Federal Court of Appeals Addresses Oft-Debated Definition of "Instrumentality" Under the Foreign Corrupt Practices Act

On May 16, 2014, the Eleventh Circuit Court of Appeals was the first federal appellate court to weigh in on the controversial definition of "instrumentality" under the Foreign Corrupt Practices Act (FCPA). In United States v. Esquenazi,1 the Eleventh Circuit upheld the government's broad interpretation of the definition of "instrumentality," and set forth a two-part analysis for determining whether an entity is an instrumentality of a foreign government such that its employees would be considered "foreign officials" under the FCPA.

This WSGR Alert outlines the relevant legal principles from the FCPA, provides an overview of the facts and legal analysis conducted in U.S. v. Esquenazi, and informs current and prospective clients on the effects of the decision.

The FCPA and Instrumentality

The FCPA was adopted in 1977 in an effort to prohibit the bribing of foreign officials for the purpose of retaining or obtaining business. It also requires that public companies and other "issuers" of securities file proper financial statements and maintain a system of internal controls. Specifically, the FCPA prohibits "any domestic concern" from "mak[ing] use of the mails or any means . . . of interstate commerce corruptly in furtherance of" a bribe to "any foreign official" or to "any person, while knowing that all or a portion of such money or thing of value will be offered, given, or promised, directly or indirectly, to any foreign official" for the purpose of "influencing any act or decision of such foreign official . . . in order to assist such domestic concern in obtaining or retaining business for or with, or directing business to, any person."2 A "foreign official" is defined under the FCPA as:

Any officer or employee of a foreign government or any department, agency, or instrumentality thereof, or of a public international organization, or any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality, or for or on behalf of any such public international organization.3

The Department of Justice (DOJ) and Securities and Exchange Commission have taken an expansive view of the definition of "foreign official," and government authorities have interpreted the term to apply not only to officials of a foreign government, but also to employees of state-owned entities (SOEs) by virtue of the SOEs' status as an "instrumentality" of the state.4 The primary question before the Eleventh Circuit was whether Telecommunications D'Haiti, S.A.M. (Teleco) was an "instrumentality" under the FCPA such that their officers and employees would be considered "foreign officials."

Overview of U.S. v. Esquenazi

In this case, the Eleventh Circuit addressed alleged bribes paid by Joel Esquenazi and Carlos Rodriguez, owners and respective president and vice president of Terra Telecommunications Corp. (Terra), to employees of Teleco, a Haitian telecom company owned and controlled by the Haitian government. Terra's business involved purchasing phone time from certain foreign vendors, including Teleco, and reselling the minutes to customers in the United States. At one point, Terra's debt to Teleco ballooned to more than $400,000. The DOJ alleged, and testimony at trial established, that Mr. Esquenazi and Mr. Rodriguez paid bribes via various sham companies to Teleco employees in order to reduce its debt.

At trial, the government also introduced the following evidence that Teleco was an instrumentality under the FCPA:

  • the Haitian government's ownership of Teleco;
  • the Haitian president's ability to appoint all of Teleco's board members;
  • the defendants' purchase of a type of insurance typical to transactions involving foreign governments;
  • Teleco's receipt of monopoly power and certain tax advantages from the Haitian government; and
  • the fact that the people of Haiti considered Teleco a public entity.

A jury ultimately convicted Mr. Esquenazi and Mr. Rodriguez for the bribes, and they were sentenced to 15 and 7 years, respectively.5 To date, Mr. Esquenazi's 15-year sentence is the longest ever imposed on an individual for a violation of the FCPA.

The Eleventh Circuit's Analysis

On appeal, the defendants challenged the DOJ's position that Teleco was an instrumentality under the FCPA. In fact, after they were convicted, the defendants presented the trial court with a declaration from the Haitian prime minister that stated, "Teleco has never been and until now is not a State enterprise."6 Notwithstanding the declaration, the defendants argued before the Eleventh Circuit that to qualify as an instrumentality, an entity must be part of an actual government, not provide purely "commercial service[s]" and must provide a traditional government role or function.7

The court rejected the defendants' arguments, relying primarily on principles of statutory interpretation and Congress's purpose in enacting the FCPA, while also considering the Organisation for Economic Cooperation and Development's Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (OECD Convention).8 The court reasoned that to accept the defendants' argument would render the facilitating-payments exception to the FCPA meaningless because its plain text permits payments for "routine governmental action," which may include, among other things, "providing phone service."9 Additionally, the court rejected the defendants' arguments because what is considered a traditional, core, usual, or proper governmental function may change over time or differ from country to country.10

