Is Anyone Not a Foreign Official Under the FCPA?

Legislative History Suggests Otherwise

In two recent cases, defendants have sought to highlight this potential absurdity. In both U.S. v. Nguyen, 2:08-cr-00522 (E.D.Pa. 2009) and U.S. v. Esquenazi, 1:09-cr-21010 (S.D. Fla. 2009), the defendants filed motions to dismiss on the grounds that the recipients of their alleged payments were not “foreign officials” under the FCPA. In Nguyen, the president of Nexus Technologies Inc. was charged with violating the FCPA by making payments to secure contracts with various Vietnamese state-owned enterprises. Esquenazi involved payments to the directors of international relations at Haiti's government-owned telecommunications utility, allegedly in exchange for lower usage rates.

Nguyen and Esquenazi argued that Congress's intent in enacting the FCPA was to criminalize payments to individuals performing public functions, not the commercial functions typical of SOEs. They argued that the ordinary meaning of “instrumentality” ' “a thing used to achieve an end or a purpose” ' compels this interpretation. As an instrumentality of the government, such entities must necessarily advance the “end or purpose” normally associated with governance, not simple financial gain.

Nguyen and Esquenazi also analyzed the use of the term “instrumentality” in other statutes on the books in 1977, such as the Foreign Sovereign Immunities Act (FSIA) and Employee Retirement Income Security Act (ERISA), arguing that these definitions should be persuasive in interpreting FCPA.

Drawing on FSIA case law indicating that instrumentalities must be directly owned by the government, for example, Nguyen argued that one company named in the indictment, PVGC, was a subdivision of an entity that was owned by the Vietnamese government. Nguyen claimed that the “corporate layer separating PVGC from the Vietnamese government” was sufficient to preclude PVGC's status as an instrumentality. Additionally, courts interpreting “instrumentality” under ERISA have held that “a government instrumentality is one that performs an important government function,” a point used by the defendants to attempt to highlight the distinction between public and commercial functions. See Fed. Reserve Bank v. Metrocentre Improvement Dist. #1, 657 F.2d 183, 185.

Nguyen and Esquenazi also addressed the legislative history surrounding the 1998 amendment to the FCPA. The amendment added international organizations to the list of entities whose officials could be deemed foreign officials. The amendment was undertaken to conform the Act with the Organisation for Economic Co-operation and Development (OECD) Convention, an agreement among over 30 nations to effectuate stronger and more consistent laws that criminalize corruption of foreign officials. The Commentaries to the OECD Convention state that the Convention's anti-bribery provisions should apply to SOEs unless “the enterprise operates on a normal commercial basis in the relevant market, i.e., on a basis that is substantially equivalent to that of a private enterprise, without preferential subsidies or other privileges.” Convention Commentary ” 14-15. This Commentary weighs in favor of the argument that traditionally commercial entities should be deliberately excluded from the FCPA.

The district courts in Nguyen and Esquenazi rejected the defendants' arguments but only because the
issue (and evidence) would be better left as a question of fact for a jury.

In addition to the sources cited in the Nguyen and Esquenazi cases, there are numerous other sources of authority that may be helpful to a practitioner seeking to defend her client in an FCPA enforcement action where the “foreign official” appears to be more private than “official.”

The 1976 SEC Report

In U.S. v. Kay, 359 F.3d 738, 749 (5th Cir. 2004), the U.S. Court of Appeals for the Fifth Circuit identified two primary sources of FCPA legislative history ' congressional reports and the 1976 SEC Report that provided the impetus for enactment of the FCPA. This second document, titled the “Report on Questionable and Illegal Corporate Payments and Practices,” bolsters the argument that the term “foreign officials” means individuals performing a traditionally public function.

The SEC Report addressed improper foreign expenditures, dividing these by recipient: “government officials, commission agents and consultants, and recipients of commercial bribery.” SEC Report at 25. Thus, payments to officials are set forth as a category separate from ordinary commercial bribery.

The 1977 House Report for the FCPA made repeated reference to this SEC Report, and added only one example to those cited in the Report: Lockheed's bribery of various high-level politicians, such as the Japanese Prime Minister and Minister of Finance, a Dutch prince, and various Cabinet-level politicians in Italy. H.R. Rep. 95-640 at 5. While not dispositive of the issue, a deeper look at the 1977 legislative history shows that Congress was addressing traditional government officials, not SOE employees, when it passed the FCPA.

