Esquenazi Part II – The Test For Determining An Instrumentality Under The FCPA

by Thomas Fox

FCPA SettlementIn Part I of my review of the 11th Circuit Court of Appeals decision in the Esquenazi case, I reviewed the Court of Appeals opinion. Today, in Part II, I want to drill down further and examine the test developed by the Court of Appeals to use in determining whether an entity is an instrumentality under the Foreign Corrupt Practices Act (FCPA) and compare it with the two prior formulations developed by District Courts in the Carson and Lindsey cases. The chart below consolidates the factors raised by the courts.

Key Inquiry




  1. Characterization of Services

Entity provides services to citizens, in many cases all in country

Foreign states characterization of the entity and its employees

Function Test - Does the entity provide services to the public at large in the foreign Country?Control Test - the foreign government’s formal designation of the entity.

  1. Hiring and Firing

Are key officers/ directors government employees or appointed by government employees

Foreign State’s control over the entity

Control Test - the government’s ability to hire and fire the entity’s principals.

  1. Financial Control/ Funding

Is entity financed, or in large measure, by government appropriations or through government mandates?

The foreign state’s extent of ownership of the entity, including the level of financial support by the state

Function Test - Does the foreign government subsidize the costs associated with the entity providing the services?Control Test - the extent to which the government funds the entity if it fails to break even.

  1. Foreign Government Control of Administrative Functions

Is entity vested with or does it exercise exclusive/controlling power to administer its designated functions?

The Entity’s obligations and privileges under country’s laws, including whether it exercises exclusive/ controlling power to administer its designated functions

  1. Perception as Governmental Entity

Is entity widely perceived and understood to be providing official functions?

Purpose of the entity’s activities

Function Test - Does the foreign government generally perceive the entity to be performing a governmental function?Control Test – Whether the foreign government has an interest in the entity

  1. Creation

Circumstances around the entities creation

  1. Length of Time

Control Test - the length of time the indicia have existed.

  1. Monopoly over Market

Function Test - Does the entity have a monopoly over the function it exists to carry out?

The Esquenazi decision separates the analysis into two basic questions (a) does a foreign government control an entity and (b) does the entity perform a function the foreign government treats as its own? The Court of Appeals then breaks the analysis of these two questions into a series of inquiries. The prior District Court opinions in Lindsey and Carson did not have such an initial dichotomy; nevertheless the 11th Circuit’s analysis has clear overlap with the prior District Court formulations. (Please note that I have not discussed the district court formulation at the Esquenazi trial level as that analysis has been superseded by the Court of Appeals decision.) Between the Lindsey, Carson and Esquenazi factors, we see the following:

Identical - does the government appoint the officers/directors and is the entity understood to be owned by or an agency of the government in the home country? In Lindsey and Esquenazi (Control Prong), the courts agree on Inquiry 2 above, the ‘Hiring and Firing’ inquiry, while Carson says the inquiry is simply over foreign government control of the entity. Inquiry 5 in both Lindsey and Esquenazi (Control and Function Prongs) is the ‘Perception’ inquiry, while the Carson court denominates this inquiry as the ‘Purpose’ inquiry. Finally, in Inquiry 3 all Courts consider the financial support provided to the entity by the foreign government, with the Esquenazi Court (Control and Function Prongs) adding the analysis around the “Extent of obligations and privileges under its country’s laws”.

Similar – Inquiry 1 – Are the services provided by the entity available to all citizens of the home country?; and Inquiry 4 – Does it exercise exclusive/controlling power to administer its designated functions and the extent of obligations and privileges under its country’s laws? In Lindsey and Carson, the similar factors are in Inquiry 1, the Characterization of the services provided. The Esquenazi opinion has this Inquiry 1 in both the Function and Control Prong analysis. Under the Function Prong analysis it asks “Does the entity provide services to the public at large in the foreign Country?” and under the Control Test it inquires into what is the foreign government’s formal designation of the entity. In Inquiry 4, both the Lindsey and Carson court said that a foreign government’s control over the administrative functions of the entity was a key inquiry but interestingly, this factor was not present in the Esquenazi analysis, under the analysis of either the Control or Function Prong. In Inquiry 6, the Carson Court looked into the creation of the entity and the Esquenazi opinion (Control Prong) inquired into the foreign government’s designation of the entity

