Defining Moment: 'Foreign Official' Under the FCPA

“Foreign official” is defined in the FCPA 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, agency, or instrumentality.” 15 U.S.C. ' 78dd-2(h)(2)(A). However, the FCPA does not define “instrumentality,” which has led to a debate over whether state-owned or controlled entities fall within its scope.

The Eleventh Circuit has the opportunity to become the first appellate court to squarely address this issue in a case involving bribes paid to Telecommunications D'Haiti (Haiti Teleco), a Haitian telecommunications company. In that case, the defendants were convicted of participating in a scheme to bribe employees of Haiti Teleco based upon the theory that the company's employees were “foreign officials” because: 1) the Haitian government owned 97% of Haiti Teleco's shares; 2) Haiti's president and high-level ministers controlled Haiti Teleco through their appointment of its board of directors and general director; and 3) Haitian law prohibited Haiti Teleco officials from official corruption. United States v. Esquenazi, No. 09-cr-21010 (S.D. Fla. 2009).

On appeal, the defendants have argued that employees of Haiti Teleco are not “foreign officials” under the FCPA because the term “instrumentality” should be read to include only the small class of entities that perform governmental functions, rather than businesses like Haiti Teleco that are merely owned or controlled by a foreign government. The defendants argue that the term “instrumentality” must be read consistently with the terms “department” and “agency,” which suggest a specific governmental role or function.

The defendants also argue that a reading of “instrumentality” to include state-owned entities would lead to “absurd results” when viewed in context of the FCPA's affirmative defenses as to expediting payments for “routine governmental action,” and payments of reasonable and bona fide expenditures related to “a contract with the foreign government or agency,” which by definition would not apply to such payments made to state-owned or controlled entities. Defendants also argue that the government's definition is too broad and would mean that employees of General Motors Co., and American International Group Inc., are “U.S. officials,” based on the United States' ownership interest in those companies.

Koehler's Declaration

In support of their defense, the defendants rely on, among others, a declaration, which was filed in United States v. Carson, of Michael J. Koehler, Assistant Professor of Business Law at Butler University. In that case, Koehler asserted that the legislative history relevant to the enactment of the FCPA in 1977 makes clear that Congress was focused on the evils of bribing traditional foreign government officials performing official or public functions. See United States v. Carson, No. 09-cr-77, Declaration of Professor Michael J. Koehler in Support of Defendants' Motions to Dismiss Counts One Through Ten of the Indictment (Feb. 21, 2011).

Specifically, Professor Koehler cites portions of the legislative history indicating that the drafters of the FCPA were concerned with the foreign policy problems created by domestic companies' payments to traditional foreign government officials and foreign political parties. Koehler further cites Congress's use of the term “foreign official” interchangeably with the terms “foreign government official” and “foreign public official” in the legislative history. His review of that history also shows that the drafters were aware of the existence of state-owned entities, and questionable payments made to such entities, and that several competing bills introduced in Congress specifically mentioned such entities.

For example, Koehler notes, two competing bills defined “foreign government” to include, among other things, “a corporation or other legal entity established or owned by, and subject to control by, a foreign government.” Id. at 6 (internal quotation marks omitted). At a hearing on these bills, the American Bar Association suggested a more “precise” definition, namely, “a legal entity which a foreign government owns or controls as though an owner.” Id.

Koehler's review of the legislative history indicates that, despite awareness of the existence of such entities and the ability to craft a definition that expressly included state-owned entities, Congress chose not to include such definitions or concepts in the legislation that ultimately became the FCPA in 1977. Koehler also notes that Congress chose not to include state-owned entities in the definition of “instrumentality” under the FCPA when it had the opportunity to do so in amending the definition of “foreign official” in 1988 and 1998. Finally, Koehler states, there is nothing in the FCPA's post-enactment legislative history to support a definition of “instrumentality” that includes state-owned or controlled entities. With Koehler's declaration as support, the Haiti Teleco defendants argue that “instrumentality” must therefore mean an entity that is either part of the foreign government or that performs governmental functions.

