with contributing author Jon Umarov
This article originally appeared on Michael Tooshi’s FCPA-RUCIS blog and is republished here with permission.
On September 20, 2014, BP-operated Azerbaijan International Operating Company (AIOC) held a ceremony to celebrate the start of Southern Gas Corridor’s construction near Baku, Azerbaijan. The Southern Gas Corridor will connect oil fields in Azerbaijan with Europe via Turkey. The project is expected to deliver 16 billion cubic meters of gas per year from the Shah Deniz field in Azerbaijan to Georgia, Turkey, Greece, Bulgaria, Albania and Italy.
Speaking at the ceremony, BP’s CEO Bob Dudley paid tribute to Azerbaijan’s president Ilham Aliev and SOCAR, the state-operated oil and gas company. AIOC is a consortium comprised of international oil companies from several countries developing the offshore oil fields in Azerbaijan’s sector of the Caspian Sea. The development projects have been coordinated with SOCAR, the state firm that controls Azerbaijan’s oil and gas reserves, exploration, production and refining facilities.
SOCAR has attracted media attention lately due to the production-sharing agreement (PSA) that it signed with the United Arab Emirates-based Bahar Energy Limited. Interestingly, under its PSA, SOCAR gave Bahar Energy 80 percent of profits from the Gum-Deniz and Bahar oil fields. Significantly, Bahar Energy reportedly has ties to SOCAR’s officials. It has been reported that this profit-sharing arrangement is much higher compared to SOCAR’s other PSAs. In fact, the Azeri Parliament (or Milli Majlis) made the agreement for Bahar a reality when, in 2010, it approved the production-sharing agreement that afforded Bahar such a high percentage of the shares. Significantly, in SOCAR’s five other offshore PSAs to date, no private company holds more than 50 percent of the shares.
In mid-September 2014, the Organized Crime and Corruption Reporting Project (OCCRP) reported that individuals with close ties to SOCAR occupied roles as directors of the company that later became Bahar Energy. According to the investigation, the unusual deal may be explained by previously hidden links between SOCAR and Bahar officials that were uncovered by reporters for the OCCRP and Radio Free Europe in cooperation with the International Consortium of Investigative Journalists.
Many will recall that this is not the first time that SOCAR has come under scrutiny for its deals involving Azerbaijan’s oil and gas industry. In 2009, Frederic Bourke, Jr., co-founder of Dooney & Bourke, was found guilty of conspiring to violate the FCPA and making false statements to the FBI agents. In the famous case, the U.S. DOJ accused Bourke, along with Victor Kozeny (the so-called “Pirate of Prague”) and David Pinkerton, of participating in a massive scheme to bribe government officials, including a senior official at SOCAR, with the aim of ensuring the privatization of SOCAR and ultimately sharing in the profits. As Azerbaijan’s oil and gas industry is considered a strategic enterprise under Azeri policy, SOCAR could only be privatized through a special decree from the president of Azerbaijan at that time, Heidar Aliyev. The DOJ asserted that Bourke invested $8 million in the project through Kozeny’s Oily Rock and Minaret companies with “knowledge” that Kozeny offered bribes to Azerbaijan’s government officials.
The evidence of Mr. Bourke’s “knowledge” that was presented at trial indicated that he should have known of the bribery scheme based on Mr. Kozeny’s reputation (such as a report that Bourke had read about his activities in a Forbes magazine article in 1996), the pervasiveness of corruption in Azerbaijan at the time and Mr. Bourke’s concerns regarding the possible payment of bribes. Notably, the trial emphasized the concept of “conscious avoidance” (in 15 U.S.C. § 78dd-2(h)(3)(B)) of the FCPA. Bourke was sentenced to one year and one day in prison and was ordered to pay a fine of $1 million. The Second Circuit affirmed Bourke’s conviction in December of 2011. He was released from prison on March 21, 2014. Mr. Kozeny has since relocated to the Bahamas and has successfully defeated the DOJ’s efforts to extradite him to the U.S. to face corruption charges. The Azeri government never privatized SOCAR and has never admitted any wrongdoing in the affair, although it conceded that investors could have been misinformed by local officials.
This case and the most recent corruption allegations in the media demonstrate that Azerbaijan remains a challenging market for international companies and investors. International oil and gas companies should be acutely aware of the entities with which they are dealing and should conduct thorough due diligence on local partners and intermediaries, particularly as to the structure of the companies and any connections that their owners or ultimate beneficiaries may have to governmental officials in Azerbaijan.