FCPA Compliance and Ethics Blog

May 22, 2012

I Can’t Drive 55: The Uselessness of a ‘Custom and Practice’ Defense under the FCPA

For anyone who learned to drive before 1975, the bane of our driving existence thereafter was the 55 mile per hour (mph) speed limit. About the only thing that I can say it did was increase the budgets of state highway patrols through all the tickets they gave out to persons who were driving closer above that hallowed highway speed limit. But as much as we did not like the new speed limit, it was the law and if you drove over it and were clocked by radar, you were eligible for a ticket and it did not matter how many other speeders there were buzzing by that day.

I thought about that old Sammy Hagar song while reading about the forlorn attempt by the remaining US v. Carson defendants, Paul Cosgrove and David Edmonds. As reported by the FCPA Blog, in a post entitled “Feds: Widespread Corruption Is No Defense”, these defendants have sought a jury instruction that mimics that old Sammy Hagar classic. According to the FCPA Blog, the defendants “want an [jury] instruction about ‘industry practices’ in some of the countries where CCI did business. And they want to introduce evidence about corruption in those countries, including China.” The FCPA Blog goes on to site the Department of Justice (DOJ)  response which properly recites a nearly 50 year old legal standard that “Neither custom nor the widespread nature of an illegal act is a defense to a criminal charge. “Custom, involving criminality, cannot justify a criminal act.” Smith v. United States, 188 F.2d 969, 970 (9th Cir. 1951).”

Perhaps the defendants became confused about the inclusion of a local law defense in the Foreign Corrupt Practices Act (FCPA) under which payments to foreign governmental officials that are otherwise prohibited are permitted if the “payment, gift, offer, or promise of anything of value that was made, was lawful under the written laws and regulations of the foreign official’s…country.” The local law defense is an affirmative defense which was added to the FCPA in 1988 as part of a series of amendments designed to address criticisms of the statute.  As noted by Kyle Sheehan, in his article “I’m Not Going to Disneyland”, one such criticism of the FCPA was that through it the United States was more interested in exporting its cultural biases than its products”; may have placed “unreasonable restrictions on American corporations operating in foreign countries”; and that payments to foreign government officials rendered unlawful by the FCPA may have been legal in many countries. The Fifth Circuit Court of Appeals spoke to this issue in its decision in United States v. Castle, where it noted that “the [FCPA] drafters acknowledged, and the final law reflects this, that some payments that would be unethical or even illegal within the United States might not be perceived similarly in foreign countries, and those payments should not be criminalized.”

However, Sheehan also noted that Congress made it clear that in order for the local law defense to apply, the alleged corrupt payment must be legal under the written laws of the foreign country. The conference report on the 1988 amendments states “that the absence of written laws in a foreign official’s country would not by itself be sufficient to satisfy this defense.” Consequently, FCPA defendants planning to invoke the defense must know that the written law of the foreign official’s country expressly permits the payment. It cannot simply be that the “payments rendered illegal by the FCPA are part of the unwritten custom and practice of doing business in foreign countries.”

So how about Sammy Hagar and his iconic song? Just as the remaining Carson defendants have no hope of claiming some sort of ‘custom and practice’ defense to the FCPA because, after all, everyone else is doing it, the recent spate of new commentators to the FCPA who have made the same argument that the US has no business enforcing the FCPA because others are breaking the law are similarly forlorn. Simply reflect upon that defense to your speeding ticket for driving 70 mph in a 55 mph zone. It will not work in Traffic Court, it will not work in a federal District Court and it will not work in arguing that the DOJ should not enforce the FCPA.

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To listen to the music video version of Sammy Hagar belting out the classic, “I Can’t Drive 55” click here.