The OECD Convention

In the years prior to the ratification of the OECD Convention in 1998, the passage of the FCPA had created a comparative disadvantage for American companies, which were forced to compete with foreign companies that were unrestrained in their ability to pay bribes. The central purpose of the 1998 Amendment and the OECD Convention was to “level the playing field for business worldwide.” House Report No. 105-802 at 12 (1998).

By creating a uniform anti-bribery policy among the 30-plus signatories, the OECD Convention intends to eliminate any comparative disadvantage to honest companies. An FCPA defendant could use this to argue that reciprocity is a key principle to be applied when interpreting the FCPA ' that Congress intended American companies to be bound only as much as companies from other signatory nations would be. This principle militates against criminalizing conduct by American companies abroad if analogous conduct in the U.S. would not fall under other signatories' anti-corruption laws promulgated pursuant to the Convention. For example, under this approach, payments to telecommunications executives for preferential rates would fall outside the FCPA, since the equivalent American companies ' Verizon, AT&T, etc. ' are private. Instead, commercial bribery laws would cover such conduct.

The OECD Questionnaire

The DOJ's response to the OECD Phase I Questionnaire is also helpful. This questionnaire sought information regarding the DOJ's compliance with the OECD Convention. In response to a request to define the scope of the term “foreign official,” the DOJ stated:

State-owned business may, in appropriate circumstances, be considered instrumentalities of a foreign government and their officers and employees to be foreign officials ' . Among the factors [the DOJ] considers are the foreign state's own characterization of the enterprise and its employees, i.e., whether it prohibits and persecutes bribery of the enterprise's employees as public corruption, the purpose of the enterprise, and the degree of control exercised over the enterprise by the foreign government.

See U.S. Response to Phase I Questionnaire, available at www.oecd.org (emphasis added).

The DOJ's response, drafted essentially contemporaneous to the passage of the 1998 Amendment, implies that SOEs should not automatically be understood to be instrumentalities for purposes of the FCPA. Each of the factors listed ' legal characterization, purpose of the enterprise, degree of control ' offers a ground to oppose the application of FCPA to a specific SOE.

In this respect, an investigation of the foreign country's legal characterization of its SOEs may bring useful defenses to light. Certain French public corruption legislation, for example, appears to explicitly exclude companies that have less than 30% public ownership, potentially removing such companies from the FCPA's reach. See Modernization of Public Services Act of 2007.

Conclusion

The government's broad interpretation of the terms “foreign official” and “instrumentality” significantly expands the types of transactions implicated by the FCPA. Yet there are arguments to be made that this interpretation violates the intent of the statute. Despite the failure of two recent defendants to dismiss indictments on some of these grounds, the arguments can continue to be made and certainly remain viable for a defendant in the post-motion to dismiss stages of an FCPA enforcement action.

Jacqueline C. Wolff, a member of this newsletter's Board of Editors, is a former federal prosecutor and a partner in the Corporate Investigations & White Collar Defense practice group at Manatt, Phelps & Phillips, LLP. Nirav Shah is an associate in the group.

Recent years have seen a rise in the number of enforcement actions taken by the Department of Justice (DOJ) and the Securities Exchange Commission (SEC) under the Foreign Corrupt Practices Act (FCPA), as well as a notable expansion of the types of conduct covered by these prosecutions. Increasingly, the government has focused on prosecuting individuals and companies for allegedly corrupt payments to officials of state-owned enterprises (SOEs), rather than more traditional government entities.

The FCPA prohibits corrupt payments to “foreign officials,” defining a foreign official as “any officer or employee of a foreign government or any department, agency, or instrumentality thereof … or any person acting in an official capacity for or on behalf of any such government or department … ” 15 U.S.C. ' 78dd-2(h)(2)(A).

