Thoughts on the Proposed FCPA Guidance

In a similar missive, a group of business associations led by the U.S. Chamber of Commerce, a vocal critic of the FCPA, requested “detailed, authoritative guidance” arguing that “clarifying the 'rules of the road' and mitigating the significant interpretive challenges that companies face when applying the text of the statute to complex real-world circumstances” will increase companies' compliance with the FCPA.

While the requests the DOJ has received list numerous issues for its consideration, two issues warrant discussion: 1) The need for a clear definition of “instrumentality”; and 2) The need for clear guidance regarding hospitality, gifts, and the travel and lodging carve-out.

Clear Definitions of 'Foreign Official' and 'Instrumentality'

The FCPA defines “foreign official” as “any officer or employee of a foreign government or any department, agency, or instrumentality thereof.” 15 U.S.C. ' 78dd-2(h)(2)(A). However, because the FCPA fails to define the term “instrumentality,” there is significant confusion about who qualifies as a foreign official.

Both the DOJ and the Securities and Exchange Commission (SEC) have interpreted the terms “foreign official” and “instrumentality” extremely broadly. For instance, in response to a motion to dismiss in U.S. v. O'Shea, the DOJ argued that “a government instrumentality is an entity through which a government achieves an end or purpose.” Response of the United States to Defendant's Motion to Dismiss Indictment, U.S. v. O'Shea, No. 4:09-cr-00629 (S.D. Tex Mar. 28, 2011). Under this definition, if a government decides to provide a service or sell goods through an entity, that entity is automatically an “instrumentality” of the government. In the Lindsey Manufacturing case (United States v. Noriega, No. 2:10-cr-01031 (C.D. Cal. March 10, 2011), the DOJ suggested a more narrow definition, stating that a “public enterprise” is any “enterprise, regardless of its legal form, over which a government, or governments, may, directly or indirectly, exercise a dominant influence. This is deemed to be the case ' when the government or governments hold the majority of the enterprise's subscribed capital, control the majority of votes attaching to shares issued by the enterprise or can appoint a majority of the members of the enterprise's administrative or managerial body or supervisory board.” Opposition to Defendants' Motion to Dismiss The First Superseding Indictment, U.S. v. Noriega. Using the DOJ's definition, in certain countries, such as China, almost every business would qualify as an instrumentality.

The judicial interpretations of “instrumentality” have been a bit more narrow. The three courts that have had occasion to examine the issue have adopted a multi-faceted approach to defining the term.

In U.S. v. Aguilar (Lindsey Manufacturing), No. 2:10-cr-01031 (C.D. Cal. March 10, 2011), when determining whether a Mexican utility was an instrumentality of Mexico, U.S. District Judge A. Howard Matz laid out a “non-exclusive” list of characteristics that might qualify an entity as an instrumentality:

• The entity provides a service to the citizens ' indeed, in many cases to all the inhabitants ' of the jurisdiction;
• The key officers and directors of the entity are, or are appointed by, government officials;
• The entity is financed, at least in large measure, through governmental appropriations or through revenues obtained as a result of government-mandated taxes, license fees or royalties, such as entrance fees to a national park;
• The entity is vested with and exercises exclusive or controlling power to administer its designated functions; and
• The entity is widely perceived and understood in the foreign country to be performing official (i.e., governmental) functions.

In U.S. v. Carson (Control Components Inc.,), No. 8:09-cr-00077 (C.D. Cal. Feb 16, 2012), U.S. District Judge James V. Selna provided his own set of factors:

• The circumstances surrounding the entity's creation;
• The foreign government's characterization of the entity;
• Whether the governmental end or purpose sought to be achieved is expressed in the policies of the foreign government;
• The degree of the foreign government's control over the entity, including the foreign government's power to appoint key directors or officers of the entity;
• The purpose of the entity's activities, including whether the entity provides a service to the citizens of the jurisdiction;
• The entity's obligations and privileges under the foreign country's law, including whether the entity exercises exclusive or controlling power to administer its designated functions;
• The status of employees under the foreign government's law, including whether the employees are considered public employees or civil servants; and
• The extent of the foreign government's ownership of the entity, including the level of financial support by the foreign government (e.g., subsidies, special tax treatment, and loans)