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This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2012

January 3, 2012

Ten Compliance Issues from 2011

I have seen several lists of the Top Foreign Corrupt Practices Act (FCPA) issues of 2011. Sam Rubenfeld and Chris Matthews at the Wall Street Journal’s Corruption Currents have been interviewing several of the top legal practitioners on their thoughts. The ever-present Mike Volkov has weighed in with his list and his “Person of the Year”, the Chief Compliance Officer. Howard Sklar and I even got into the video act by discussing our most significant issues in “This Week in FCPA”. So as part of the compliance commentariati, I submit, for your consideration, my Top Ten anti-corruption and anti-bribery issues over the past 12 months.

1.         Amendments to the FCPA? The Senate ended 2010 with hearings focusing on why there were not more individual prosecutions under the FCPA. In June, the House Judiciary Committee focused on ways to ease up on or gut the anti-corruption provisions of the FCPA in the name of US “competitiveness” overseas. Then in a stunning turnaround, the House Judiciary Chair asked the Department of Justice (DOJ) representative if the DOJ would support a ban on all commercial bribery, not just a ban on bribing foreign governmental officials. Then again he did say was drafting amendments to the FCPA which we haven’t heard about since the great theater in June.

2.         UK Bribery Act goes live. For many in the anglophile world, the event of the year was the marriage of Prince William to Kate Middleton. However, for us in the anti-corruption and anti-bribery world, it was effective date of the UK Bribery Act, July 1. While some had opined that the Bribery Act was “the FCPA on steroids” the initial prosecution under the Bribery Act was for a £500 bribe paid to a UK court clerk. Perhaps it just takes awhile for UK steroids to kick in.

 3.         Crystal Ball Reading. One does not have to read a crystal ball or tea leaves to know what should constitute a best practices compliance program. The DOJ continues to respond to calls for information by practitioners and the commentarati by providing solid information through which you can implement or enhance your compliance program. In addition to continuing to list the 12 points in a minimum best practices compliance program in each Deferred Prosecution Agreement (DPA)/Non-Prosecution Agreement (NPA) released; the DOJ has provided ‘enhanced compliance obligations’ in DPAs which provide information on evolving standards. Back in January, the DOJ provided information on areas of risk which should be assessed to inform your compliance program.

4.         Chief Compliance Officer Upgrade. With the effective changes in the federal sentencing guidelines from November, 2010 and the DOJ comments this year, it has become clear that companies must give a more prominent role to the Chief Compliance Officer and separate that function from that of the General Counsel.

5.         Investigating Private Equity. Both the DOJ and Serious Fraud Office (SFO) announced that they would be looking at private equity, in conjunction with anti-bribery and anti-corruption. Well known for cost reductions through cutting corporate budgets, they may become a prime and profitable set of targets for enforcement agencies.  Additionally, their unique structure of separately operating portfolio companies may greatly increase ownerships control and person risks. If you are in private equity and are reading this and have no clue what I am talking about, get on the phone to one of Howard Sklar’s recommended FCPA counsel ASAP.

6.         It Just Can’t Get any Weirder. Just when you think you have seen it all in the FCPA world, News Corp., is accused of bribing Scotland Yard to further its newspaper business and it is also alleged that a lawyer representing a US company in Mexican litigation attempts to bribe a court official to obtain a favorable ruling. Then, of course there is Olympus, which not only fires its whistle-blowing Chief Executive Officer (CEO) for questioning Red Flag payments to agents, which reveals that it has been engaged in a decade long corporate fraud. But here’s the topper in my book, someone posted a comment to my blog post about Tyson’s Foods paying bribes to the wives of Mexican food inspectors to obtain ‘favorable treatment’. She said the following “The meat being TIF-certified for export was not meat distributed to U.S. The meat was being exported to countries such as Japan and other Asian destinations.” I am sure that is of great comfort to the folks in “Japan and other Asian destinations”. Memo to Tyson: Call Gini Dietrich at Spin Sucks for some serious PR help.

