Esquenazi Appeal Confirms the Broad Reach of the Foreign Corrupt Practices Act (FCPA)

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In last month’s closely watched Esquenazi decision, a U.S. court of appeal weighed in on the definition of “instrumentality” under the Foreign Corrupt Practices Act (FCPA) for the first time. The case—an appeal to the 11th Circuit—involved the upholding of the ruling in United States v Esquenazi, in which the longest ever individual sentence for violating the FCPA was handed down when two executives were sentenced for scheming to bribe government officials.

Three Key Elements of the Ruling

1) The Interpretation of “Instrumentality”

This case marked the first time an appellate court has addressed the question of who is a foreign official under the FCPA.

The FCPA defines foreign official as “any officer or employees of a foreign government or any department, agency, or instrumentality thereof.”  

In the appellate opinion, an instrumentality under the FCPA was defined as “an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own.”  

2) Determining Government Control

The court ruled that what constitutes “control” is a question to be determined depending on the particular facts of the case at issue. However it suggested looking at the following factors:

  • Foreign government’s formal designation of that entity
  • Whether the government has a majority interest
  • Government’s ability to hire and fire the entity’s principals
  • Extent to which the entity’s profits, if any, go directly into the governmental treasury,
  • Extent to which the government funds the entity if it fails to break even
  • Length of time these indicia have existed

3) Determining Whether an Entity is Performing a Governmental Function  

In deciding if an entity performs a function the government treats as its own, the court suggested examining:

  • Whether the entity has a monopoly over the function it exists to carry out
  • Whether the government subsidizes the costs associated with the entity providing services
  • Whether the entity provides services to the public at large in the country
  • Whether the public and the government of that foreign country generally perceive the entity to be performing a governmental function.

Implications for Future FCPA Cases

While this ruling does not create a major change since it essentially upholds the lower court rulings and DOJ Guidance, the Esquenazi appeal supports the proposition that FCPA violations can be triggered even when illegal payments are not offered to a foreign official.

It is now more clear than ever that the FCPA can be violated when someone is bribed who, although not a government official, may be an “instrumentality” of the government. For example, money paid to executives or employees of hospitals in communist countries, which may be owned in large part by the government, could result in a company falling afoul of the FCPA provisions.

Failure to operate within the boundaries of the FCPA can result in significant reputational damage, along with the more tangible threat of fines, penalties—and in some cases disbarment from bidding on future work.

There is now an even stronger argument for organizations to ensure that their policies and training on bribery and corruption are broad enough to define and prohibit bribes or questionable payments to employees of instrumentalities of foreign governments.

Download our white paper A Holistic Approach to Anti-Corruption Compliance for insights into building an effective anti-corruption compliance program.

- See more at: http://www.navexglobal.com/blog/2014/06/04/esquenazi-appeal-confirms-broad-reach-foreign-corrupt-practices-act-fcpa#sthash.pGrO8giM.dpuf

In last month’s closely watched Esquenazi decision, a U.S. court of appeal weighed in on the definition of “instrumentality” under the Foreign Corrupt Practices Act (FCPA) for the first time. The case—an appeal to the 11th Circuit—involved the upholding of the ruling in United States v Esquenazi, in which the longest ever individual sentence for violating the FCPA was handed down when two executives were sentenced for scheming to bribe government officials.

Three Key Elements of the Ruling

1) The Interpretation of “Instrumentality”

This case marked the first time an appellate court has addressed the question of who is a foreign official under the FCPA.

The FCPA defines foreign official as “any officer or employees of a foreign government or any department, agency, or instrumentality thereof.”  

In the appellate opinion, an instrumentality under the FCPA was defined as “an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own.”  

2) Determining Government Control

The court ruled that what constitutes “control” is a question to be determined depending on the particular facts of the case at issue. However it suggested looking at the following factors:

  • Foreign government’s formal designation of that entity
  • Whether the government has a majority interest
  • Government’s ability to hire and fire the entity’s principals
  • Extent to which the entity’s profits, if any, go directly into the governmental treasury,
  • Extent to which the government funds the entity if it fails to break even
  • Length of time these indicia have existed

3) Determining Whether an Entity is Performing a Governmental Function  

In deciding if an entity performs a function the government treats as its own, the court suggested examining:

  • Whether the entity has a monopoly over the function it exists to carry out
  • Whether the government subsidizes the costs associated with the entity providing services
  • Whether the entity provides services to the public at large in the country
  • Whether the public and the government of that foreign country generally perceive the entity to be performing a governmental function.

Implications for Future FCPA Cases

While this ruling does not create a major change since it essentially upholds the lower court rulings and DOJ Guidance, the Esquenazi appeal supports the proposition that FCPA violations can be triggered even when illegal payments are not offered to a foreign official.

It is now more clear than ever that the FCPA can be violated when someone is bribed who, although not a government official, may be an “instrumentality” of the government. For example, money paid to executives or employees of hospitals in communist countries, which may be owned in large part by the government, could result in a company falling afoul of the FCPA provisions.

Failure to operate within the boundaries of the FCPA can result in significant reputational damage, along with the more tangible threat of fines, penalties—and in some cases disbarment from bidding on future work.

There is now an even stronger argument for organizations to ensure that their policies and training on bribery and corruption are broad enough to define and prohibit bribes or questionable payments to employees of instrumentalities of foreign governments.

Download our white paper A Holistic Approach to Anti-Corruption Compliance for insights into building an effective anti-corruption compliance program.

 

Topics:  Appeals, FCPA, Foreign Entities, Foreign Official, Instrumentality, Popular, SEC, US v Esquenazi

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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