Flailing at the Definition of a “Foreign Official”

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http://corruptioncrimecompliance.com/wp-content/uploads/2012/11/imagesCA84PDI6.jpgPerhaps I was being overly optimistic.  I thought the Justice Department and the SEC could bring a little clarity to the term “instrumentality” in the definition of a “foreign official” under the FCPA.  It was wishful thinking on my part.

In fairness, the Justice Department has a pending appeal before the 11th Circuit on this issue and any statements made could definitely have been used against the Department in the appeal.  Instead, we are left with standards which look more like roadkill – a mish mosh of factors developed by two district court judges, and a pending appeal on another in the 11th Circuit. 

Depending on political leanings, judges can sometimes “legislate” from the bench.  Hopefully, the 11th Circuit will clean this issue up a little bit or at least ask Congress to do so. 

The cleanest solution to the “instrumentality” and “foreign official” test is to adopt a standard which covers private entities that are controlled by foreign governments through ownership or voting power.  In analogous terms, it means de jure and de facto control should be the standard.  It is the easiest solution available and will help companies and practitioners ensure compliance.

But there is no chance that Congress will step in and fix this problem.  It is too politically dicey and there is too much controversy surrounding the FCPA for a simple and clean solution.  While the Eleventh Circuit could adopt such a standard, I am not optimistic.  Judges tend to like multi-part tests and factors to weigh so that they can create flexibility to address some situations which may not be foreseeable at the time of the court decision. 

Unfortunately, a judicial solution or conflict among the circuits will take years to occur so that the issue can be resolved, if necessary, by the Supreme Court.  Congress should do something about this.  It is in its wheelhouse of constitutional responsibilities. 

The FCPA Guidance provides little “guidance” on the term “instrumentality” in the “foreign official” definition, citing its “long used analysis of ownership, control, status and function” to decide whether an entity is an agency or instrumentality of a foreign government.  

In recognition of the problem it faces in this area, the FCPA Guidance tries to walk a tight rope by stating that “an entity is unlikely to qualify as an instrumentality if the government does not own or control a majority of its shares.”  That is about as good as it can get.

The problem for DOJ and the SEC is that, in a prior enforcement action, they extended the “instrumentality” definition to bribes paid to a foreign telecommunications company which was 43 percent owned by the Malaysian government.  The FCPA Guidance tries to distinguish this situation by suggesting that the government had a “special shareholder” status which gave it veto power over major operational decisions, and that a number of the company leaders were government officials.  This is a distinction without any persuasion since it is not unusual for minority shareholders to have protections or veto authority involving major corporate decisions.

DOJ and the SEC could not disavow the 43 percent standard it applied in the one case.  They had to try and shoehorn the situation into a workable ownership or control test.  They gave it a good try but they were a victim of their own success. 

The issue will remain muddy for the years to come.  It makes life a little bit more difficult when advising companies on compliance.  My fingers are crossed that a more practical solution will be adopted either by the courts or by Congress.