7.         Plaintiff’s Bar gets that old time (FCPA) religion. The FCPA was used, in a somewhat novel manner, in three civil actions which may portend an entire new wave of private and civil FCPA litigations. In SciClone a shareholder derivative action was filed after the announcement of a FCPA investigation. During the pendency of a FCPA investigation, this civil action was settled with the company agreeing to implement a best practices compliance program. In Alba v. Alcoa a company whose employees were allegedly paid bribes (Alba) sued the alleged bribe-payor (Alcoa) for damages in driving up the costs for products sold because of the corrupt acts of Alcoa. In ICE, the Costa Rican telecom company sought to use the victim restitution component to allow it to participate in the DOJ’s FCPA settlement with Alcatel-Lucent.

8.         Rule of Law. Several DOJ prosecutions of individuals under the FCPA have brought a plethora of legal rulings to flesh out legal standards under the FCPA. In the spring, there were district court rulings on whether a state owned enterprise is covered by the FCPA and an analysis of what constitutes a state owned enterprise. These cases will probably be appealed so we may have the first US court of appeals’ interpretation of the FCPA in quite some time.

9.         Wide World of Enforcement. More countries are implementing new anti-corruption laws and more resources are being dedicated to enforcement. The US has had significant cooperation with the UK SFO and Financial Services Association (FSA) and this will increase with the go live date of the Bribery Act. However, the BRIC countries have passed, or are considering, significant anti-corruption laws. The US is starting to coordinate and share more information with these countries — China being the most significant.  For global companies, this increase will portend greater numbers of fines and penalties and will complicate international settlement efforts.

10.       Year of the FCPA Trial. This was the year that the DOJ brought out the big trial guns for three very high profile FCPA trials: the Gun Sting cases; Lindsey Manufacturing; and Haitian Telecom. The resolution results have been mixed, with convictions in Lindsey and Haitian Telecom; mistrial in the first of four Gun Sting trials and some dismissals in the second Gun Sting trial. However, the government has taken a black eye for some procedural missteps, particularly the judge throwing out the entire guilty verdict for prosecutorial misconduct in the Lindsey Mfg. case.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2012

November 7, 2011

Checklist for Defending FCPA Cases

Most readers of this blog will be familiar with the Lindsey Manufacturing and Esquenazi Rodriguez prosecutions earlier this year. Both sets of individual defendants in these cases were convicted of violating the Foreign Corrupt Practices Act (FCPA). These convictions were what the FCPA Blog called, “quick verdicts”. There was also the first of four groups of defendants tried in the Gun Sting case. In this case the jury deliberated for five days before the judge declared a mistrial. The second group of defendants is currently in trial.

While the Lindsey Manufacturing defendants have yet to be sentenced, Joel Esquenazi was sentenced to 15 years in prison and Carlos Rodriguez received a sentence of seven years. The John O’Shea case, which was set to go to trial this week here in Houston has been delayed until January, 2012 and the individual defendants in the Control Components case, US v. Carson, are scheduled to go to trial next spring. So there is an increase in the number of individuals going to trial and the length of their sentences, with apparently more to come.

An article in the September issue of The Champion, the monthly magazine of National Association of Criminal Defense Lawyers, entitled “You Mean You’re Really Going to Try an FCPA Case?” authors Timothy O’Toole and Andrew Wise provide “a checklist of defenses that should be explored” if an individual finds himself in such a prosecution. They list some of the defenses that might be raised.

The Foreign Official Defense

While the trial judge in the Carson case made a ruling on the defense claim of who might be a foreign official under the FCPA, the authors believe that the factor listed requires a “complicated analysis and are difficult to apply.” Therefore, with “the absence of any appellate precedent, it remains to be seen whether this fact-based analysis will prevail or whether courts will ultimately accept the Carson defendants’ argument that employees of a state-owned business enterprise are not, as a matter of law, ’foreign officials’ under the FCPA.” This would allow such a defense to at least be explored.

Facilitation Payments

This defense might be available where the amount of the alleged bribe made is small and is made to obtain a “routine, ministerial act…” However, the authors note that the line between a bribe and a facilitation payment is a “blurry one” and the Department of Justice (DOJ) considers this exception to “quite narrow.” I would also add that any payment where the facilitation defense is claimed should not be recurring.

