In Court, FCPA Comes Under Fire

Call it one of the great assumptions of the Foreign Corrupt Practices Act: that employees of state-owned companies overseas qualify as “foreign government officials” who should never be bribed by U.S. companies.

After all, of the roughly 20 FCPA enforcement actions in 2010, 12 involved employees of state-owned or state-controlled entities, according to Michael Koehler, a law professor at Butler University who has testified before Congress on FCPA matters. Putting such “foreign instrumentalities” within the scope of your FCPA worries, then, seems to make sense.

What's more, excluding state-owned companies from your list of FCPA worries can be a costly gamble. The Justice Department's criminal division imposed a record $1 billion in FCPA enforcement fines last year. Add in civil disgorgement and other penalties, and the full price tag for those 12 cases involving state-owned companies was an estimated $2.7 billion in 2010 alone.

“The government has a cash cow here,” says Joseph Spinelli, a managing director in the disputes and investigations practice at Navigant Consulting. “This is the easy way for the government to take money and basically build a nest egg.”

The FCPA prohibits U.S. companies and employees from paying bribes to foreign officials to obtain business abroad, yes. But the law defines “foreign official” to mean an “officer or employee of a foreign government or any department, agency, or instrumentality thereof.” The definition of “instrumentality” ends there, allowing the Justice Department and Securities and Exchange Commission to interpret it broadly.

“Has this interpretation of foreign official become a signature feature of current FCPA enforcement? The answer is undeniably yes,” Koehler says. The question is urgent, he says, because companies are spending “a lot of wasteful money to comply with a law based on not what a court says, not what a judge says, not what a jury says, but what the Justice Department says.”

Finally, Forward Motion

All that may soon change. For the first time in FCPA history, not one, but three, federal judges have agreed to take up the instrumentality question.

The first case, U.S. v. Carson, stems from the indictment of six former employees of California-based valve company, Control Components Inc. The April 2009 indictment accuses the employees of having made more than 200 bribes from 2003 through 2007 to a variety of businesses in China, Malaysia, South Korea, and the United Arab Emirates, including companies that the government defined as Chinese “state-owned customers.”

Two of those former employees have pleaded guilty, but the remaining four defendants have filed a motion to dismiss. They argue that no court has meaningfully construed the term “instrumentality” under the FCPA. “In the absence of such case law, the Justice Department has liberally pushed the envelope and staked out a maximalist position as to the meaning of the term,” the motion to dismiss says.

They also accuse the government of “baldly” asserting that instrumentality includes state-owned businesses, and therefore FCPA applies to all employees “regardless of rank, position, function, or duties.” The Justice Department's interpretation is so broad, the motion argues, that even U.S. citizens living and working in the United States for an overseas company would be considered a foreign official.

A ruling on the case is expected May 9. “It's going to be interesting to see the final decision as to whether the government has to go back and basically redefine [instrumentality],” Spinelli says. If the court finds the definition to be insufficient and beyond congressional intent, it could lead to other cases being tossed out, he says.

Since Carson, two other motions to dismiss FCPA charges have been filed. In U.S. v. Enrique Faustino Aguilar Noriega, pending in the Central District of California, Lindsey Manufacturing and two of its executives were charged with paying bribes to individuals at the Mexican state-owned utility company, Commission Federal de Electricidad (CFE).

“It's going to be interesting to see the final decision as to whether the government has to go back and basically redefine (instrumentality).”

—Joseph Spinelli,

Managing Director, Disputes & Investigations,

Navigant Consulting

The third case, U.S. v. O'Shea, pending in the Central District of Texas, also stems from alleged bribes made to CFE. In that case, a former general manager of ABB was charged in November 2009 in an 18-count indictment with conspiracy, FCPA violations, international money laundering, and falsifying records. That case is scheduled to go to trial May 3.

In support of the motion to dismiss, Koehler submitted in Carson a 151-page declaration outlining the legislative history of the FCPA. In his filing, he argues that the legislative history and plain meaning of the term “foreign official” does not encompass employees of state-owned companies.

The Justice Department offered its own supporting arguments in both Lindsey and O'Shea by including a declaration by Clifton Johnson, assistant legal adviser for law enforcement and intelligence in the Legal Adviser's Office at the State Department. In his declaration, Johnson argued, “The judge should not grant the defendants' motion to dismiss because it would adversely impact U.S. foreign policy.”

