Foreign Corrupt Practices Act — Probes may hit D&O insurers

Frederic Bourke Jr. was convicted in July by a federal jury in Manhattan of violating the Foreign Corrupt Practices Act (“FCPA”), among other charges, in connection with an alleged scheme to bribe Azerbaijan government officials, and highlights an emerging area of concern for directors and officers liability insurers and policyholders.

The FCPA prohibits paying foreign government officials to obtain or retain business. Mr. Bourke did not pay bribes himself. But he invested $5.7 million with a Czech expatriate, Viktor Kozeny, whom he knew—or should have known—planned to bribe Azerbaijani government officials, jurors found.

The FCPA bars attempted bribes, even if unsuccessful, and jurors found that Mr. Bourke must have known Mr. Kozeny’s intentions. Mr. Kozeny was sometimes called the “Pirate of Prague” for allegedly stealing investor money as part of a similar scheme in the Czech Republic, and two witnesses said Mr. Bourke knew of the bribes.

The case is part of a pronounced effort by the federal government in recent years to enforce the 1977 statute more aggressively. The Securities and Exchange Commission has established a dedicated FCPA enforcement unit, and the Justice Department says it is investigating at least 120 companies on five continents.

According to attorneys who track these actions, the number of SEC and DOJ enforcement actions has increased 500% between 2004 and 2009. This is why the FCPA could become a significant exposure for D&O liability underwriters.

Fines and disgorgement penalties paid in connection with SEC or DOJ probes likely would be excluded from coverage under most D&O liability policies, legal observers agree. But defense costs for such cases likely would be covered by D&O liability policies. Those costs often can be significant and sometimes blow through D&O liability limits.

In addition, professionals involved with D&O say FCPA violations make follow-on litigation—a securities fraud or derivative suit—more likely. In addition to its bribery prohibition, the FCPA also requires companies to maintain adequate internal accounting controls and accurate and transparent records. Violations of this “books and records” provision of the FCPA often provide a foundation for suits alleging that directors and officers breached their fiduciary duty.

Only 31% of companies report having a “comprehensive” FCPA compliance program, according to a September survey by Deloitte Financial Advisory Services L.L.P.

It is expected D&O underwriters will increase their attention and inquiries into a company’s practices in foreign countries with an eye toward FCPA exposure. However, history in our industry tells us that until they have losses, they will ignore the possible risks.

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