FCPA: The First Circuit Court Decision Defining Instrumentality

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The Eleventh Circuit Court of Appeals handed down the first decision on the question of who is a foreign official under the Foreign Corrupt Practices Act. Specifically, the Court considered the question of what is an “instrumentality” as that term is employed in the Act. U.S. v. Esquenazi, No. 11-15331 (11th Cir. Opinion filed May 16, 2014).

Joel Esquenazi and Carlos Rodriguez, the co-owners of Terra Telecommunications, were indicted and convicted after a jury trial of conspiracy, violating the FCPA and money laundering in connection with business conducted with Telecommunications D’Haiti, S.A.M. (Telco). A critical question in the case centered on the relationship of Telco to the Haitian government and whether it was an instrumentality within the meaning of the FCPA.

Telco was formed in 1968, according to an expert witness at trial. The Haitian government gave the company a monopoly on telecommunication services and significant tax advantages. Initially the government appointed two members of the board and its Director General, the senior position at the company, was designated by executive order. Subsequently, 98% of its ownership passed to the National Bank of Haiti which split into two entities. The Banque de la Republique d’ Haiti or BHR, roughly the functional analogue of the U.S. Federal Reserve, retained ownership of Telco.

The S.A.M. in Telco’s name meant that the firm was not by statute a government entity but de facto since Haiti did put money into the enterprise. Telco was privatized between 2009 and 2010 and was considered part of “public administration.” While there was no law stating that Telco was a public entity, the “government, officials, everyone consider[ed] Teleco as a pubic administration.” When the anti-corruption law was passed in 2008 Telco was cited as a public administration.

In 2001 Terra began discussions with Teleco to purchase time. By October of that year Terra owed Teleco a substantial sum. Ultimately an arrangement was entered into, evidenced in part by a consulting agreement, in which an official of Teleco shaved time off the bill in return for a kickback of portions of those amounts. The payments were channeled through shell companies. Over the period Terra paid about $822,000 in return for a reduction in its bills of about $2 million.

In April 2003 the President of Haiti removed the person at Teleco with whom the defendants dealt. When the replacement was appointed an new arrangement was entered into in which a series of payments totaling $75,000 was channeled to the new appointee. Terra did not receive invoices. Each transfer became a substantive FCPA count in the indictment.

During the period Mr. Esquenazi, the majority owner of Terra, served as its President and CEO. Mr. Rodriguez, the minority owner, served as EVP of Operations. In prior dealings with Teleco, Terra had obtained political-risk insurance which is only available when a foreign government is a party to an agreement.

The question of whether Teleco was an instrumentality within the meaning of the FCPA was submitted to the jury. It was instructed that an “instrumentality of a foreign government is a means or agency through which a function of the foreign government is accomplished. State-owned or state-controlled companies that provide services to the public may meet this definition . . .” The jury was also instructed that it may consider a list of five factors in making its determination: 1) “whether it [Telco] provides services to the citizens and inhabitants of Haiti . . .” 2) if “its key officials and directors are government officials or are appointed by government officials . . .” 3) “the extent of Haiti’s ownership . . .” including if it owns a majority of the shares, provides support, special tax treatment or obtains revenue from government required fees; 4) “Teleco’s obligations and privileges under Haitian law . . .” and 5) if “Teleco is widely perceived and understood to be performing official or governmental functions.”

The Eleventh Circuit began its analysis with the text of the statute. It defines the term “foreign official” as “any officer or employee of a foreign government or any department, agency, or instrumentality thereof.” (emphasis original). The term instrumentality which is key to the issues in this case is not defined in the statute.

The Court developed a definition by considering first standard definitions of the word and second other provisions in the Act. Initially, the available definitions for the term establish that an instrumentality is “’something that serves as an intermediary or agent through which one or more functions of a controlling force are carried out: a part, organ, or subsidiary branch esp. of a governing body,’” quoting Webster’s Third New International Dictionaries. The parties agree that an instrumentality must perform a governmental function at its behest. They do not agree on what functions count as government business.

To resolve this question the Court turned to its second key point – other provisions in the Act. One provision which provides guidance concerns grease payments. It establishes an exception to the anti-bribery provisions. Those payments are defined in the FCPA as being for “routine governmental action . . .” including “an action . . . ordinarily and commonly performed by a foreign official in . . . .providing phone service.” This definition undercuts the notion that a government controlled entity providing a commercial service is not an instrumentality.

The point is underscored by the 1998 amendments to the FCPA, added to conform it to the OECD convention. That convention defines foreign public official as “any person exercising a public function for a foreign country, including for a public enterprise.” The commentaries to the convention explain that a public enterprise is one over which a government may exercise a dominant influence. An official of such an enterprise is deemed to perform a public function unless it operates on a normal commercial basis. Since the amendments were made to conform the FCPA to the Convention of which the U.S. is a signatory, the Court was “constrained to interpret “instrumentality” under the FCPA so as to reach the type of officials the United States agreed to stop domestic interests from bribing when it ratified the OECD Convention.” It thus rejected the defendants assertion that would limit the duties performed to “core government functions.”

Viewed in this context the Court defined the term instrumentality “as an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own . . . what constitutes control and what constitutes a function the government treats as its own are fact-bound questions . . . To decide if the government ‘controls’ an entity, courts and juries should look to the foreign government’s formal designation of that entity; whether the government has a majority interest in the entity; the extent to which the entity’s profits, if any, go directly into the governmental fisc, and, by the same token, the extent to which the government funds the entity if it fails to break even; and the length of time these indicia have existed.” These factors were informed by the OECD Convention commentary.

Similarly, to determine if an entity performs a function the government treats as its own, a number of factors should be considered including “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 foreign country; and whether the public and the government of that foreign country generally perceive the entity to be performing a governmental function.” These factors are also drawn from the OECD Convention commentary.

In this case the list of factors identified by the District Court in its jury instruction is similar but not identical to those identified. While the defendants argue that the instructions given caused the jury to convict them solely because Teleco was a government owned entity that is not correct. Read in context the jury instructions make it clear that service by a government-owned entity is not sufficient. Rather, the instruction made it clear that only a means or agency that performs a “function of the foreign government would qualify as an instrumentality.” This covers the substance of the definition crafted here. Accordingly, the instruction was sufficient and the convictions were affirmed.

 

Topics:  Appeals, FCRA, Foreign Official, Teleco, Terra Telecommunications

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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