Common Sense In The Definition Of ‘Instrumentality’ Under The FCPA

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7K0A0032In what can only be called a judicial decision based on common sense the 11th Circuit Court of Appeals, in an opinion released on May 16, upheld the convictions of Joel Esquenazi and Carlos Rodriguez for violations of the Foreign Corrupt Practices Act (FCPA) and certain US anti-money laundering (AML) laws. The two had engaged in a long running bribery scheme with the Haitian telephone company, Telecommunications d’Haiti, S.A.M (Teleco). The pair were convicted and sentenced to lengthy jail terms, Esquenazi receiving 15 years and Rodriguez receiving 7 years. In this post, I will review the 11th Circuit’s opinion and tomorrow I will try and articulate some of its lessons for the compliance practitioner.

This opinion was the first time that a Court of Appeals had reviewed the FCPA question of what is an ‘instrumentality’ under the Act. Both defendants had argued that instrumentality could only mean (1) “that only an actual part of the government would qualify as an instrumentality” or (2) the FCPA should be construed to encompass only foreign entities performing ‘core’ governmental functions similar to departments or agencies. The Court rejected both arguments.

As to the first argument, the Court said “that contention is too cramped and would impede the “wide net over foreign bribery” Congress sought to cast in enacting the FCPA.” The court rejected several points that the defense raised in the second argument. In addition to some rejections of technical statutory constructions, the Court went into detail about two separate Congressional actions regarding the FCPA.

Grease Payments

The Court noted that the facilitation payment exemption to the FCPA specifically excepted liability “to FCPA liability for “any facilitating or expediting payment to a foreign official . . . the purpose of which is to expedite or to secure the performance of a routine governmental action by a foreign official.”” Further, a ““Routine governmental action” is defined as “an action . . . ordinarily and commonly performed by a foreign official in,”” among other things, “providing phone service.” If an entity involved in providing phone service could never be a foreign official so as to fall under the FCPA’s substantive prohibition, there would be no need to provide an express exclusion for payments to such an entity. In other words, if we read “instrumentality,” as the defendants urge, to categorically exclude government-controlled entities that provide telephone service, like Teleco, then we would render meaningless a portion of the definition of “routine governmental action” in section 78dd-2(b). [all citations omitted] In other words, to say that Teleco could not be an instrumentality would render meaningless the plain words of the statute.

US Treaty Obligations

Next the Court turned to the 1998 amendments to the FCPA, which Congress enacted, in part, to ensure that the US was in compliance with its treaty obligations, as a signatory to the Organization for Economic Cooperation and Development’s (OECD) Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (the “Convention”). After noting that “In joining the OECD Convention, the United States agreed to “take such measures as may be necessary to establish that it is a criminal offence under [United States] law for any person intentionally to offer, promise or give . . . directly or through intermediaries, to a foreign public official . . . in order that the official act or refrain from acting in relation to the performance of official duties, in order to obtain or retain business or other improper advantage in the conduct of international business.””; the Court then said that under the OECD treaty, a ““Foreign public official” is defined to include “any person exercising a public function for a foreign country, including for a . . . public enterprise.”” Finally, the Court stated, “An official of a public enterprise shall be deemed to perform a public function unless the enterprise operates on a normal commercial basis in the relevant market, i.e., on a basis which is substantially equivalent to that of a private enterprise, without preferential subsidies or other privileges.”

With these definitions as a backdrop, the Court found that in making the 1988 changes to the FCPA, the law itself was changed to meet the OCED Convention. The Court stated that since Congress affirmatively changed the law to meet certain requirements in the Convention which the prior version of the FCPA did not cover; the fact that Congress did not see the need to change the definition of instrumentality to meet the treaty obligations was evidence that Congress believed that the FCPA definition of instrumentality met the language of the OECD Convention. To conclude otherwise “would put the United States out of compliance with its international obligations.”

The Test to Determine Instrumentality

Here the Court started with the premise that “Specifically, to decide in a given case whether a foreign entity to which a domestic concern makes a payment is an instrumentality of that foreign government, we ought to look to whether that foreign government considers the entity to be performing a governmental function.” From this starting point, the Court said that “An “instrumentality” under section 78dd-2(h)(2)(A) of the FCPA is an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own.”

From this the Court developed two key analyses. First, does a foreign government ‘control’ an entity, what I call the “Control Test”? Second, is “deciding if the entity performs a function the (foreign) government treats as its own”; what I call the “Functions Test”?

1. Control Test

With the caution that “It would unwise and like impossible to exhaustively answer them in the abstract”; the Court said, “For today, we provide a list of some factors that may be relevant to deciding the issue” of the Control Test. These factors are:

  • The foreign government’s formal designation of the entity;
  • Whether the government has an interest in the entity;
  • The government’s ability to hire and fire the entity’s principals;
  • The extent to which the entity’s profits, if any, go directly into the governmental fisc;
  • The extent to which the government funds the entity if it fails to break even; and
  • The length of time these indicia have existed.

2. The Functions Test

As to this second analysis, the Court set out the following factors to determine if the entity performs a function the government treats as its own:

  • Does the entity have a monopoly over the function it exists to carry out;
  • Does the foreign government subsidize the costs associated with the entity providing the services;
  • Does the entity provide services to the public at large in the foreign Country; and
  • Does the foreign government generally perceive the entity to be performing a governmental function?

The Court then went on to analyze the trial court’s jury instructions in light of their two-part formulation, which was the following:

One, whether it provides services to the citizens and inhabitants of Haiti.

Two, whether its key officers and directors are government officials or are appointed by government officials.

Three, the extent of Haiti’s ownership of Teleco, including whether the Haitian government owns a majority of Teleco’s shares or provides financial support such as subsidies, special tax treatment, loans or revenue from government mandated fees.

Four, Teleco’s obligations and privileges under Haitian law, including whether Teleco exercises exclusive or controlling power to administer its designated functions.

And five, whether Teleco is widely perceived and understood to be performing official or governmental functions.

The Court of Appeals found that the trial court jury instructions met the formulation it had set out by stating, “Read in context, the district court’s instructions make plain that provision of a service by a government-owned or controlled entity is not by itself sufficient. The district court explained only that an entity that provides a public service “may” meet the definition of “instrumentality,” thus indicating that providing a service is not categorically excluded from “a function of the foreign government.” But the sentence just before explained with no equivocation that only “a means or agency [that performs] a function of the foreign government” would qualify as an “instrumentality.”

Tomorrow I will present the lesson that can be gleaned from this opinion, for the compliance practitioner in a FCPA compliance program.

 

Topics:  Anti-Money Laundering, Appeals, FCPA, Instrumentality, OECD, Treaties

Published In: General Business Updates, Criminal Law Updates, International Trade Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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