In U.S. v. O'Shea, although U.S. District Judge Lynn N. Hughes denied a motion to dismiss based on the defendant's argument that employees of the same Mexican utility at issue in the Lindsey Manufacturing matter were not “foreign officials,” Judge Hughes stated in his prepared jury instructions that the jury could consider the fact that the Mexican authority was not the only electrical power supplier in Mexico in that other such entities were private and permitted to compete under Mexican law. This fact supported the defendant's argument that the utility was not an instrumentality of the government and thus its officers were not “foreign officials” under the FCPA.

Should the DOJ incorporate a similar view as the courts in its guidance, this would provide significant breathing room for companies that operate in countries where government involvement in industries that are generally private in the U.S. is simply a matter of historic accident and the country has already moved beyond the nationalized monopoly. But it still would not address the problem of doing business with a state-owned entity in a country like China, in an industry that is private everywhere else but when the country still maintains a monopoly. DOJ guidance could consider whether, within the United States, such an entity is always private, suggesting that its function is not a government function, but is one only in China (for example) because of the particular political makeup of that country. If the purpose of the FCPA is to prevent corruption of government officials, someone who, for all intents and purposes, is operating a business should not be deemed a government official in one country but not in others simply because of the particular political system within which the business is operating.

Guidance Regarding Hospitality, Travel and Lodging, and Gifts

Although the FCPA specifically excludes travel and lodging for foreign officials that is directly related to “the promotion, demonstration, or explanation of products or services” or “the execution or performance of a contract with a foreign government or agency thereof” (15 U.S.C.
' 78dd-(3)(c)(2)), there is no real statutory guidance for how much can be spent on such travel and lodging, whether attendant hospitality is covered or whether unrelated hospitality geared more toward generating goodwill is prohibited. The DOJ has stated publicly that it will not prosecute conduct involving de minimis hospitality. Acting Deputy Assistant Attorney General Greg Andres stated in June, 2011 that “just to clear the record, the Department of Justice has never prosecuted somebody for giving a cup of coffee to a foreign official, a martini, two martinis, a lunch, a taxi ride or anything like that.” Hearing of the Crime, Terrorism and Homeland Security Subcommittee of the House Judiciary Committee (June 14, 2011), Tr. at 16-17.

Despite the DOJ's assurance that it will not prosecute cases involving “a cup of coffee” or “two martinis,” it has never provided official guidance. As a result, companies operating abroad are plagued with questions, doubts and unnecessary compliance issues. Company compliance officers must attempt to determine how much is too much. They must either arbitrarily limit hospitality spending or wrestle with frequent questions regarding how much the business may spend on meals, a sporting event, or other ordinary hospitality offered when dealing with foreign officials who are also purchasers of the Company's goods or services. Clear guidance from the Attorney General as to what is allowed, as proposed in the FCPA itself, would enable compliance officers to focus more time and effort on truly high risk areas.

In drafting the forthcoming guidance, the DOJ could look to the UK Bribery Act of 2010 Guidance. The Guidance recognizes that bona fide hospitality and promotional expenditures designed to improve the image of a commercial organization are an important part of doing business and should not be criminalized. The UK Guidance clearly states that absent additional evidence, the “incidental provision of a routine business courtesy” will not be considered a violation of the Bribery Act “particularly where such hospitality is commensurate with the reasonable and proportionate norms for the particular industry; e.g., the provision of airport-to-hotel transfer services to facilitate an on-site visit, or dining and tickets to an event.” The UK Guidance provides further examples of specific hospitality expenditures that would not violate the Bribery Act, including the provision of “fine dining and attendance at a baseball match” during the course of a routine business trip. The Bribery Act 2010 ' Guidance, UK Ministry of Justice.