Promotional Expenses

This defense might arise where the defendant is alleged to “have paid for travel as well as room and board for foreign governmental officials coming to the United States.” However, the FCPA specifically requires that such payments under the exception to the FCPA might be “reasonable and bona fide”. The authors note that if you took foreign government officials to Disneyland and your employer is not the Walt Disney Corporation that this defense is not available to you by stating, “The more the trip looks like a routine business trip, and the more that the company itself pays for meal and lodging expenses directly, the more viable the defense becomes.” If you have taken the foreign officials to your plant for a visit, have paid for coach travel and have not paid for wives or other family members, this defense might be available. The overall key is reasonableness.

Local Law

The authors note that “The FCPA also contains an affirmative defense for payments to foreign officials that are ’lawful under the written laws and regulations’ of the foreign country.” However, there is no country in the world which allows the bribery of its governmental officials so there has never been a successful invocation of this defense.

Jurisdictional Defenses

The jurisdiction of the FCPA is quite broad reaching any US company, US citizen, anywhere in the world, and any employee of any US company; all for “acts that take place entirely outside of the United States.” The authors note that even with this very wide application, the DOJ interprets this jurisdictional base quite broadly so that “enforcement authorities have based jurisdictional claims entirely on foreign wire transfers denominated in U.S. dollars, under the theory that such transfers proceed through a correspondent bank account in New York.” This may be quite a difficult defense to raise.

Business Nexus Requirement

The authors cite the statute for the basis of criminalization of a payment to a foreign governmental official

(i)                 influencing any act or decision of such foreign official in his official capacity, (ii) inducing such foreign official to do or omit to do any act in violation of the lawful duty of such official, or (iii) securing any improper advantage … in order to assist [the company making the payment] in obtaining or retaining business for or with, or directing business to, any person.

Recognizing that the first two elements are more or less straightforward, the authors argue that the third element is “more difficult to apply both because it often involves administrative action similar to the circumstances in which facilitating payments can be made, and because there is confusion about the meaning of the ’obtaining or retaining business’ requirement.” This is the “business nexus requirement.” The authors believe that the case which has the most thorough discussion of the business nexus requirement, the Kay case, “provides little clarity about the scope of the FCPA’s reach other than to suggest that the government must prove a ‘business nexus’ beyond a reasonable doubt.” Due to this lack of “clarity” the authors posit that the business nexus requirement is one that defendants “should pursue both through pretrial motions and potentially as a fact-based defense before the jury.”

Mens Rea

This requires that any payment made to a foreign governmental official is made knowing “that all or part of the money would be used to bribe” such foreign official. As the FCPA is a criminal statute, the government “must prove beyond a reasonable doubt that the required mental state coexisted with the proscribed act, i.e., that the defendant acted with the requisite ‘corrupt intent’ when the alleged misconduct occurred.” However, the government also can invoke the “willful blindness” doctrine which the authors define as a doctrine that “merely allows a finding of ’knowledge’ and ’willfulness’ in a situation where the evidence shows the defendant ’actually knew but he refrained from obtaining final confirmation’”. The authors argue that the mens rea defense is important in defending high level company officials when bribes were paid by a lower level employee or an agent.

Entrapment

This is reserved for cases which might be similar to the Gun Sting case in which the government engages in an undercover sting to obtain indictments for violation of the FCPA. Recognizing that this defense will never be an “easy one” it may be “an easier one to pursue in white collar cases than blue collar cases due to the potential differences with regard to predisposition evidence.” Also, as was found after the mistrial in the first Gun Sting trial, juries may be sympathetic to situations where the government creates an entire scenario which the defendant may have believed such conduct was not illegal. Contrast this with the recent conviction of Raj Rajaratnam where the case involved wiretaps but was not an undercover sting operation with an entire business opportunity created by the government.