After rejecting each of the defendants' arguments, the court provided guidance to future litigants and articulated a two-part test to determine whether an entity is an instrumentality under the FCPA: An entity is an instrumentality if it is "[1] controlled by the government of a foreign country [and] [2] performs a function the controlling government treats as its own."11

First, when determining whether a government controls an entity, the Eleventh Circuit stated that 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 to the foreign government;
  5. the extent to which the government subsidizes the entity if it fails to break even; and
  6. the length of time these indicia have existed.12

Second, to decide whether the entity performs a function the government treats as its own, the Eleventh Circuit stated that courts and juries should examine whether:

  1. the entity has a monopoly over the function it exists to carry out;
  2. the government subsidizes the costs associated with the entity providing services;
  3. the entity provides services to the public at large in the foreign country; and
  4. the public and the government of that foreign country generally perceive the entity to be performing a governmental function.13

The court emphasized that any analysis under these factors is necessarily a fact-specific inquiry and, in affirming the defendants' convictions, held that Teleco was an instrumentality under the FCPA. Other courts have likewise set forth factor tests, but Esquenazi is the first federal appellate court to speak to the issue.14

What It All Means

These factors may be used by companies when determining whether their customers or business partners are instrumentalities under the FCPA. Additionally, these factors will be useful in conducting due diligence during mergers and acquisitions and the vetting of third-party contractors. However, while these factors are helpful in analyzing whether a particular entity may be an instrumentality, the court's decision does not provide particularly useful guidance on how to apply these factors. Rather than provide a factor-by-factor analysis, the court stated, "Teleco would qualify as a Haitian instrumentality under almost any definition we could craft."15 As such, the court did not address the relevant weight of each of these factors and noted that these factors were non-exhaustive.

The Eleventh Circuit affirms what WSGR FCPA practitioners have been advising clients for many years: If there is any inclination that a customer, business partner, joint venture, or other third party is owned or controlled by a foreign government, be very careful. Companies may consider using the two-part test enumerated in Esquenazi as the standard to evaluate the proper classification of an entity's status under the FCPA. Businesses may consult outside counsel when appropriate, since many companies, depending on the nature of their businesses, may not have the resources to conduct an ad hoc, case-by-case analysis on every customer or third party that may be owned or controlled by a foreign government (i.e., what are generally known as SOEs). Lastly, companies may consider reviewing their anticorruption and antibribery policies and procedures to ensure that they are consistent with the Eleventh Circuit's recent decision.

1 No. 11-15331 (11th Cir. May 16, 2014).

2 15 U.S.C. §§ 78dd-2(a)(1), (3).

3 Id. § 78dd-2(h)(2)(A).

4 A Resource Guide on the U.S. Foreign Corrupt Practices Act, Criminal Division of the U.S. Department of Justice and Enforcement Division of the U.S. Securities and Exchange Commission (November 14, 2012), available at http://www.justice.gov/criminal/fraud/fcpa/guide.pdf.

5 A former controller at Terra also pleaded guilty and received a sentence of 24 months, and two persons who acted as middlemen in the scheme received sentences of 57 months and 6 months. The Esquenazi case is a grim reminder of the increasingly serious penalties for individuals found to have violated the FCPA.

6 Esquenazi, at 8.

7 Id. at 11, 14, 18-19.

8 Dec. 17, 1997, 37 I.L.M. 1 (ratified Dec. 8, 1998, entered into force Feb. 15, 1999). The OECD Convention requires its parties to criminalize the bribery of foreign public officials in international business transactions. See FCPA Guide, at 7.

9 15 U.S.C. §§ 78dd-2(b) and (h)(4)(A); Esquenazi, at 14 (stating that principles of statutory interpretation do not permit courts to interpret a statute in a manner that renders portions of it meaningless).

10 Id. at 19 (citing First Nat'l City Bank v. Banco Para El Comercio Exterior de Cuba, 462 U.S.611, 634 n.27, 103 S. Ct. 2591, 2603 n.27 (1983)).

11 Esquenazi, at 20.

12 Id. at 21.

13 Id. at 22-23.

14 See Minutes in Chamber Order at 9, United States v. Noriega, 2:10-cr-01031-AHM (C.D. Cal. Apr. 20, 2011); United States v. Carson, No. 09-77, 2011 WL 5101701 at *4 (C.D. Cal. May 18, 2011).

15 Esquenazi, at 20.

 

Topics:  Appeals, DOJ, FCPA, Foreign Entities, Foreign Official, Instrumentality, SEC, Teleco, Terra Telecommunications, 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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