Using Bribery and Corruption to Steal Business – A Thyestean Feast?

Not much beats the ancient Greek House of Atreus for dramatic gore: infanticide, patricide, fratricide, filicide, matricide, cannibalism, incest and about every other horror which can befall one family occurs in the various stories of this, the ruling family of Mycenae. One of the most horrific stories involves the brothers Atreus and Thyestes. After Atreus steals the throne from Thyestes, Thyestes seeks his revenge by sleeping with Atreus’ wife Aerope. Atreus then invites Thyestes to a reconciliation banquet where he serves the roasted heads of Atreus’ two sons on platters as the main course. Atreus then puts a curse on Atreus and all his offspring, which lasted throughout Greek antiquity (i.e. longer than the Curse of the Bambino or Curse of the Billy Goat). To this day a Thyestean Feast is synonymous as cannibalistic feast. In other words, at what cost did you really prevail?

I thought about the above myth in the context of the arrest of two articles I wrote about yesterday which appeared in the Weekend Edition of the Financial Times (FT) about the arrest of Frederic Cilins, a French citizen, for seeking to obstruct a federal grand jury investigation about alleged Foreign Corrupt Practices Act (FCPA) violations. The two articles were “Contracts link BSGR to alleged bribes” (mine rights article) and “FBI sting says that ‘agent’ sought to have mining contracts destroyed” (FBI sting article). Both articles were by the same triumvirate of FT reporters, Tom Burgis, Misha Glenny and Cynthia O’Murchu.

To recap, the articles revolved around allegations that “The resources arm of Beny Steinmetz Group agreed to pay $2m to the wife of an African president to help it secure rights to one of the world’s richest untapped mineral deposits, according to documents seen by the Financial Times”. These payments were allegedly memorialized in “Copies of two contracts from 2007 and 2008, apparently signed by BSGR’s representatives in the mineral-rich west African nation of Guinea, set out agreements for the company to make payments and transfer shares to Mamadie Touré, wife of the then president Lansana Conté.”

The FBI sting article also revealed a bit more of the history of the underlying mining rights at issue. The Australian company Rio Tinto “held the rights to the whole of Simandou, a mountain range groaning with iron ore in Guinea’s remote interior, for a decade.” But in August, 2008, the Conté government withdrew the mining group’s concession, “saying it had taken too long to develop a mine.” In December 2008, just days before the dictator’s death, the then Guinean government assigned over half the rights of Simandou to BSGR. The FT also reported that “One African mining veteran described BSGR’s sale as the “best private mining deal of our generation.”” After spending $160m developing its assets in Guinea, 18 months later, in April 2010, BSGR sold a 51% stake of its Guinean venture to Vale of Brazil for $2.5bn.

The FT also reported that after the transfer of mining rights from Rio Tinto to BSGR, another mining entity, “Vale of Brazil, the world’s biggest iron ore miner, bought a 51 per cent in BSR’s Guinea assets in April 2010. Late last year, as a Guinean government committee levelled corruption allegations against BSGR, Vale put the Simandou project on hold. Earlier this month, it suspended payments on the $2.5bn it agreed to pay for its stake.”

Now all of the above are only allegations at this point and BSGR has clearly stated that it believes the allegations have no merit. As the mining rights article noted, “BSGR said in a statement to the FT on Friday: “Allegations of fraud in obtaining our mining rights in Guinea are entirely baseless. We are confident that BSGR’s position in Guinea will be fully vindicated.””

But under such a scenario, what might be the cost to be to a company which engages in such conduct. Fortunately we have somewhat evolved past the blood feuds that the ancients Greeks engaged in were they wronged. We have developed the litigation system to help redress violations of law. In an interesting note, even this was foreshadowed in the Greek myths where the final play about the House of Atreus involved a trial rather than blood revenge.

In the above scenario, what might be some of the legal rights of the parties listed? In an article entitled “Use of the FCPA in State-Law Unfair Competition Cases”, Edward Little, Jr. explored the question of whether the FCPA can serve as the basis as a predicate act for civil liability under state unfair competition laws. He makes a powerful case that such lawsuits may be the next frontier for FCPA cases.