I found this article though provoking and quite interesting that it should be in the monthly magazine of the National Association of Criminal Defense Lawyers. I do believe that there will be an increase in the prosecution of individuals under the FCPA as there is an outcry for such prosecutions even from Congress.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2011

August 19, 2011

Reading a Crystal Ball? Guidance on Instrumentality under the FCPA-Part II

In Part I of Reading a Crystal Ball? Guidance on Instrumentality under the FCPA, we listed the factors which the three federal district courts have set forth for the determination of whether an entity is an instrumentality under the Foreign Corrupt Practices Act (FCPA). In Part II, we will review these factors to see if there is any pattern which we can suggest to the compliance practitioner or indeed the US Chamber of Commerce, which desires to bring some ‘clarity’ to this question, all of which might help an understanding of when the FCPA applies to a transaction or business partner. The chart below consolidates the factors raised by the courts and are set out for reference:

Factor Lindsey Carson Esquenazi
1 Entity provides services to citizens, in many cases all in country Foreign states characterization of the entity and its employees Does the entity provides services to citizens and inhabitants of country
2 Are key officers/directors government employees or appointed by government employees Foreign State’s control over the entity Are key officers/directors government employees or appointed by government  employees
3 Is entity financed by or in large measure by government appropriations or through government mandates Purpose of the entity’s activities Extent of government ownership or does government provide financial support
4 Is entity vested with or does it exercise exclusive/controlling power to administer its designated functions The Entity’s obligations and privileges under country’s laws, including whether it exercises exclusive/controlling power to administer its designated functions Extent of obligations and privileges under its country’s laws, including whether it exercises exclusive/controlling power to administer its designated functions
5 Is entity widely perceived and understood to be providing official functions Circumstances around the entities creation Is entity widely perceived and understood to be providing official functions
6 The foreign state’s extent of ownership of the entity, including the level offinancial support by the state

I.                   Overlap?

There is clear overlap in the Lindsey and Esquenazi factors.

Identical - does the government appoint the officers/directors and is the entity understood to be owned by or an agency of the government in the home country? In Lindsey and Esquenazi, the courts agree on factors (2) Are key officers/directors government employees or appointed by government employees; and (5) Is the entity widely perceived and understood to be providing official functions?

Similar – are the services provided by the entity available to all citizens of the home country? In Lindsey and Esquenazi, the similar factors are (1) Does the entity provide services to the inhabitants of the country?

Related - does the government finance the entity in question and does it own the entity? Does it exercise exclusive/controlling power to administer its designated functions and the extent of obligations and privileges under its country’s laws? In Lindsey and Esquenazi, two courts had nearly similar factors, but the Esquenazi court added an additional component. In factor (3) The Lindsey court inquired ‘is the entity financed by or in large measure by government appropriations or through government mandates’ and the Esquenazi court added to this inquiry ‘the extent of government ownership.’ In factor (4) the Lindsey court inquired, ‘Is entity vested with or does it exercise exclusive/controlling power to administer its designated functions’ and the Esquenazi court added the factor of ‘Extent of obligations and privileges under its country’s laws’.

II.      Compare and Contrast

At first blush it may appear that the Carson court takes a slightly different approach. If one examines the Carson factors in detail they are not significantly different from Lindsey and Esquenazi. One clear factor that Carson has in common with Lindsey and Esquenazi is the factor of the entity’s obligations and privileges under its country’s laws, including whether it exercises exclusive/controlling power to administer its designated functions. Carson combines two of the Esquenazi factor of the extent of government ownership and financial support by said government. While Lindsey does not speak to financial ownership it does have the factor of government financing and government appointment of officers and directors. Carson speaks to the entity’s purpose while Lindsey and Esquenazi list the factor of providing services to the country’s citizens. Indeed the only factor included in Carson and not found in Lindsey and Esquenazi is the following: the circumstances around the entity’s creation. It is incumbent to note that both the Lindsey and Carson court opinions and the Esquenazi jury instructions all have language that indicates these factors are not exclusive, and no single factor will determine whether an entity is an instrumentality of a foreign government.