To even consider this legislative history, however, the Eleventh Circuit will have to overcome the conclusion of the district court in the case in which Koehler filed his declaration, that the term “instrumentality” is unambiguous. See United States v. Carson, 2011 WL 5101701, at *13-14, No. 09-cr-77 (C.D. Cal. May 18, 2011). In Carson, the district court did not address the legislative history because it held that “instrumentality” should be given its ordinary meaning, i.e., “something that is used to achieve an end.”

The court then held that the defendants' reading of “instrumentality,” as limited by the terms “agency” and “department,” would work an “impermissible narrowing” of the statute, which was intended by Congress to mount a “broad attack” on foreign government corruption. Id. at *20. The district court also noted that corporations have been used in this country to carry out governmental objectives and that other statutes support the conclusion that a state-owned enterprise may be considered an instrumentality. Id. at *20-30.

The Carson Court

Given the ordinary meaning of “instrumentality,” the Carson court held that a state-owned or controlled entity can be an “instrumentality” under the FCPA depending on several factors, including the circumstances surrounding the creation of the entity, the purpose of the entity, the extent of the foreign state's ownership of the entity, the foreign state's characterization of the entity and its employees, the foreign state's control over the entity, the purpose of the entity, and the entity's obligations under the foreign state's law. Id. at *11-12.

The district court noted that “[s]uch factors are not exclusive, and no single factor is dispositive.” Id. at *12. The Carson defendants pleaded guilty after losing their motion to dismiss and therefore this issue was never taken up on an appeal.

Conclusion

It may be quite some time between when the Eleventh Circuit hears the Haiti Teleco appeal in October and when it rules on the case. In the meantime, businesses should keep in mind the DOJ and SEC guidances that contain the government's view of “instrumentality.” See U.S. Department of Justice and the Enforcement Division of the U.S. Securities and Exchange Commission, A Resource Guide to the U.S. Foreign Corrupt Practices Act (Nov. 14, 2012).

The guidance notes that many foreign governments operate through state-owned and controlled entities, particularly in the areas of “aerospace and defense manufacturing, banking and finance, healthcare and life sciences, energy and extractive industries, telecommunications, and transportation.” It goes on to conclude that such entities may constitute instrumentalities under the FCPA based on a “fact-specific analysis of an entity's ownership, control, status, and function.” Id.

The FCPA guidance sets forth the following list of factors that companies should keep in mind when evaluating transactions with foreign businesses:'

• the foreign state's extent of ownership of the entity;
• the foreign state's degree of control over the entity (including whether key officers and directors of the entity are, or are appointed by, government officials);
• the foreign state's characterization of the entity and its employees;
• the circumstances surrounding the entity's creation;
• the purpose of the entity's activities;
• the entity's obligations and privileges under the foreign state's law;
• the exclusive or controlling power vested in the entity to administer its designated functions;
• the level of financial support by the foreign state (including subsidies, special tax treatment, government-mandated fees, and loans);
• the entity's provision of services to the jurisdiction's residents;
• whether the governmental end or purpose sought to be achieved is expressed in the policies of the foreign government; and
• the perception that the entity is performing official or governmental functions.

Businesses would be well served to incorporate the current DOJ/SEC guidance, as well as any future decisions from appellate courts, in their processes for review and approval of transactions in high-risk countries.

Stanley A. Twardy Jr., a member of this newsletter's Board of Editors, is a partner at Day Pitney LLP and is a former U.S. Attorney for the District of Connecticut. Elizabeth A. Latif is a counsel in the firm and is a former Assistant U.S Attorney.

Prosecution of Foreign Corrupt Practices Act (FCPA) cases remains a top law enforcement priority of the Department of Justice (DOJ) and Securities and Exchange Commission (SEC). Since 2010, the DOJ and SEC have brought more than 150 FCPA enforcement actions against corporations and individuals and have collected billions of dollars in penalties. Most recently, French oil company Total S.A. entered into a non-prosecution agreement with the government and agreed to pay a $245 million penalty to the DOJ, and an additional $153 million in disgorgement and prejudgment interest to the SEC, to resolve FCPA charges related to bribes paid to Iranian officials.

