Prosecuting white collar crimes is a “mind game” in more ways than one.  This is another in my long series of profound grasps of the obvious. 

As a former federal prosecutor, the difference between a crime and compliant behavior often turns on the specific mind or intent of the actor.  Unless you are a mind reader (i.e. Kreskin for you boomers), this is often a challenging task.  Criminal conduct is often more equivocal.  Let me give you a few examples.

In the Shot Show Sting prosecution involving an undercover FCPA sting, some of the defendants in the case asked the confidential informant (CI) in recorded meetings whether the payments to an undercover foreign officials were legal.  The CI equivocated. 

The defendants had raised a question – was the conduct illegal – and the government’s CI was put into a position of having to answer that question.  As it turns out, the defendants may have lacked the requisite intent because the CI “misinformed” or “mislead” them into believing their actions were legal when in fact they were illegal.  To make matters worse, the law is clear that the defendants did not have to know what law they were breaking but simply that their conduct was wrong or illegal.  The complex set of facts made prosecution of some of the defendants very difficult.  A jury would have scratched their respective heads on this question.  It is difficult, if not impossible, in these circumstances, to convince a jury of the defendant’s guilt beyond a reasonable doubt.  This was one of many reasons the Shot Show Sting prosecutions eventually fell apart. 

Consider another example – the criminal case against Frederic Bourke, who was convicted of FCPA conspiracy and false statements after a six-week jury trial.  Bourke was charged with participating in a scheme to bribe Azerbaijan government officials to privatize the state-owned oil company in a rigged auction that Bourke and an investor, Viktor Kozeny, hoped to win.  Much of the government’s case turned on whether Bourke “knew” that Kozeny increased the capitalization of a private company, jointly owned with Bourke, to fund bribery payments to Azerbaijan government officials. 

At trial, the government presented evidence of significant “red flags” known to Bourke, and in response to which he failed to respond, suggesting that he was aware of these risks but chose to act in the face of these risks. 

In completing its case, the government’s evidence rested on Bourke’s knowledge of these red flags and his failure to act in response.  Together, this evidence supported a strong inference that Bourke knew that Kozeny was taking investment funds from the jointly-owned company and paying bribes.  Bourke was convicted based on this evidence and the conviction was upheld on appeal.

The Bourke case is an important reminder for legal and compliance officers – when presented with red flags, a failure to act by itself or in combination with multiple red flags can provide evidence of criminal intent, better known as deliberate indifference (i.e., the head in the sand).  In the Bourke case, the government’s evidence consisted of four significant red flags that supported an inference that Bourke himself knew about the bribery scheme.  Once that intent was inferred, Bourke’s actions themselves were consistent with his intent and the underlying inference.

For legal and compliance officers, this is the important reason why compliance programs should include robust documentation.  An effective compliance program will require contemporaneous documentation of the underlying reasons for taking an action or refraining from action so that there is no question surrounding the issue.  In effect, the documentation fills in the actors’ state of mind and mitigates the possibility of a negative inference as to the decision made.  In a sense, it is an insurance policy against government claims (or litigation claims) that the actors carried a specific state of mind when acting or failing to act.

The tricky part is to design and implement a robust documentation policy to cover key instances when corporate actors’ exercise discretion to ensure that their actions and mindset are preserved for future investigations or litigation.  It is important to avoid “over-documentation” that may not be justified given the potential risk and frustrate business operations.  A careful balance has to be struck between risk and documentation to ensure that such requirements are neatly tailored to the risk.