A similar formal statement from the DOJ would do much to ease businesses' fears relating to routine hospitality. Similarly, the DOJ should include guidance regarding specific, commonplace business scenarios, including guidance about whether and when it would violate the FCPA to provide first-class air fare, car services, hotel accommodations and meals in a premier restaurant when negotiating a contract with, or pitching services to, a high level official. The DOJ should also provide similar guidance relating to promotional materials, gifts exchanged during traditional ceremonies, and company sponsored events that include not just foreign official customers but all customers, private as well as public.

Conclusion

The DOJ's commitment to provide “useful and transparent” FCPA guidance is good news for businesses subject to the FCPA. Providing clarity on basic issues, such as who truly qualifies as a “Foreign Official,” and what is a proper use of the travel and lodging carve-out, should lead to increased compliance with the FCPA, additional resources for combating corruption, and additional business opportunities for American companies operating abroad.

Jacqueline C. Wolff, a member of this newsletter's Board of Editors, and a former federal prosecutor, is Co-Chair of the Corporate Investigations and White Collar Defense practice group at Manatt, Phelps & Phillips, LLP in New York. Nicole German Di Schino is a litigation associate in the group.

This year may mark the beginning of a new, more predictable era in the world of FCPA compliance and enforcement. In November 2011, Assistant Attorney General (AAG) Lanny Breuer announced that the Department of Justice (DOJ) would release “detailed guidance” on the FCPA's criminal and civil enforcement provisions before the end of 2012. See www.justice.gov/criminal/pr/speeches/2011/crm-speech-111108.html. Such guidance has been regularly requested by the legal and business communities. In fact, the FCPA statute itself contemplated that the DOJ would provide this sort of guidance as long ago as 1989. Section 78dd-a(d) of Title 15 states that the Attorney General “shall determine to what extent compliance with [the FCPA] would be enhanced and the business community would be assisted by further clarification [and] may issue guidelines describing specific types of conduct, associated with common types of ' business contracts, which ' would be in conformance with the [FCPA].”

In the 35 years since the FCPA was enacted, the DOJ has provided guidance in the form of Opinion Procedure Releases. But these are specifically limited to the particular facts presented and have limited value for anyone other than the requestor.

Since the AAG's November announcement, the DOJ has received communications from various stakeholders, outlining requests for specific guidance. In a Feb. 15, 2012, letter to Attorney General Holder, Sens. Amy Kobuchar (D-MN) and Chris Coons (D-DE) urged the DOJ to “provide clarity and predictability to companies subject to” the FCPA. The senators noted that “too many companies are devoting a disproportionate amount of resources to FCPA compliance and internal investigations,” and noted that effective guidance would allow those companies to more efficiently comply with the FCPA, while not decreasing the government's ability to enforce the law.

In a similar missive, a group of business associations led by the U.S. Chamber of Commerce, a vocal critic of the FCPA, requested “detailed, authoritative guidance” arguing that “clarifying the 'rules of the road' and mitigating the significant interpretive challenges that companies face when applying the text of the statute to complex real-world circumstances” will increase companies' compliance with the FCPA.

While the requests the DOJ has received list numerous issues for its consideration, two issues warrant discussion: 1) The need for a clear definition of “instrumentality”; and 2) The need for clear guidance regarding hospitality, gifts, and the travel and lodging carve-out.

Clear Definitions of 'Foreign Official' and 'Instrumentality'

The FCPA defines “foreign official” as “any officer or employee of a foreign government or any department, agency, or instrumentality thereof.” 15 U.S.C. ' 78dd-2(h)(2)(A). However, because the FCPA fails to define the term “instrumentality,” there is significant confusion about who qualifies as a foreign official.