The FCPA prohibits payments to a “foreign official” or a “foreign political party or official thereof of any candidate for political office” for the purpose of influencing acts of that official in his or her official capacity, or inducing the official to influence an act or decision of the government in order to obtain or retain business on behalf of a private concern. 15 U.S.C. ' 78dd-2(a)(1)-(2). While the concept of a “foreign official” might seem to be straightforward, it is actually quite murky.

Defining the Terms

“Foreign official” is defined in the FCPA 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, agency, or instrumentality.” 15 U.S.C. ' 78dd-2(h)(2)(A). However, the FCPA does not define “instrumentality,” which has led to a debate over whether state-owned or controlled entities fall within its scope.

The Eleventh Circuit has the opportunity to become the first appellate court to squarely address this issue in a case involving bribes paid to Telecommunications D'Haiti (Haiti Teleco), a Haitian telecommunications company. In that case, the defendants were convicted of participating in a scheme to bribe employees of Haiti Teleco based upon the theory that the company's employees were “foreign officials” because: 1) the Haitian government owned 97% of Haiti Teleco's shares; 2) Haiti's president and high-level ministers controlled Haiti Teleco through their appointment of its board of directors and general director; and 3) Haitian law prohibited Haiti Teleco officials from official corruption. United States v. Esquenazi, No. 09-cr-21010 (S.D. Fla. 2009).

On appeal, the defendants have argued that employees of Haiti Teleco are not “foreign officials” under the FCPA because the term “instrumentality” should be read to include only the small class of entities that perform governmental functions, rather than businesses like Haiti Teleco that are merely owned or controlled by a foreign government. The defendants argue that the term “instrumentality” must be read consistently with the terms “department” and “agency,” which suggest a specific governmental role or function.

The defendants also argue that a reading of “instrumentality” to include state-owned entities would lead to “absurd results” when viewed in context of the FCPA's affirmative defenses as to expediting payments for “routine governmental action,” and payments of reasonable and bona fide expenditures related to “a contract with the foreign government or agency,” which by definition would not apply to such payments made to state-owned or controlled entities. Defendants also argue that the government's definition is too broad and would mean that employees of General Motors Co., and American International Group Inc., are “U.S. officials,” based on the United States' ownership interest in those companies.

Koehler's Declaration

In support of their defense, the defendants rely on, among others, a declaration, which was filed in United States v. Carson, of Michael J. Koehler, Assistant Professor of Business Law at Butler University. In that case, Koehler asserted that the legislative history relevant to the enactment of the FCPA in 1977 makes clear that Congress was focused on the evils of bribing traditional foreign government officials performing official or public functions. See United States v. Carson, No. 09-cr-77, Declaration of Professor Michael J. Koehler in Support of Defendants' Motions to Dismiss Counts One Through Ten of the Indictment (Feb. 21, 2011).

Specifically, Professor Koehler cites portions of the legislative history indicating that the drafters of the FCPA were concerned with the foreign policy problems created by domestic companies' payments to traditional foreign government officials and foreign political parties. Koehler further cites Congress's use of the term “foreign official” interchangeably with the terms “foreign government official” and “foreign public official” in the legislative history. His review of that history also shows that the drafters were aware of the existence of state-owned entities, and questionable payments made to such entities, and that several competing bills introduced in Congress specifically mentioned such entities.

For example, Koehler notes, two competing bills defined “foreign government” to include, among other things, “a corporation or other legal entity established or owned by, and subject to control by, a foreign government.” Id. at 6 (internal quotation marks omitted). At a hearing on these bills, the American Bar Association suggested a more “precise” definition, namely, “a legal entity which a foreign government owns or controls as though an owner.” Id.

