Esquenazi: DOJ Wins Appeal On “Instrumentality”

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esquenazi3The 11th Circuit US Court of Appeals handed the Department of Justice a clear victory in the Esquenazi appeal.  Esquenazi was sentenced to 15 years in jail for FCPA violations – the longest criminal sentenced imposed in a criminal FCPA case.

Most importantly, and as predicted, the Eleventh Circuit upheld the Department of Justice’s interpretation of the term “instrumentality” in the definition of a foreign official to include state-owned enterprises owned or controlled by foreign governments.

No one should be surprised.  DOJ’s interpretation was logical, well reasoned and amply supported by logic and statutory construction.  DOJ certainly dodges a big bullet – its interpretation of the term “instrumentality” is the foundation for much of its enforcement activity against bribery of foreign officials at state-owned enterprises, including National Oil Companies and state-owned hospitals.

In the end, the Court boiled down the test going forward to include entities that are “controlled by the government of a foreign country that performs a function the controlling government treats as its own.”

This two-part test focuses first on whether the government “controls” the entity and then whether the function of the entity is something the government “treats as its own.”  These first two factors are “fact-bound” questions.

To resolve the question of “control,” the Court listed several factors including the government’s formal designation of the entity; whether the government has a majority interest in the entity; the government’s ability to hire and fire principals at the entity; and the government’s fiscal relationship to the entity (whether it received profits or covered losses).Esquenazi4

Applying this test, the government’s hand has been vindicated.  FCPA enforcement against a host of state-owned enterprises will continue, including sovereign wealth funds, state-owned or controlled banks, National Oil and Gas Companies, state-run hospitals and physicians who work there, foreign-owned universities and colleges, and a variety of other entities.

In order to decide whether a government function is one that the government “treats as its own,” the Court outlined 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 the entity providing services; (3) whether the entity provides services to the public at large; and (4) whether the public and the government of that foreign country generally perceive the entity to be performing a governmental function.

The Court’s analysis is persuasive.  DOJ’s arguments and enforcement strategy were vindicated.  The Court’s decision is not a surprise.

The Court’s decision follows logic concerning control (equity or voting) over a state-owned entity, public function definition and will reinforce existing legal compliance guidance.

The Esquenazi Court also is a welcome decision in comparison to the district court decisions outlining multi-factor tests for foreign government related entities.  Instead of squaring a multi-factor analysis, the Esquenazi Court focused and tailored the test to define an easier test to administer.

esquenaziFor those who challenged the government’s legal interpretation of the term “instrumentality,” they need to pick and choose better places to challenge the FCPA and the government’s enforcement  program.  In the end, the appeal strengthened the government’s hand and left little room for doubt – the FCPA applies with full force to entities that are controlled by foreign governments.

 

Topics:  Criminal Prosecution, DOJ, FCPA, Instrumentality

Published In: Antitrust & Trade Regulation 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.

© Michael Volkov, The Volkov Law Group | Attorney Advertising

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