III.             Reading the Crystal Ball

With all this information in mind what inferences can be drawn by a compliance officer, or indeed the US Chamber of Commerce, for guidance on whether a business is an instrumentality under the FCPA? Reviewing the foregoing, the factors can be distilled down to a manageable list, which I believe is as follows:

  1. Ownership/Financial Control – There is no percentage amount listed but the inclusion of financial control would clearly indicate that anything over 50% would be a significant factor.
  2. Actual control is key in all three court decisions. In Lindsey and Esquenazi, it is characterized as the government’s right to appoint key officers and directors. In Carson, it is called government control. But this means that if actual control is exercised by the government in question, it may trump the 50% guidance stated above.
  3. Privileges and Obligations are also mentioned in all three. Does the entity have the right to control its own functions?
  4. Financing – Is the entity a for-profit entity, financed through its own revenues or does it depend on financing by its government?
  5. Perception is Reality - André Agassi’s immortal words appear again. If it is widely perceived to be providing an official function, then it is an instrumentality under the FCPA.

That leaves Carson factor 5, the circumstances around the entity’s creation. While I believe this could well be the last factor in your analysis, it can be one which is ascertained. Most government entities will disclose how they were formed; this information can be found on their website or within their company history. If you cannot determine how a business was formed perhaps you need to think hard about doing business with them.

So that is my reading of the Crystal Ball. You may have a different reading but for my money the information is out there to be read and indeed it may not be all that difficult.

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This Week in FCPA is back. Howard Sklar and I continue our conversation on all things FCPA and global anti-corruption. The audio is up. Click here.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2011

August 17, 2011

Reading a Crystal Ball? Guidance on Instrumentality under the FCPA-Part I

One the criticisms of the Foreign Corrupt Practices Act (FCPA) is that it provides little guidance as to what constitutes an instrumentality under the Act and attendant question of who is a foreign governmental official. One of the five points raised by the US Chamber of Commerce in its lobbying efforts to amend the FCPA is on this issue. In the Chamber’s White Paper, authored by Andrew Wiessmann and Alixandra Smith, entitled “Restoring Balance-Proposed Amendments to the Foreign Corrupt Practices Act”, they wrote that this lack of statutory guidance has led US companies to have “no way of knowing whether the FCPA applies” to a transaction because there is allegedly no way to know if a foreign governmental official is involved.

The authors suggest that the definition of an instrumentality and foreign governmental official be more clearly defined to include such information as (1) “the percentage ownership by a foreign government that will qualify a corporation as an “instrumentality”; (2) whether ownership by a foreign official necessarily qualifies a company as an instrumentality and, if so, (3) whether the foreign official must be of a particular rank or the ownership must reach a certain percentage threshold; and (4) to what extent “control” by a foreign government or official will qualify a company as an “instrumentality.” At the House Judiciary Committee hearing in June, former Attorney General and current Debevoise & Plimpton partner Michael Mukasey followed this article up by urging a clarification of the definition of instrumentality.

As reported by the FCPA Professor, in a post entitled “House Hearing-Overview and Observations”, Mukasey stated that the federal district court rulings in the Lindsey Manufacturing and Carson cases did very little to clarify the limits of the “foreign official” issue other than to say that whether an employee of an alleged state-owned or state-controlled enterprise could constitute a “foreign official” varied depending on the circumstances. Mukasey stated that leaving this issue in the hands of a jury in a criminal trial makes it “impossible” for companies to determine in advance who is a “foreign official” thereby increasing uncertainty and barriers to US business. According to Mukasey, “majority ownership is the most plausible threshold” for whether a state-owned or state-controlled enterprise constitutes a foreign government “instrumentality.”

