Are you in compliance?

Don't miss out! Sign up today for our weekly newsletters and stay abreast of important GRC-related information and news.

Get updates on Compliance Week offerings, including new features, databases, research, and other resources, along with announcements of upcoming Webcasts, conferences, seminars, CPE/CLE opportunities and more.

Published every Thursday, Compliance Week Europe offers a condensed summary of risk, audit, and compliance news either originating in Europe, or of special interest to European compliance professionals. This newsletter will follow developments by the European Commission, as well as those of national governments across the region, or any U.S.-based news that might have consequence across the Atlantic. Frequency: weekly; Thursday a.m.

A fresh edition of Compliance Week delivered via e-mail and online every Tuesday morning, relentlessly focused on the disclosure, reporting and compliance requirements of our 25,000+ paying subscribers.

Published every Friday, Compliance Weekend was launched at the behest of subscribers, and offers a quick Plain English review of the week's key developments. We hope you enjoy this supplement to Compliance Week's Tuesday edition.

Appeals Court Defines 'Instrumentality' Under FCPA

Jaclyn Jaeger | May 16, 2014

A landmark ruling issued today by the 11th Circuit Court of Appeals upholds the government's broad definition of “instrumentality” under the Foreign Corrupt Practices Act.

In addressing the case, U.S. v. Esquenazi, the 11th Circuit is the first appellate court—as opposed to a trial court—in FCPA history to tackle squarely the Justice Department's interpretation of "foreign official” under the FCPA, potentially setting new precedent in all other FCPA cases moving forward.

Prior to 11th Circuit's ruling, legal experts had warned that a ruling in favor of the Justice Department could lead enforcement agencies to seek “to push the envelope even more and broadening the application of what it means to be a foreign official,” according to an Alston & Bird client alert.

The case resulted from a federal jury's conviction in October 2011 of Joel Esquenazi and Carlos Rodriguez for their roles in a scheme to bribe officials at Haiti Telecom, a Haiti state-owned telecommunications company. Esquenazi and Rodriguez were convicted at trial and sentenced to 15 and seven years in prison, respectively.

Most significant about the Haiti Teleco case was that defense lawyers asked the judge to dismiss FCPA accounts due to the ambiguity around the term “instrumentality.” The FCPA prohibits U.S. companies and employees from paying bribes to foreign officials to obtain business abroad, but the law vaguely defines “foreign official” to mean an “officer or employee of a foreign government or any department, agency, or instrumentality thereof.”

Defense attorneys argued that foreign state-owned enterprises—as opposed to government agencies—should not be covered by FCPA because state-owned entities are not an instrumentality. The district judge denied that motion.

In its response brief to the appeals court, the Justice Department stated that “the district court's instructions on the meaning of ‘instrumentality of a foreign government' were correct.”

“The instructions stated that an instrumentality must perform a governmental function and provided a non-exhaustive list of relevant factors for the jury to consider in deciding whether Teleco was an instrumentality of the government of Haiti,” the Justice Department wrote.

In this case, the evidence “sufficiently established that Teleco was an instrumentality of Haiti during the relevant time period,” the Justice Department wrote. According to court documents, the government, through its national bank, owned 97 percent of Teleco's shares. If Teleco had been profitable, those profits would have accrued to the government and the national bank. Because it was not, the national bank subsidized Teleco.

The district court and the Justice Department further noted that Haiti's president and high-level ministers controlled Teleco through their appointment of Teleco's board of directors and general director. Teleco's status as a government instrumentality is also reflected in Haitian law that subjected Teleco officials to its prohibitions against official corruption.

Circuit Ruling

In affirming the lower court's decision, the three-judge panel for the 11th Circuit defined “instrumentality” under the FCPA as “an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own.”

The court added that what constitutes “control” and what constitutes “a function the government treats as its own” are fact-bound questions. “It would be unwise and likely impossible to exhaustively answer them in the abstract,” the opinion stated.

The court, nonetheless, went on to provide a list of factors that may be relevant to deciding the issue. First, to decide if the government “controls” an entity, courts and juries should look to:

  • The foreign government's formal designation of that entity;
  • Whether the government has a majority interest in the entity;
  • The government's ability to hire and fire the entity's principals; and
  • How the government manages the profits and losses of the entity.

“We do not cut these factors from whole cloth,” the court said. “Rather they are informed by the commentary to the OECD [Anti-Bribery] Convention the United States ratified.”

The court then addressed factors to consider in deciding if the entity “performs a function the government treats as its own.” Again, citing the Anti-Bribery Convention the United States ratified, the 11th Circuit said courts and juries should examine whether:

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

Through reaching its decision, the 11th Circuit affirmed the convictions and sentences of both Esquenazi and Rodriguez.

The decision will be covered in full in a future edition of Compliance Week. Stay tuned.