Both the DOJ and the Securities and Exchange Commission (SEC) have interpreted the terms “foreign official” and “instrumentality” extremely broadly. For instance, in response to a motion to dismiss in U.S. v. O'Shea, the DOJ argued that “a government instrumentality is an entity through which a government achieves an end or purpose.” Response of the United States to Defendant's Motion to Dismiss Indictment, U.S. v. O'Shea, No. 4:09-cr-00629 (S.D. Tex Mar. 28, 2011). Under this definition, if a government decides to provide a service or sell goods through an entity, that entity is automatically an “instrumentality” of the government. In the Lindsey Manufacturing case (United States v. Noriega, No. 2:10-cr-01031 (C.D. Cal. March 10, 2011), the DOJ suggested a more narrow definition, stating that a “public enterprise” is any “enterprise, regardless of its legal form, over which a government, or governments, may, directly or indirectly, exercise a dominant influence. This is deemed to be the case ' when the government or governments hold the majority of the enterprise's subscribed capital, control the majority of votes attaching to shares issued by the enterprise or can appoint a majority of the members of the enterprise's administrative or managerial body or supervisory board.” Opposition to Defendants' Motion to Dismiss The First Superseding Indictment, U.S. v. Noriega. Using the DOJ's definition, in certain countries, such as China, almost every business would qualify as an instrumentality.

The judicial interpretations of “instrumentality” have been a bit more narrow. The three courts that have had occasion to examine the issue have adopted a multi-faceted approach to defining the term.

In U.S. v. Aguilar (Lindsey Manufacturing), No. 2:10-cr-01031 (C.D. Cal. March 10, 2011), when determining whether a Mexican utility was an instrumentality of Mexico, U.S. District Judge A. Howard Matz laid out a “non-exclusive” list of characteristics that might qualify an entity as an instrumentality:

• The entity provides a service to the citizens ' indeed, in many cases to all the inhabitants ' of the jurisdiction;
• The key officers and directors of the entity are, or are appointed by, government officials;
• The entity is financed, at least in large measure, through governmental appropriations or through revenues obtained as a result of government-mandated taxes, license fees or royalties, such as entrance fees to a national park;
• The entity is vested with and exercises exclusive or controlling power to administer its designated functions; and
• The entity is widely perceived and understood in the foreign country to be performing official (i.e., governmental) functions.

In U.S. v. Carson (Control Components Inc.,), No. 8:09-cr-00077 (C.D. Cal. Feb 16, 2012), U.S. District Judge James V. Selna provided his own set of factors:

• The circumstances surrounding the entity's creation;
• The foreign government's characterization of the entity;
• Whether the governmental end or purpose sought to be achieved is expressed in the policies of the foreign government;
• The degree of the foreign government's control over the entity, including the foreign government's power to appoint key directors or officers of the entity;
• The purpose of the entity's activities, including whether the entity provides a service to the citizens of the jurisdiction;
• The entity's obligations and privileges under the foreign country's law, including whether the entity exercises exclusive or controlling power to administer its designated functions;
• The status of employees under the foreign government's law, including whether the employees are considered public employees or civil servants; and
• The extent of the foreign government's ownership of the entity, including the level of financial support by the foreign government (e.g., subsidies, special tax treatment, and loans)

In U.S. v. O'Shea, although U.S. District Judge Lynn N. Hughes denied a motion to dismiss based on the defendant's argument that employees of the same Mexican utility at issue in the Lindsey Manufacturing matter were not “foreign officials,” Judge Hughes stated in his prepared jury instructions that the jury could consider the fact that the Mexican authority was not the only electrical power supplier in Mexico in that other such entities were private and permitted to compete under Mexican law. This fact supported the defendant's argument that the utility was not an instrumentality of the government and thus its officers were not “foreign officials” under the FCPA.

Should the DOJ incorporate a similar view as the courts in its guidance, this would provide significant breathing room for companies that operate in countries where government involvement in industries that are generally private in the U.S. is simply a matter of historic accident and the country has already moved beyond the nationalized monopoly. But it still would not address the problem of doing business with a state-owned entity in a country like China, in an industry that is private everywhere else but when the country still maintains a monopoly. DOJ guidance could consider whether, within the United States, such an entity is always private, suggesting that its function is not a government function, but is one only in China (for example) because of the particular political makeup of that country. If the purpose of the FCPA is to prevent corruption of government officials, someone who, for all intents and purposes, is operating a business should not be deemed a government official in one country but not in others simply because of the particular political system within which the business is operating.