But in a significant setback for prosecutors, Howard Matz, the presiding judge in Lindsey, struck out the declaration in an order dated March 22. Matz agreed with the argument presented by the defense lawyers that, “It is the job of the federal courts, not the executive branch, to be the final arbiter of what the FCPA actually provides.”

Then on March 31, the Lindsey case—the first to be decided—came with a surprising twist when Matz sided with the Justice Department and rejected arguments that employees of CFE fall outside the scope of FCPA. Ruling from the bench, Matz said he would follow up shortly with a written opinion.

The Justice Department wouldn't offer any comment.

Congressional Efforts

The U.S. Chamber of Commerce also continue to ramp up its campaign to amend the FCPA. Recently, the Chamber enlisted former Attorney General Michael Mukasey to help in its efforts.

FINED!

What follows are some examples of companies that settled FCPA charges in 2010:

Company Name

State-owned Cos. Involved

Criminal Fines & Disgorgement

Date

Innospec

Iraqi Ministry of Oil; Pertamina, another state owned oil company

$14.1 million

March 2010

Daimler

State-owned entities in several countries.

$185 million

April

2010

Technip

Nigerian National Petroleum Corp.

$338 million

June

2010

Veraz Networks

Employees of government-controlled telecommunications companies in China and Vietnam

$300,000

June

2010

Eni/Snamprogetti

Nigerian National Petroleum Corp.

$365 million

July

2010

Alliance One & Universal

Thai government officials

$13.8 million

Aug.

2010

ABB

Mexican state-owned electric company, Comisión Federal de Electricidad

$58 million

Sept.

2010

Panalpina

Nigeria National Petroleum Corp., a Nigerian government owned oil company

$81.9 million

Nov.

2010

RAE Systems

China government departments, agencies, and instrumentalities

$2.9 million

Dec.

2010

Alcatel Lucent

State-owned agencies in Costa Rica, Honduras, Malaysia, and Taiwan

$137 million

Dec.

2010

Pride International

Petroleos de Venezuela S.A., a Venezuelan state-owned oil company

$56.2 million

Dec.

2010

Source

Compliance Week.

“Judge Mukasey brings tremendous knowledge, insight, and experience on these matters given his past positions as U.S. attorney general, as well as chief judge of the Southern District of New York,” says Harold Kim, senior vice president of legal reform initiatives for the U.S. Chamber Institute for Legal Reform.

With the help of Mukasey, Kim says the Chamber aims to provide companies with “much needed clarity and certainty under the statute.” He adds that the statute is “ripe for reform in a number of important areas,” including the establishment of a compliance defense and a clearer definition of a “foreign official.”

The Chamber first expressed those concerns in a policy paper released last October. While Congress has not yet acted on the recommendations, the FCPA was the focus of a hearing held by the Senate Judiciary Committee in November.

During the meeting, Sens. Amy Klobuchar, D-Minn., and Christopher Coons, D-Del., indicated their intent to amend the FCPA. “People and companies have to know what the law is in order to comply with it,” Klobuchar said, but many companies have expressed concerns that they don't know what behavior triggers an enforcement action. “If we could have some discussion on this going forward, I think it would be helpful.”

Kim says the Chamber is hopeful Congress will “appropriately scrutinize current enforcement practices under the FCPA and embrace our recommended policy initiatives in this area.”

Many have said the solution isn't to get rid of FCPA, but to clarify what is and isn't prohibited. Spinelli says one possible solution is for the Justice Department to specify what percentage of ownership by a foreign government would qualify a corporation as an instrumentality.

Looking forward, it's likely many more FCPA enforcement actions will be coming along. What you're going to see in the next two years, Spinelli says, isn't just cases against companies, but also “more and more cases against individuals of companies.”

Enforcement officials may even start to take it a step further, Spinelli adds. “If they find board members to be negligent, you might even see some types of prosecution against board members,” he says. “I don't rule that out either.”

Because more cases have been brought against individuals, the likelihood of getting more guidance from the courts is greater, says Andrew Weissmann, co-chair of Jenner Block's white-collar defense and investigations practice, who is representing the Chamber. “It will also force the government to articulate what their view is on who constitutes a ‘foreign government official.'”