U.S. Court of Appeals Provides Long-Awaited Guidance Regarding Whether an Entity Should be Considered an ‘Instrumentality’ of a Foreign Government under the FCPA

In a decision with significant implications regarding the application of the Foreign Corrupt Practices Act (“FCPA”), the U.S. Court of Appeals for the Eleventh Circuit has clarified the framework for determining whether an entity will be considered an “instrumentality” of a foreign government for purposes of the FCPA. In establishing a fact-based approach to this critical determination, the Court essentially adopted the U.S. Department of Justice’s (“DOJ”) broad definition of “instrumentality”, exposing more companies to the long reach of the FCPA. However, the Court’s recent decision in U.S. v. Esquenazi also provides business owners with some guidance to better evaluate their FCPA risk, and to adapt their internal compliance policies accordingly.

The FCPA makes it unlawful to bribe “foreign officials”, which are defined in the statute as “any officer or employee of a foreign government or any department, agency, or instrumentality thereof…” 15 U.S.C. §78dd-1(f)(1)(A) (emphasis added). However, the statute does not provide further guidance regarding what factors are to be considered in determining whether an entity is an “instrumentality” of a foreign government for the purpose of this section. In Esquenazi, the Eleventh Circuit provided a framework for assessing whether an entity will be considered an “instrumentality” under the FCPA. The first U.S. appeals court to address this issue, the Court found that to qualify as an “instrumentality” of a foreign government under the FCPA, two elements must be established: (1) the “entity must be under the control or dominion of the government…” that (2) “performs a function the controlling government treats as its own.”

The foreign entity at issue in Esquenazi is Telecommunications D’Haiti, S.A.M. (“Teleco”), a telecommunications company majority-owned by the Haitian government. Two executives from Terra Telecommunications Corp. (“Terra”)—a U.S. telecommunications company—were convicted of funneling gifts and bribes to Teleco in exchange for a reduction of Terra’s rates and the receipt of payment credits.

In determining whether Teleco should be considered an “instrumentality” for the purposes of the FCPA, the Court drew from commentary to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. To establish the first prong of the determination—namely that an entity is “under the control or dominion of the foreign government”—the Court enumerated the following “non-exhaustive” factors for consideration:

  • 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 the governmental coffers; and
  • The extent to which the government funds the entity if it fails to break even.

Similarly, the Court listed a number of factors to consider in connection with the second prong of the analysis which is whether the foreign entity “perform[s] a function the government treats as its own”:

  • 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.

Based on a consideration of these factors, the Court found that Teleco was controlled by the Haitian government, and “performed a function Haiti treated as its own, namely, nationalized telecommunication services.” As such, the Court found Teleco to be an “instrumentality” of the Haitian government for purposes of the FCPA. Accordingly, the convictions of the two Terra executives were affirmed and they were subject to the long prison sentences (15 years and 9 years, respectively) and the large monetary penalties (over US $3 million) that were handed down by the lower court.

While the Court’s fact-based analysis is a clear victory for the DOJ and allows the DOJ to draw from a variety of factors in establishing that an entity is an “instrumentality” for purposes of the FCPA, the decision also provides business leaders with some guidance to more effectively evaluate their FCPA risk. With the framework set forth in the Eleventh Circuit’s decision in Esquenazi, businesses will now be better able to assess whether their dealings with state-owned or controlled entities may fall under the purview of the FCPA, and potentially subject their companies and employees to the significant penalties that can be imposed under the FCPA. The implications from this decision should serve as a reminder to companies regarding the critical importance of implementing a comprehensive and effective FCPA compliance program, particularly for the many companies doing business in high risk jurisdictions around the world.

 

Topics:  Appeals, DOJ, FCPA, Foreign Entities, Foreign Official, Instrumentality, Risk Assessment, 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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