Little next noted that the violation of the FCPA may provide a basis for civil liability under federal or state anti-trust laws, “especially when it is proved that the foreign bribery had an anti-competitive effect within the United States.” Little pointed to the example of two Phillip Morris subsidiaries that bribed officials in several South American countries “to obtain price controls on tobacco.” There was also a recent FCPA/anti-trust enforcement action against Bridgestone which may provide such a trigger.

Little turned to state unfair competition laws which, if based on the Revised Uniform Deceptive Trade Practices Act, can “provide severe penalties for violations of federal and state laws when committed in trade or commerce.” These penalties can include treble damages and attorneys’ fees. He pointed to a currently pending litigation matter styled “Newmarket Corp. v. Innospec, Inc. Civil Action No. 10-503-HEH (E.D Va.)” in which Newmarket has brought claims under the Sherman Act, the Robinson-Patman Act and the state of Virginia Business Conspiracy Act. This state law makes illegal “combinations of two or more persons for the purpose of willfully and maliciously injuring another in his…business…”

Most states have some type of law which broadly declares that “unfair methods of competition are…unlawful.” If a company admits to guilt under the FCPA the facts of liability are laid out in a Deferred Prosecution Agreement (DPA). There is some discussion of the amount of bribes paid, usually referencing both the monetary value of the contract or other business obtained through the conduct, which laid the predicate for the FCPA violation. Lastly, there is often a specific amount of money identified as profit disgorgement that is remitted to the government. Doesn’t this sound something like “Did the defendant engage in illegal conduct which impacted the plaintiff?” and “If so, what are the plaintiff’s damages?”

As a recovering trial lawyer, I was proud to engage in a profession which can trace its roots back to ancient Greece. As a lawyer, who specializes in the FCPA, I wonder if a company which uses corruption and bribery to steal or even procure a contract or business might find that the cost of obtaining such business is too high if they are forced to defend themselves in a civil trial and pay out the amount of damages that their conduct caused. Indeed, might it even be the modern day equivalent to a Thyestean Feast?

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, 2013

Election Day – Just Who is a Foreign Government Official?

Ed. Note-we continue our series of guest posts from our colleague Mary Shaddock Jones, who today looks at the issue of foreign government officials under the FCPA. Both she and I urge you to exercise that most important right of all Americans–to vote for the candidate of your choice.

Today is a monumental day for the United States – Election 2012.  I am writing this blog on Monday, October 22, and as such, have no idea who will actually be elected as the next president of the United States.  However, regardless of whom you voted for or whether they won or lost – it is always important to keep in mind that we as a nation are blessed to be a democracy.  Let us never lose sight of the importance of freedom of speech, and the concomitant duty that freedom imposes upon us all, to speak up for what we believe is right or wrong.  Speaking of which, this leads me to today’s topic – the Haiti Telecom case.

In 2009 the Department of Justice charged Juan Diaz with conspiracy to make corrupt payments to Haitian officials for the purpose of securing business advantages from Haiti’s state-owned telecommunications company.  In October 2011, Joel Esquenazi and Carlos Rodriquez, the former president and vice president of Terra Telecommunications, were sentenced for their roles in a scheme to bribe officials in Haiti’s state-owned telecom company.  Esquenazi received 15 years, the longest sentence imposed in the history of the FCPA and Rodriquez received 7 years behind bars.

Both men have appealed their convictions, and one of the key  issues on appeal is “Whether Esquenazi (Rodriquez) is entitled to an acquittal because employees of Haiti Teleco were not “foreign officials” within the  meaning of FCPA simply because the National Bank of Haiti owned shares of Haiti Teleco and the Haitian government appoints board members and directors”.