In addition to the definitions found in the Lindsey Manufacturing and Carson cases, there has been the district court’s jury instruction in the recent trial of Joel Esquenazi and Carlos Rodriguez. This case involved the lengthy saga of the Haitian Telecom matter. In July, both men were found guilty by a Miami jury. In this post we will set out factors the courts have set out to define an instrumentality under the FCPA in these three cases. In our next post we analyze these factors to see what they have in common and what guidance, if any, that they may provide.

a.      Lindsey Manufacturing

The court in Lindsey Manufacturing pointed to various characteristics of foreign government ‘instrumentalities’ that would provide coverage under the FCPA. The court listed five non-exclusive factors:

•           The entity provides a service to its citizens, in many cases to all the inhabitants of the country.

•           The key officers and directors of the entity are government officials 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, licenses, 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.

•           The entity is widely perceived and understood to be performing official functions.

In Lindsey Manufacturing the foreign governmental entity at issue was the Mexican national electric company CFE. The trial court found that the entity had all of the characteristics listed in the five non-exclusive factors. It was created as a public entity; its governing Board consisted of high ranking government officials; CFE described itself as a government agency and it performed a function that the Mexican government itself said was a government function, the delivery of electricity.

b.      Carson

 In the Carson case, the court denied the “foreign official” challenge ruling that “the question of whether state-owned companies qualify as instrumentalities under the FCPA is a question of fact.” The court cited the following factual inquiries to determine whether a business entity constitutes a “government instrumentality” including:

(1)   The foreign state’s characterization of the entity and its employees;

(2)   The foreign state’s degree of control over the entity;

(3)   The purpose of the entity’s activities;

(4)   The entity’s obligations and privileges under the foreign state’s law, including whether the entity exercises exclusive or controlling power to administer its designated functions;

(5)   The circumstances surrounding the entity’s creation; and

(6)   The foreign state’s extent of ownership of the entity, including the level of financial support by the state (e.g., subsidies, special tax treatment, and loans).

The Court specifically noted that the factors were non-exclusive and no single factor is dispositive. Later, in its opinion, the court added additional guidance with the following, “Admittedly, a mere monetary investment in a business by the government may not be sufficient to transform the entity into a government instrumentality. But when a monetary investment is combined with additional factors that objectively indicate that the entity is being used as an instrumentality to carry out governmental objectives that business entity would qualify as a governmental instrumentality.” Lastly, as it is a factual inquiry, the question will go to the jury.

c.       Esquenazi and Rodriguez

In the Esquenazi and Rodriguez case, the defendants challenged the Department of Justice’s (DOJ) foreign official interpretation and the DOJ. However, the district court denied the Motion to Dismiss with a short order which did not set out any factors for analysis. Nevertheless, the court did provide contested jury instructions on the definition. As reported by the FCPA Professor, the jury instructions were as follows.

“An ‘instrumentality’ of a foreign government is a means or agency through which a function of the foreign government is accomplished. State-owned or state-controlled companies that provide services to the public may meet this definition. To decide whether [Haiti Telecom] is an instrumentality of the government of Haiti, you may consider factors including but not limited to:

(1) whether it provides services to the citizens and inhabitants of Haiti;

(2) whether its key officers and directors are government officials or are appointed by government officials;

(3) the extent of Haiti’s ownership of Teleco, including whether the Haitian government owns a majority of Teleco’s shares or provides financial support such as subsidies, special tax treatment, loans or revenue from government-mandated fees;

(4) Teleco’s obligations and privileges under Haitian law, including whether Teleco exercises exclusive or controlling power to administer its designated functions; and

(5) whether Teleco is widely perceived and understood to be performing official or government functions. These factors are not exclusive, and no single factor will determine whether [Teleco] is an instrumentality of a foreign government. In addition, you do not need to find that all the factors listed above weigh in favor of Teleco being an instrumentality in order to find that Teleco is an instrumentality.”

Tomorrow we will compare these factors and attempt to distill a formula which can bring the clarity that the Chamber of Commerce so desires.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2011

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