Stand-alones – Interestingly, Esquenazi has two factors for analysis not found in either of the district court opinions. The first, Inquiry 7, is from the Control Prong and asks the question of the length of time the various factors listed have existed. The second, Inquiry 8, is from the Function Prong and is whether the entity has a monopoly in the foreign country. Carson also has a stand-alone inquiry, which is found at Inquiry 6 and inquires into the facts and circumstances surrounding the creation of the entity. While I believe this could well be the last factor in your analysis, it can be one, which most easily is ascertained. Most government entities will disclose how they were formed; this information can be found on their website or within their company history. If you cannot determine how a business was formed perhaps you need to think hard about doing business with them.

Comparison of Approaches

At first blush it may appear that the Esquenazi court took a slightly different approach by dividing the two initial prongs of inquiry into ‘Control’ and ‘Function’. If one examines the individual Esquenazi factors in detail they are not significantly different from Lindsey and Carson, with the exception noted above of the two stand-alone inquiries. One clear factor that Esquenazi has in common with Lindsey and Carson is the factor of the entity’s obligations and privileges under its country’s laws, including whether it exercises exclusive/controlling power to administer its designated functions. Carson combines two of the Esquenazi factor of the extent of government ownership and financial support by the foreign government. While Carson does not speak to financial ownership it does have the factor of government financing and government appointment of officers and directors. Carson speaks to the entity’s purpose while Lindsey and Esquenazi list the factor of providing services to the country’s citizens. Indeed the only factor included in Carson and not found in Lindsey and Esquenazi is the following: the circumstances around the entity’s creation. It is incumbent to note that both the Lindsey and Carson court opinions and the Esquenazi 11th Circuit opinion all have language that indicates these factors are not exclusive, and no single factor will determine whether an entity is an instrumentality of a foreign government.

What to make of the two stand-alones found in Esquenazi; those being lengthy of time the entity has existed (Function Prong) and does it have monopoly power (Control Prong)? I would have to opine that these are the two least important factors listed. I say this because if there is clear indicia that an entity is controlled by, financed in whole or in part by a foreign government, perceived to be run by a foreign government and the entity provides services to the citizens of the foreign country; it really does not matter when it was created, i.e. yesterday or 50 years ago. It will be considered as an instrumentality under the FCPA. Similarly, even if there is no monopoly present, if these other factors are present, it will still be considered an instrumentality under the FCPA.

Lessons Learned

With all this information in mind what inferences can a compliance practitioner for guidance draw on whether a business is an instrumentality under the FCPA? Reviewing the foregoing, the factors can be distilled down to a manageable list, which I believe is as follows:

  1. Ownership/Financial Control – There is no percentage amount listed but the inclusion of financial control would clearly indicate that anything over 50% would be a significant factor.
  2. Actual control is key in all three court decisions. In Lindsey and Esquenazi, it is characterized as the government’s right to appoint key officers and directors. In Carson, it is called government control. But this means that if actual control is exercised by the government in question, it may trump the 50% guidance stated above.
  3. Privileges and Obligations are also mentioned in all three. Does the entity have the right to control its own functions?
  4. Financing – Is the entity a for-profit entity, financed through its own revenues or does it depend on financing by its government?
  5. Perception is Reality - André Agassi’s immortal words appear again. If it is widely perceived to be providing an official function, then it is an instrumentality under the FCPA.

The Esquenazi Court of Appeals decision is a very welcome addition to the dearth of case law interpretation of the FCPA. The 11th Circuit has seemingly put to rest the question of whether an instrumentality means only a government agency or something else. Clearly it means something else. The Esquenazi decision also provides significant guidance on what type of inquiry a company should use to determine if an entity is a part of a foreign government and, therefore, subject to FCPA scrutiny. Whatever specific facts or indicia that you are looking at, it now boils down to (1) does a foreign government control the entity?; and (2) does the entity function as part of the part of the foreign government?

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.

© Thomas Fox, Compliance Evangelist | Attorney Advertising

Written by:

Thomas Fox

Compliance Evangelist on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.