The DOJ has brought cases against companies and individuals in relation to their dealings with SOEs based on a broad reading of the term “instrumentality,” a term not otherwise defined in the statute. According to one survey of FCPA prosecutions in 2009, two-thirds of the prosecutions against companies that year related to SOEs, with DOJ and the SEC pursuing a disproportionate number of cases in a handful of industries like energy, telecommunications and health care. Mike Koehler, The Foreign Corrupt Practices Act in the Ultimate Year of Its Decade of Resurgence, 43 Ind. L. Rev. 389, 411-13 (2010). Some recent examples include:

• A deferred prosecution agreement and $2 million fine for payments made to physicians employed at Chinese state-owned hospitals in exchange for physicians directing their hospitals to purchase the defendant U.S. corporation's medical devices. U.S. v. AGA Medical Corp., 0:08-cr-00172-1 (D. Minn. 2008).
• Charges leading to a $402 million criminal settlement for, inter alia, bribes allegedly made by KBR to officials of Nigeria LNG, a joint venture between private multinational energy companies owning 51% of the joint venture, and Nigeria's state-owned oil company owning 49%, for the purpose of securing engineering and procurement contracts. U.S. v. Kellogg, Brown and Root LLC, 09-cr-071 (S.D. Tex. 2009).
• Indictments of officers of a Florida company for payments made to officials of Honduras' national telecommunications company ' including the senior in-house attorney of that company ' in exchange for interconnection agreements and preferential rates. U.S. v. Granados, 1:10-cr-20881 (S.D.Fla. 2010).

The government's approach appears to subsume nearly every entity that has some government ownership, even if the amount of government ownership is less than 50% of an otherwise privately owned entity or the entity is engaged in purely commercial pursuits. From a domestic perspective, this approach has potentially absurd results: if the U.S. were a foreign country, American International Group officers would have to be deemed foreign officials by virtue of the government's takeover of that company as part of TARP.

Legislative History Suggests Otherwise

In two recent cases, defendants have sought to highlight this potential absurdity. In both U.S. v. Nguyen, 2:08-cr-00522 (E.D.Pa. 2009) and U.S. v. Esquenazi, 1:09-cr-21010 (S.D. Fla. 2009), the defendants filed motions to dismiss on the grounds that the recipients of their alleged payments were not “foreign officials” under the FCPA. In Nguyen, the president of Nexus Technologies Inc. was charged with violating the FCPA by making payments to secure contracts with various Vietnamese state-owned enterprises. Esquenazi involved payments to the directors of international relations at Haiti's government-owned telecommunications utility, allegedly in exchange for lower usage rates.

Nguyen and Esquenazi argued that Congress's intent in enacting the FCPA was to criminalize payments to individuals performing public functions, not the commercial functions typical of SOEs. They argued that the ordinary meaning of “instrumentality” ' “a thing used to achieve an end or a purpose” ' compels this interpretation. As an instrumentality of the government, such entities must necessarily advance the “end or purpose” normally associated with governance, not simple financial gain.

Nguyen and Esquenazi also analyzed the use of the term “instrumentality” in other statutes on the books in 1977, such as the Foreign Sovereign Immunities Act (FSIA) and Employee Retirement Income Security Act (ERISA), arguing that these definitions should be persuasive in interpreting FCPA.

Drawing on FSIA case law indicating that instrumentalities must be directly owned by the government, for example, Nguyen argued that one company named in the indictment, PVGC, was a subdivision of an entity that was owned by the Vietnamese government. Nguyen claimed that the “corporate layer separating PVGC from the Vietnamese government” was sufficient to preclude PVGC's status as an instrumentality. Additionally, courts interpreting “instrumentality” under ERISA have held that “a government instrumentality is one that performs an important government function,” a point used by the defendants to attempt to highlight the distinction between public and commercial functions. See Fed. Reserve Bank v. Metrocentre Improvement Dist. #1 , 657 F.2d 183, 185.

Nguyen and Esquenazi also addressed the legislative history surrounding the 1998 amendment to the FCPA. The amendment added international organizations to the list of entities whose officials could be deemed foreign officials. The amendment was undertaken to conform the Act with the Organisation for Economic Co-operation and Development (OECD) Convention, an agreement among over 30 nations to effectuate stronger and more consistent laws that criminalize corruption of foreign officials. The Commentaries to the OECD Convention state that the Convention's anti-bribery provisions should apply to SOEs unless “the enterprise operates on a normal commercial basis in the relevant market, i.e., on a basis that is substantially equivalent to that of a private enterprise, without preferential subsidies or other privileges.” Convention Commentary ” 14-15. This Commentary weighs in favor of the argument that traditionally commercial entities should be deliberately excluded from the FCPA.

The district courts in Nguyen and Esquenazi rejected the defendants' arguments but only because the
issue (and evidence) would be better left as a question of fact for a jury.