Guidance Regarding Hospitality, Travel and Lodging, and Gifts

Although the FCPA specifically excludes travel and lodging for foreign officials that is directly related to “the promotion, demonstration, or explanation of products or services” or “the execution or performance of a contract with a foreign government or agency thereof” (15 U.S.C.
' 78dd-(3)(c)(2)), there is no real statutory guidance for how much can be spent on such travel and lodging, whether attendant hospitality is covered or whether unrelated hospitality geared more toward generating goodwill is prohibited. The DOJ has stated publicly that it will not prosecute conduct involving de minimis hospitality. Acting Deputy Assistant Attorney General Greg Andres stated in June, 2011 that “just to clear the record, the Department of Justice has never prosecuted somebody for giving a cup of coffee to a foreign official, a martini, two martinis, a lunch, a taxi ride or anything like that.” Hearing of the Crime, Terrorism and Homeland Security Subcommittee of the House Judiciary Committee (June 14, 2011), Tr. at 16-17.

Despite the DOJ's assurance that it will not prosecute cases involving “a cup of coffee” or “two martinis,” it has never provided official guidance. As a result, companies operating abroad are plagued with questions, doubts and unnecessary compliance issues. Company compliance officers must attempt to determine how much is too much. They must either arbitrarily limit hospitality spending or wrestle with frequent questions regarding how much the business may spend on meals, a sporting event, or other ordinary hospitality offered when dealing with foreign officials who are also purchasers of the Company's goods or services. Clear guidance from the Attorney General as to what is allowed, as proposed in the FCPA itself, would enable compliance officers to focus more time and effort on truly high risk areas.

In drafting the forthcoming guidance, the DOJ could look to the UK Bribery Act of 2010 Guidance. The Guidance recognizes that bona fide hospitality and promotional expenditures designed to improve the image of a commercial organization are an important part of doing business and should not be criminalized. The UK Guidance clearly states that absent additional evidence, the “incidental provision of a routine business courtesy” will not be considered a violation of the Bribery Act “particularly where such hospitality is commensurate with the reasonable and proportionate norms for the particular industry; e.g., the provision of airport-to-hotel transfer services to facilitate an on-site visit, or dining and tickets to an event.” The UK Guidance provides further examples of specific hospitality expenditures that would not violate the Bribery Act, including the provision of “fine dining and attendance at a baseball match” during the course of a routine business trip. The Bribery Act 2010 ' Guidance, UK Ministry of Justice.

A similar formal statement from the DOJ would do much to ease businesses' fears relating to routine hospitality. Similarly, the DOJ should include guidance regarding specific, commonplace business scenarios, including guidance about whether and when it would violate the FCPA to provide first-class air fare, car services, hotel accommodations and meals in a premier restaurant when negotiating a contract with, or pitching services to, a high level official. The DOJ should also provide similar guidance relating to promotional materials, gifts exchanged during traditional ceremonies, and company sponsored events that include not just foreign official customers but all customers, private as well as public.

Conclusion

The DOJ's commitment to provide “useful and transparent” FCPA guidance is good news for businesses subject to the FCPA. Providing clarity on basic issues, such as who truly qualifies as a “Foreign Official,” and what is a proper use of the travel and lodging carve-out, should lead to increased compliance with the FCPA, additional resources for combating corruption, and additional business opportunities for American companies operating abroad.

Jacqueline C. Wolff, a member of this newsletter's Board of Editors, and a former federal prosecutor, is Co-Chair of the Corporate Investigations and White Collar Defense practice group at Manatt, Phelps & Phillips, LLP in New York. Nicole German Di Schino is a litigation associate in the group.