Eleventh Circuit Adopts Broad Definition of Government "Instrumentality" in Recent FCPA Case - Ruling Underscores the Need to Continually Assess and Update Anti-Bribery Policies and Practices

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The Foreign Corrupt Practices Act (FCPA) makes it unlawful for a person or company to provide money or anything of value to any foreign official in order to obtain or retain business or to acquire an improper business advantage. The FCPA defines a "foreign official" as "any officer or employee of a foreign government or any department, agency, or instrumentality thereof." However, the FCPA does not define "instrumentality," and the definition of this word became the central issue in United States v. Esquenazi.

Case Background

In Esquenazi, two co-owners of a Florida-based phone service company, Terra Telecommunications, were indicted on 21 counts of money laundering, wire fraud and substantive FCPA violations. The United States alleged that these two individuals paid bribes to certain officials of the Haiti-based telecommunications company, Telecommunications D'Haiti, S.A.M. (Teleco). At trial, the United States offered a substantial amount of evidence in an effort to show that Teleco was an "instrumentality" of the Haitian government under the FCPA, meaning that any bribes paid to Teleco officials would have straightforwardly constituted a violation the FCPA. The United States presented evidence that:

  • The Banque de la Republique d'Haiti (BRH), the central bank of Haiti, which is analogous to the US Federal Reserve, held a 97% ownership in Teleco.
  • The Haitian President appointed all of Teleco's board members.
  • Teleco was given special tax advantages and granted a monopoly on telecommunications services within the country.
  • Teleco was "considered" a public entity.

On this and some further evidence, the trial court concluded that Teleco was an "instrumentality" of the Haitian government, and therefore found the defendants guilty on all counts for their conduct in giving bribes. The verdict was affirmed on appeal before the Eleventh Circuit Court of Appeals.

On appeal, the Eleventh Circuit noted that it had never previously defined "instrumentality", nor had any of the other courts of appeal. Although the Eleventh Circuit stated that it "believe[d] Teleco would qualify as a Haitian instrumentality under almost any definition [the Court] could craft", the Court nonetheless proceeded to introduce a formal definition of "instrumentality" in order to provide corporations and the government with "ex ante direction about what an instrumentality is."

The Eleventh Circuit wrote, "an 'instrumentality' under section 78dd-2(h)(2)(A) of the FCPA is an entity [1] controlled by the government of a foreign country [2] that performs a function the controlling government treats as its own." In so declaring, the Eleventh Circuit chose to follow the DOJ and SEC's broad understanding of the word of "instrumentality," and found opposing arguments (including those suggesting that only an actual, official part of a government could be considered an "instrumentality") unpersuasive.

The Eleventh Circuit also noted that "what constitutes control and what constitutes a function the government treats as its own are fact-bound questions" which cannot be satisfactorily answered in the abstract. Even so, the Eleventh Circuit explicitly provided "a list of some factors that may be relevant to deciding the issue." The Court wrote, "To decide if the government 'controls' an entity, courts and juries should look to [1] the foreign government's formal designation of that entity; [2] whether the government has a majority interest in the entity; [3] the government's ability to hire and fire the entity's principals; [4] the extent to which the entity's profits, if any, go directly into the governmental fisc, and […] the extent to which the government funds the entity if it fails to break even; and [5] the length of time these indicia have existed".

To decide if an entity performs a function the government treats as its own, "courts and juries should examine [1] whether the entity has a monopoly over the function it exists to carry out; [2] whether the government subsidizes the costs associated with the entity providing services; [3] whether the entity provides services to the public at large in the foreign country; and [4] whether the public and the government of that foreign country generally perceive the entity to be performing a governmental function."

The Effect of the Ruling and Recommend Compliance Measure

The Eleventh Circuit's ruling has several potentially important implications for businesses with international operations. First, the ruling clears up significant confusion and debate surrounding the concept of a government "instrumentality." Instrumentalities are now characterized as having two specific attributes: (1) being controlled by a foreign government and (2) performing a function that the foreign government treats as its own. Second, the Esquenazi ruling reaffirms the trend established in United States v. Aguilar to understand "foreign official" in a broad manner such that the FCPA is more widely-applicable. Third, the ruling underscores the need for corporate compliance officers to continually assess and update their anti-bribery policies and practices.

Recommended measures for compliance officers may include the following:

  • Determining whether foreign state-owned business partners qualify as government instrumentalities under the Eleventh Circuit's stated criteria
    Investigating any reports or allegations of bribery with special consideration as to whether the bribe was made to an individual who may be considered to be an "instrumentality" of the foreign government under the FCPA
  • Conducting FCPA and anti-corruption compliance due diligence in the context of mergers, acquisitions, and joint ventures, which takes into consideration the effects of the Esquenazi ruling, as well as other recent developments
  • Reviewing the company's policies guiding interactions with respect to all employees of any foreign state-owned businesses
  • Updating the company's training and education programs to ensure that the relevant persons fully understand the breadth of the Esquenazi decision and how the decision should impact their interactions with employees of any foreign state-owned business

Topics:  Anti-Corruption, Bribery, Corruption, FCPA, Foreign Official, Instrumentality

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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