive) instruction about the government’s burden to prove Bourke acted “corruptly and willfully.”

After the jury convicted Bourke, he asked Judge Scheindlin for a directed acquittal or new trial. She denied Bourke’s motions and explained her reasoning for not giving the “true extortion” jury instruction:

. . . I ruled that the legislative history of the FCPA makes a distinction between payments “demanded on the part of a government official as a price for gaining entry into a market or to obtain a contract” and payments made to an official “to keep an oil rig from being dynamited,” an example of “true extortion.” I therefore held that if Bourke provided an evidentiary foundation at trial that he was a victim of true extortion, the jury would be instructed with respect to the corrupt intent the Government must prove Bourke possessed before it may convict him of the offense.

Bourke appealed unsuccessfully to the Second Circuit on related issues. He also petitioned the U.S. Supreme Court for review, which turned him down. He eventually served almost a year in federal prison.

As far as I know, Bourke’s trial is the only time a criminal FCPA defendant publicly raised (or tried to raise) the “true extortion” defense.

Reason #3: Just one civil FCPA enforcement action against an issuer involved “true extortion.” In 2010, the SEC charged NATCO Group Inc. with violating the FCPA accounting provisions. The U.S.-based energy services firm admitted that its wholly-owned subsidiary, TEST Automation & Controls, Inc., “created and accepted false documents while paying extorted immigration fines and obtaining immigration visas in the Republic of Kazakhstan.” NATCO agreed to pay the SEC a $65,000 civil penalty.

What happened? Kazakh immigration prosecutors threatened to fine, jail, or deport TEST employees unless they paid “cash fines.” The TEST employees in Kazakhstan believed the threats to be genuine. Their bosses in the United States agreed, and authorized the payments. The TEST employees paid a total of about $80,000, and the company reimbursed them. TEST falsely recorded the reimbursements as advances on salary or bonuses, the SEC said.

Violating the FCPA accounting provisions is a “technical” offense and doesn’t require mens rea or corrupt intent. So, “true extortion” (even payments to prevent innocent workers being jailed, or an oil rig being dynamited) isn’t a defense in a case about civil violations of the accounting provisions.

As far as I know, NATCO is still the only time extortion was publicly mentioned in a civil FCPA enforcement action against an issuer.

Note: A 2001 civil case, SEC v. Eric L. Mattson and James W. Harris, involved allegations that the defendants (employees of Baker Hughes) violated the FCPA anti-bribery and accounting provisions, and aided and abetted Baker Hughes’s violations, by bribing an Indonesian tax official. Mattson and Harris argued that the payment was extorted, with threats of an excessive tax bill. In September 2002, the federal court in Houston dismissed the anti-bribery allegations on other grounds, and the SEC dismissed the other charges two years later.

Reason #4: The “true extortion” defense requires specific threats. The DOJ and SEC included a short section in their original 2012 version of the FCPA Resource Guide about “true extortion,” and repeated it without changes in the updated 2020 version of the FCPA Resource Guide.

Citing the FCPA’s legislative history, Judge Scheindlin’s reasoning from Bourke, and various federal pattern jury instructions about “coercion” and “duress,” the FCPA Resource Guide emphasizes that “true extortion” in a criminal FCPA prosecution involves the imminent threat of physical harm. “Mere economic coercion, however, does not amount to extortion,” the FCPA Resource Guide says.

It continues: “The defense that the payment was demanded on the part of a government official as a price for gaining entry into a market or to obtain a contract would not suffice since at some point the U.S. company would make a conscious decision whether or not to pay a bribe.”

Reason #5: Do incidents of “true extortion” ever come into public view? The world isn’t any less dangerous today than it was in 1977 when those U.S. Senators worried about extortionists threatening to dynamite oil rigs. Why, then, don’t we hear more about companies and people paying off foreign officials after being threatened with “true extortion”?

I think it’s because the DOJ won’t bring an FCPA enforcement action against any company or person who has real evidence of “true extortion.” What’s the point of charging a defendant who can present a credible and complete defense? And, companies that face “true extortion” overseas are probably very reluctant to talk about it. Public complaints could raise the danger level from a vengeful extortionist, or give other predators the idea that the company is an easy target.

Incidents of “true extortion” may be more common than we think, but are kept hidden. Still, if the incidents are happening, why aren’t issuers disclosing “extortion” or “ransom” payments in their books and records, as apparently required by the outcome of NATCO? The FCPA Resource Guide says, “These [extortion] payments, however, must be accurately reflected in the company’s books and records so that the company and its management are aware of the payments and can assure that the payments were properly made under the circumstances.”

Despite NATCO and the FCPA Resource Guide, I think the feds reached a silent consensus to be practical, and not to insist on that level of accuracy from issuers. Most likely, NATCO itself was the moment when a lot of people, inside the government and outside, grasped that any public discussion about “true extortion” could expose the victims to even more danger.

———

Those are my thoughts. I’d welcome hearing from readers who might have first-hand experience with “true extortion,” or have learned about it through their professional roles.

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3 Comments

  1. I have a few thoughts:

    1. I don’t think the NATCO case stands for the proposition that “true extortion” necessarily violates the accounting provisions, even under the strict liability standards for civil enforcement. Instead, the lesson is that if a company makes true extortion payments it must record those correctly in its books. This raises, perhaps, an issue of whether it can call them one thing in the local books to avoid local issues (or invite more demands) and then correct them at a higher level before they are implicitly integrated into the parent issuer’s books.

    2. I can think of one other unreported case in which there was a “commercial extortion” jury instruction. Many, many years ago, when I and some friends from USAO-Mass. tried the Mead case in New Jersey (long story), the court gave what was essentially a commercial extortion instruction, i.e., payments to get a contract, over our objection. I thought then, and still think, that instruction was wrong, as that is essentially the gravemen of the FCPA – you either do the business without payments or you don’t do the business.

    3. One other “true extortion” case is the Chiquita Brands case. That was not a FCPA case, but it sounds in the same space. In that case the company was extorted by insurgents or paramilitary groups (or both) in Colombia and made payments to protect the safety of its trucks and employees. It sought guidance from the US government, which was not forthcoming, and continued to make the payments. Eventually the government came back and charged the company with aiding a terrorist organization. The company probably wouldn’t have been charged for a few payments, but once it became a routine course of doing business, the government no longer bought the extortion defense.

  2. Excellent post as always, Dick, and excellent comment by Mr. Urofsky. I had a client with a similar issue to the Chiquita case, except in Southeast Asia and the threat was from a well-known terrorist organization. They said they’d put railroad spikes in fruit if they weren’t paid. I’ve also heard of payments extorted in Sierra Leone to pass roadblocks of either government or rebel groups, as well as tax inspectors in Indonesia threatening loss of liberty if bribes weren’t paid.

  3. I believe the same case applies to Chiquita and them withdrawing their operation from Honduras, Central America, I am very familiar with the country since I am from there, and I know for a fact that extorsion exists in big proportions, you have well organized gangs that you can denominate like terrorist organizations also and they will ask for money in exchange for protection of the employees and installations, I don’t know if this is the case that applies to Chiquita, all I know is that the lack of collaboration from the Honduran government forced them to move most of their Central American operation to Guatemala which is fairly a bit more stable.


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