In addition to the sources cited in the Nguyen and Esquenazi cases, there are numerous other sources of authority that may be helpful to a practitioner seeking to defend her client in an FCPA enforcement action where the “foreign official” appears to be more private than “official.”

The 1976 SEC Report

In U.S. v. Kay , 359 F.3d 738, 749 (5th Cir. 2004), the U.S. Court of Appeals for the Fifth Circuit identified two primary sources of FCPA legislative history ' congressional reports and the 1976 SEC Report that provided the impetus for enactment of the FCPA. This second document, titled the “Report on Questionable and Illegal Corporate Payments and Practices,” bolsters the argument that the term “foreign officials” means individuals performing a traditionally public function.

The SEC Report addressed improper foreign expenditures, dividing these by recipient: “government officials, commission agents and consultants, and recipients of commercial bribery.” SEC Report at 25. Thus, payments to officials are set forth as a category separate from ordinary commercial bribery.

The 1977 House Report for the FCPA made repeated reference to this SEC Report, and added only one example to those cited in the Report: Lockheed's bribery of various high-level politicians, such as the Japanese Prime Minister and Minister of Finance, a Dutch prince, and various Cabinet-level politicians in Italy. H.R. Rep. 95-640 at 5. While not dispositive of the issue, a deeper look at the 1977 legislative history shows that Congress was addressing traditional government officials, not SOE employees, when it passed the FCPA.

The OECD Convention

In the years prior to the ratification of the OECD Convention in 1998, the passage of the FCPA had created a comparative disadvantage for American companies, which were forced to compete with foreign companies that were unrestrained in their ability to pay bribes. The central purpose of the 1998 Amendment and the OECD Convention was to “level the playing field for business worldwide.” House Report No. 105-802 at 12 (1998).

By creating a uniform anti-bribery policy among the 30-plus signatories, the OECD Convention intends to eliminate any comparative disadvantage to honest companies. An FCPA defendant could use this to argue that reciprocity is a key principle to be applied when interpreting the FCPA ' that Congress intended American companies to be bound only as much as companies from other signatory nations would be. This principle militates against criminalizing conduct by American companies abroad if analogous conduct in the U.S. would not fall under other signatories' anti-corruption laws promulgated pursuant to the Convention. For example, under this approach, payments to telecommunications executives for preferential rates would fall outside the FCPA, since the equivalent American companies ' Verizon, AT&T, etc. ' are private. Instead, commercial bribery laws would cover such conduct.

The OECD Questionnaire

The DOJ's response to the OECD Phase I Questionnaire is also helpful. This questionnaire sought information regarding the DOJ's compliance with the OECD Convention. In response to a request to define the scope of the term “foreign official,” the DOJ stated:

State-owned business may, in appropriate circumstances, be considered instrumentalities of a foreign government and their officers and employees to be foreign officials ' . Among the factors [the DOJ] considers are the foreign state's own characterization of the enterprise and its employees, i.e., whether it prohibits and persecutes bribery of the enterprise's employees as public corruption, the purpose of the enterprise, and the degree of control exercised over the enterprise by the foreign government.

See U.S. Response to Phase I Questionnaire, available at www.oecd.org (emphasis added).

The DOJ's response, drafted essentially contemporaneous to the passage of the 1998 Amendment, implies that SOEs should not automatically be understood to be instrumentalities for purposes of the FCPA. Each of the factors listed ' legal characterization, purpose of the enterprise, degree of control ' offers a ground to oppose the application of FCPA to a specific SOE.

In this respect, an investigation of the foreign country's legal characterization of its SOEs may bring useful defenses to light. Certain French public corruption legislation, for example, appears to explicitly exclude companies that have less than 30% public ownership, potentially removing such companies from the FCPA's reach. See Modernization of Public Services Act of 2007.

Conclusion

The government's broad interpretation of the terms “foreign official” and “instrumentality” significantly expands the types of transactions implicated by the FCPA. Yet there are arguments to be made that this interpretation violates the intent of the statute. Despite the failure of two recent defendants to dismiss indictments on some of these grounds, the arguments can continue to be made and certainly remain viable for a defendant in the post-motion to dismiss stages of an FCPA enforcement action.

Jacqueline C. Wolff, a member of this newsletter's Board of Editors, is a former federal prosecutor and a partner in the Corporate Investigations & White Collar Defense practice group at Manatt, Phelps & Phillips, LLP. Nirav Shah is an associate in the group.