A federal appeals court ruling that clarifies the definition of a “foreign official” under the Foreign Corrupt Practices Act has effectively upheld the government's broad view of who qualifies.
In addressing the case, U.S. v. Esquenazi, the 11th Circuit Court of Appeals became the first appellate court in FCPA history to tackle what constitutes an “instrumentality” within the FCPA's definition of “foreign official,” which the statute vaguely defines as “any officer or employee of a foreign government or any department, agency, or instrumentality thereof.” Companies have long struggled with whether employees of state-owned entities qualify as public officials under the FCPA, and this ruling now provides some guidance on the issue.
Legal experts say it is likely to set a new precedent in similar FCPA cases moving forward. “Esquenazi is only binding on courts within the 11th Circuit, but due to the rarity of rulings on FCPA cases, particularly at the circuit court level, this decision is likely to be an influential authority for other courts,” says Daniel Ruzumna, a partner in the law firm Patterson Belknap Webb & Tyler.
While the case doesn't create any new interpretations of FCPA provisions, it does provide enforcement regulators with more certainty. “The Department of Justice and the SEC have long maintained that even minority state-owned entities can qualify as instrumentalities, provided the entity performs a public function,” wrote Tirzah Lollar, a counsel at law firm Vinson & Elkins, in a client brief. “The Eleventh Circuit endorsed this view.”
The case is the result of a federal jury's conviction in 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 7 years in prison, respectively.
On appeal to the 11th Circuit, defense attorneys argued that Teleco did not fall under the FCPA's definition of an “instrumentality,” because it is a foreign state-owned business—as opposed to a government agency. Therefore, the defense argued, the Teleco officials who received the bribes were not foreign officials under the FCPA.
On May 16, a three-judge panel for the 11th Circuit disagreed, affirming the convictions and sentences of both Esquenazi and Rodriguez. In its opinion, the court disagreed with the defendants that an instrumentality should be an actual part of the government. “That contention is too cramped and would impede the wide net over foreign bribery Congress sought to cast in enacting the FCPA,” the court stated.
With its ruling, the court could effectively embolden the Justice Department and the Securities and Exchange Commission to more readily pursue similar cases where bribes are made to executives at government-owned businesses, or even businesses that are partially owned by the government. “This decision likely will trigger more FCPA-related inquiries and investigations by the Department of Justice,” says Michael Burke, a partner with the law firm Arnall Golden Gregory.
Instrumentality Defined
According to the court, nothing in the FCPA limits instrumentality to core government functions. Rather, the court 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.”
“Due to the rarity of rulings in FCPA cases, particularly at the circuit court level, this decision is likely to be an influential authority for other courts.”
—Daniel Ruzumna,
Partner,
Patterson Belknap Webb & Tyler
The court added that what constitutes “control” and “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 court stated.
The court went on to provide a list of factors that courts and juries should look to when deciding if the government “controls” an entity, including:
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.”
Similarly, in analyzing whether an entity “performs a function the government treats as its own,” the 11th Circuit said other 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.
Many of these same factors identified by the 11th Circuit overlap with the definition of instrumentality in the FCPA Resource Guide, guidance issued jointly by the Justice Department and the SEC in 2012. “Thus, the Esquenazi decision should not lead to a dramatic shift in how companies interpret the law,” says Ruzumna.
“Notwithstanding the 11th Circuit's predictions that it will be ‘relatively easy' for courts and businesses to apply these factors, this multi-factor analysis does not provide bright-line rules and, therefore, some ambiguity as to whether an entity is an instrumentality will remain,” Ruzumna adds.
U.S. v. Esquenazi
Below is a partial transcript of the court's opinion in U.S. v. Esquenazi, explaining how the 11th Circuit defines “instrumentality” under the Foreign Corrupt Practices Act.
An “instrumentality” under section 78dd-2(h)(2)(A) of the FCPA is an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own…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; the extent to which the entity's profits, if any, go directly into the governmental fisc, and, by the same token, the extent to which the government funds the entity if it fails to break even; and the length of time these indicia have existed. We do not cut these factors from whole cloth. Rather, they are informed by the commentary to the OECD Convention the United States ratified…We then turn to the second element relevant to deciding if an entity is an instrumentality of a foreign government under the FCPA—deciding if the entity performs a function the government treats as its own. Courts and juries should examine 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.
Source: U.S. v. Esquenazi.
The case may provide the last legal word on instrumentality for some time. Lawyers say the matter is unlikely to rise to the U.S. Supreme Court since no other circuit courts are currently considering this issue. “It took 37 years to get to this point, and the stars really would have to align for this to happen again,” says Mike Koehler, a law professor at Southern Illinois University School of Law.
For a similar case to make it to the appellate level, for example, it would require not only that the Justice Department file criminal charges against an individual, but the case itself would specifically have to address the “foreign official” theory, Koehler adds. On top of that, he says, a defendant would have to be willing to mount a defense and risk going to trial.
For the time being, “this decision provides companies with the opportunity to review their compliance programs,” says Tara Giunta, a partner with law firm Paul Hastings. Specifically, she says, companies should assess whether the third parties with whom they currently conduct business could be construed as an instrumentality of a government based on the factors identified by the 11th Circuit.
Burke advises that companies retrain relevant officers, directors, and employees on the FCPA's now-expanded scope. Foreign partners, customers, and counter-parties of U.S. companies that previously may have been deemed as falling outside the FCPA's scope, he says, may now be considered an instrumentality.
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