Koehler's review of the legislative history indicates that, despite awareness of the existence of such entities and the ability to craft a definition that expressly included state-owned entities, Congress chose not to include such definitions or concepts in the legislation that ultimately became the FCPA in 1977. Koehler also notes that Congress chose not to include state-owned entities in the definition of “instrumentality” under the FCPA when it had the opportunity to do so in amending the definition of “foreign official” in 1988 and 1998. Finally, Koehler states, there is nothing in the FCPA's post-enactment legislative history to support a definition of “instrumentality” that includes state-owned or controlled entities. With Koehler's declaration as support, the Haiti Teleco defendants argue that “instrumentality” must therefore mean an entity that is either part of the foreign government or that performs governmental functions.

To even consider this legislative history, however, the Eleventh Circuit will have to overcome the conclusion of the district court in the case in which Koehler filed his declaration, that the term “instrumentality” is unambiguous. See United States v. Carson, 2011 WL 5101701, at *13-14, No. 09-cr-77 (C.D. Cal. May 18, 2011). In Carson, the district court did not address the legislative history because it held that “instrumentality” should be given its ordinary meaning, i.e., “something that is used to achieve an end.”

The court then held that the defendants' reading of “instrumentality,” as limited by the terms “agency” and “department,” would work an “impermissible narrowing” of the statute, which was intended by Congress to mount a “broad attack” on foreign government corruption. Id. at *20. The district court also noted that corporations have been used in this country to carry out governmental objectives and that other statutes support the conclusion that a state-owned enterprise may be considered an instrumentality. Id. at *20-30.

The Carson Court

Given the ordinary meaning of “instrumentality,” the Carson court held that a state-owned or controlled entity can be an “instrumentality” under the FCPA depending on several factors, including the circumstances surrounding the creation of the entity, the purpose of the entity, the extent of the foreign state's ownership of the entity, the foreign state's characterization of the entity and its employees, the foreign state's control over the entity, the purpose of the entity, and the entity's obligations under the foreign state's law. Id. at *11-12.

The district court noted that “[s]uch factors are not exclusive, and no single factor is dispositive.” Id. at *12. The Carson defendants pleaded guilty after losing their motion to dismiss and therefore this issue was never taken up on an appeal.

Conclusion

It may be quite some time between when the Eleventh Circuit hears the Haiti Teleco appeal in October and when it rules on the case. In the meantime, businesses should keep in mind the DOJ and SEC guidances that contain the government's view of “instrumentality.” See U.S. Department of Justice and the Enforcement Division of the U.S. Securities and Exchange Commission, A Resource Guide to the U.S. Foreign Corrupt Practices Act (Nov. 14, 2012).

The guidance notes that many foreign governments operate through state-owned and controlled entities, particularly in the areas of “aerospace and defense manufacturing, banking and finance, healthcare and life sciences, energy and extractive industries, telecommunications, and transportation.” It goes on to conclude that such entities may constitute instrumentalities under the FCPA based on a “fact-specific analysis of an entity's ownership, control, status, and function.” Id.

The FCPA guidance sets forth the following list of factors that companies should keep in mind when evaluating transactions with foreign businesses:'

• the foreign state's extent of ownership of the entity;
• the foreign state's degree of control over the entity (including whether key officers and directors of the entity are, or are appointed by, government officials);
• the foreign state's characterization of the entity and its employees;
• the circumstances surrounding the entity's creation;
• the purpose of the entity's activities;
• the entity's obligations and privileges under the foreign state's law;
• the exclusive or controlling power vested in the entity to administer its designated functions;
• the level of financial support by the foreign state (including subsidies, special tax treatment, government-mandated fees, and loans);
• the entity's provision of services to the jurisdiction's residents;
• whether the governmental end or purpose sought to be achieved is expressed in the policies of the foreign government; and
• the perception that the entity is performing official or governmental functions.

Businesses would be well served to incorporate the current DOJ/SEC guidance, as well as any future decisions from appellate courts, in their processes for review and approval of transactions in high-risk countries.

Stanley A. Twardy Jr., a member of this newsletter's Board of Editors, is a partner at Day Pitney LLP and is a former U.S. Attorney for the District of Connecticut. Elizabeth A. Latif is a counsel in the firm and is a former Assistant U.S Attorney.