In First Ruling by a Court of Appeals, Eleventh Circuit Adopts Broad Definition of “Foreign Instrumentality” under FCPA

more+
less-

The Foreign Corrupt Practices Act (“FCPA”) prohibits bribing a “foreign official,” yet courts have rarely had the chance to weigh in on who exactly qualifies as a foreign official. Enforcement agencies have taken the position that state-owned entities generally are covered “foreign instrumentalities”—and therefore their employees are “foreign officials”1—while others have countered that only entities performing a traditional, core government function, not a commercial function, count as “foreign instrumentalities.” Many recent investigations and prosecutions have involved employees of state-owned or controlled entities such as oil companies, banks, and healthcare providers, so the scope of these definitions is crucial to the government’s enforcement activities.

On May 16, 2014, the U.S. Court of Appeals for the Eleventh Circuit—which has jurisdiction over federal cases in Florida, Georgia, and Alabama—issued the first appellate court decision interpreting the term “foreign instrumentality.” Siding with the government, the Court upheld the convictions of two owners of a Florida-based company who had been found to have bribed employees of the Haitian telecommunications company, Teleco.

The Eleventh Circuit’s decision clarifies that a separate inquiry into an entity’s function—as well as the level of governmental control—is required by the statute, holding that “[a]n ‘instrumentality’ under . . . the FCPA is [1] an entity controlled by the government of a foreign country that [2] performs a function the controlling government treats as its own.”2 Each of these two separate requirements must be satisfied:  “[P]rovision of a service by a government-owned or controlled entity is not by itself sufficient” for that entity to qualify as an “instrumentality” under the FCPA.  Furthermore, the decision’s “definition of ‘instrumentality’ requires that the entity perform a function the government treats as its own.”3

As to the first requirement, the Court put forth several non-exhaustive factors to guide the determination of whether a foreign government controls an entity:

  • The foreign government’s designation of the entity
  • Whether the government has a majority interest in the entity
  • The government’s ability to hire and fire the entity’s principals
  • The extent to which the entity’s profits, if any, go directly into government coffers and conversely whether the government funds the entity if it fails to break even
  • The length of time these indicia have existed

The Court noted that these factors are informed by the commentary to the Organization for Economic Cooperation and Development’s (“OECD”) Anti-Bribery Convention, which the United States ratified in 1998.4 In reaching its conclusions, the Court found significant that Congress amended the FCPA in order to bring the United States into compliance with the OECD Convention but did not change the definition of “foreign instrumentality” or “foreign official,” indicating that Congress believed that the existing statute already complied with the OECD’s definitions of those terms.5

As to the second requirement, the Court found that the following non-exhaustive list of factors should be considered in determining whether the entity “performs a function the government treats as its own”:

  • Whether the entity has a monopoly
  • Whether the government subsidizes the entity’s costs
  • Whether the entity provides services to the public at large
  • Whether the public and the government of the foreign country generally perceive the entity to be performing a governmental function6

Again, the Court drew these factors in part from the OECD’s guidance about its own Anti-Bribery Convention, as well as U.S. Supreme Court and other U.S. precedent.7 The decision emphasized that another country’s definition of what constitutes a governmental function may well be different from the United States’, and courts must look to the objective manifestations of whether the particular foreign government and foreign populace view the entity’s function as a governmental function.8 The factors the Court set forth for these two requirements are similar but not identical to those set forth by the government in its 2012 Resource Guide.9

Conclusion

Although the Court noted that the entity at issue “would qualify as a Haitian instrumentality under almost any definition we could craft,”10 and although the Court has jurisdiction over only three states, this decision is likely to be influential because it is the first appellate decision to address this crucial definition. The decision likely means that companies will face even stronger headwinds than previously if they attempt to avoid prosecution based on an argument that the government body at issue did not perform “core” governmental functions.11 Notably, the Court set no bright-line rules, nor did it opine on which factor or factors may be most significant, but instead established a fact-based framework to be applied in each case’s particular circumstances.  The Court’s reliance on the guidelines set forth by the OECD could likewise lead future courts to look to the OECD’s guidance on other interpretive issues that arise under the FCPA.  This decision underlines the need for a case-by-case analysis and for companies to implement policies and procedures that ensure genuine engagement with compliance or legal personnel on these sensitive issues.

Footnotes

1

 
See The Criminal Division of the U.S. Dep’t of Justice & the Enforcement Division of the U.S. Securities and Exchange Commission, FCPA: A Resource Guide to the U.S. Foreign Corrupt Practices Act at 20-21 (Nov. 2012) (“Resource Guide”), available at http://www.justice.gov/criminal/fraud/fcpa/guide.pdf (stating that determining whether an entity is an “instrumentality” “requires a fact-specific analysis of an entity’s ownership, control, status, and function” and listing numerous non-exclusive factors).

2

 
United States v. Esquenazi, No. 11-15331 (11th Cir. May 16, 2014), Slip Op. at 20, available at http://www.ca11.uscourts.gov/opinions/ops/201115331.pdf.

3

 
Id. at 25, 28 (emphases in original).

4

 
Id. at 15, 21.

5

 
Id. at 15-17. The Court did not address several defense arguments based on the FCPA’s legislative history, including that early drafts of the FCPA specifically included “state-owned entities” in the definition of foreign government, but the final version passed by Congress did not.

6

 
Id. at 22-23.

7

 
Id. at 23.

8

 
See id. at 19 & n.8.

9

 
See Resource Guide at 20.

10

 
Esquenazi Slip Op. at 20.

11

 
As the Resource Guide also points out, bribery to employees of an entity that may not fall under the definition of “foreign instrumentality” could very well violate the FCPA’s accounting provisions or other federal law. Resource Guide at 21.
Because private bribery is prohibited by other U.S. laws such as the Travel Act and by the anti-bribery laws of many other countries, such as the U.K., it would not be advisable to adopt anti-corruption policies and practices that place too much emphasis on whether a counterparty is a “foreign instrumentality.” Rather, companies should continue to adopt a broad approach to preventing bribery.

 

Topics:  Anti-Corruption, Compliance, FCPA, Foreign Official, Instrumentality

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.

© Dechert LLP | Attorney Advertising

Don't miss a thing! Build a custom news brief:

Read fresh new writing on compliance, cybersecurity, Dodd-Frank, whistleblowers, social media, hiring & firing, patent reform, the NLRB, Obamacare, the SEC…

…or whatever matters the most to you. Follow authors, firms, and topics on JD Supra.

Create your news brief now - it's free and easy »