In general, the Foreign Corrupt Practices Act (“FCPA”) prohibits the payment of money or anything of value to a foreign official in order to influence any act or decision of the foreign official in his or her official capacity or to secure any improper advantage in order to obtain or retain business. See 15 U.S.C. § 78dd-1. “Foreign official” is defined as “any officer or employee of a foreign government or any department, agency, or instrumentality thereof . . . .” Id. at §78dd-1(f)(1)(A) (emphasis added). The DOJ and SEC have routinely relied on the term “instrumentality” to charge unlawful payments made to employees of various state-owned entities, such as employees of state-owned hospitals, oil companies, and telecommunication companies.
According to the Resource Guide issued by the Criminal Division of the DOJ and the Enforcement Division of the SEC, whether a particular entity is considered an “instrumentality” under the FCPA depends on a “fact-specific analysis of an entity’s ownership, control, status, and function.” See A Resource Guide to the U.S. Foreign Corrupt Practices Act. Until recently, few courts have had occasion to opine on the definition of instrumentality and no Court of Appeals had considered the issue.
This month, in United States v. Esquenazi, No. 11-15331, 2014 WL 1978613 (11th Cir. May 16, 2014), the Eleventh Circuit affirmed the convictions of two individuals for FCPA violations. The government alleged that the defendants made unlawful payments to officials at Telecommunications D’Haiti, S.A.M. (“Teleco”), in exchange for reductions in the company’s bills. The main issue on appeal was whether Teleco was an instrumentality of Haiti under the FCPA. The Eleventh Circuit found that the term “instrumentalities” includes entities that: (1) are “controlled by the government of a foreign country,” and (2) “perform a function the controlling government treats as its own.” Id. at *8, *11. The court identified a list of factors to be considered for each element. While the court noted that it looked to the OECD Anti-Bribery Convention and commentaries for guidance, the factors the court identified are strikingly similar to the factors listed in the DOJ/SEC Resource Guide.
To determine whether a company is “controlled” by the government, the court considered the following factors:
(1) The foreign government’s formal designation of the entity,
(2) Whether the government has a majority ownership 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 government,
(5) The extent to which the government funds the entity, and
(6) The length of time each factor has existed.
With respect to whether a company performs a function that the foreign government treats as its own, the court considered the following factors:
(1) Whether the entity has a monopoly over the function it exists to carry out,
(2) Whether the government subsidizes the costs associated with entity providing services,
(3) Whether the entity provide services to the public at large, and
(4) Whether the public and the government generally perceive the entity to be performing a governmental function.
Relying on these factors, the Esquenazi court concluded that there was sufficient evidence for a jury to find that Teleco was an “instrumentality” of Haiti. Among other things, Teleco had been granted a monopoly over telecommunication service, received various tax advantages, was 97% owned by Haiti’s national bank, and its senior officers were chosen by the president of Haiti.
Given that many of the factors used by the court also appear in the DOJ/SEC Resource Guide, the court’s decision is unlikely to lead to any dramatic changes in the way the DOJ or SEC charges FCPA violations. The opinion, however, does serve as a reminder for companies doing business in foreign jurisdictions that the prohibition of making payments to a “foreign official” may be broader than it initially appears. Accordingly, it is critical for companies to fully evaluate their risk of violating the FCPA, including whether they are doing business with “instrumentalities” of foreign governments, and to implement robust compliance policies and procedures to ensure employees and third parties acting on the company’s behalf do not run afoul of the FCPA.