The Brief filed by Appellant, United States v. Joel Esquenazi, No 11-15331 (7th Cir, May 9, 2010) poses the following argument “ Esquenazi is also entitled to an acquittal on all FCPA-based counts because the term “instrumentality” in the FCPA should be construed to encompass only foreign entities performing governmental functions similar to departments or agencies.  Here, the Government failed to establish that Haiti Teleco performed a governmental function.  Despite the Government’s continued reliance on the premise that state-ownership or state-control of a business entity makes that entity and “instrumentality” of the government under the FCPA, that theory was explicitly considered by the drafters of the FCPA, but not included in the statute, and is inconsistent with the language of the statute as drafted.  Because so many individuals and companies prosecuted by the Government prefer to resolve their cases prior to trial, the validity of the Government’s theory has seldom been tested in court, and never before by a United States Court of Appeals.  This case presents an opportunity to review the Government’s aggressive enforcement of a less-than-clear federal statute and properly limit its scope to corrupt payments made to “foreign officials,” including employees of “instrumentalities” that perform governmental functions similar to governmental departments and agencies”.   I have no reason to doubt that all of the above is absolutely true – but do you want to spend millions of dollars defending your actions and trying to keep your CEO out of jail based upon the meaning of the term “instrumentality”?

The practical pointer for today’s blog is this – doesn’t it make more sense for companies to prohibit all forms of bribery both commercial bribery (improper payment made with the corrupt intent to a private, rather than a governmental, person, company, or other entity in order to receive a business advantage) and governmental bribery?  The U.K. Bribery Act takes this stance by prohibiting bribery in the private sector.  Furthermore, the U.K. Act doesn’t just limit the criminal offense to bribing foreign officials, but also prohibits both the offer and the acceptance of a bribe.  I am not advocating that the United States expand the reach of the Foreign Corrupt Practices Act to include international bribery of private entities or individuals.  However, from a practical perspective – doesn’t it make sense, and send a more unified message to your employees when you say “We do not permit bribes in any way, shape or form. Period, Full Stop”?

Consider the following Policy Statement:

It is Company policy to comply with all applicable anti-bribery laws, including but not limited to the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, and all applicable local laws where Company operates, and to accurately reflect all transactions on Company’s books and records.  It is also Company’s policy to require those agents, consultants and business partners who work on Company’s behalf to comply with these same laws and practices.  Bribery is a criminal offense in most countries in which we operate and corrupt acts expose the Company and our employees to the risk of prosecution, fines and imprisonment as well as endangering the Company’s reputation. Fines assessed against individuals may and will not be reimbursed by the Company.

This policy prohibits all forms of bribery.  As such, all Company employees, and all those acting for or on the Company’s behalf, are strictly prohibited from offering, paying, soliciting or accepting bribes or kick-backs, including facilitation payments to any person or entity for the purpose of obtaining or retaining business or gaining any improper business advantage, regardless of whether or not the person or entity is governmental or private. Third parties, contractors, agents, representatives and intermediaries who act on behalf of the foundation must comply with these anti-bribery provisions. This policy also requires due diligence of Business Partners, internal approvals, books and records entries, and it imposes records retention requirements in key risk areas related to Government Officials and Business Partners.  It requires audits to help ensure compliance, as well as appropriate scrutiny of acquisition and joint venture target companies for compliance with this policy, particularly where the target companies have had government sales and other significant governmental interaction.

Like other facets of a Company’s operations, its  anti-corruption policy and/or Code of Conduct  should  be tailored to meet its particular business needs, policies, and procedures.  However, when drafting your code of conduct you should ask yourself:  What do you want your company to stand for?

In 1919, King George the V dedicated November 7^th as a day of remembrance for members of the armed forces who were killed during World War I.  The joint venture by the U.S. and Great Britain to defeat the enemy in both World Wars is an excellent segue to discuss the risks and rewards of Foreign Joint Ventures.  Stay tuned.

  Mary Shaddock Jones has practiced law for 25 years in Texas and Louisiana primarily in the international marine and oil service industries.  She was of the first individuals in the United States to earn TRACE Anti-bribery Specialist Accreditation (TASA).  She can be reached at msjones@msjllc.com or 337-513-0335. Her associate, Miller M. Flynt, assisted in the preparation of this series.  He can be reached at mmflynt@msjllc.com.

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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.

Wal-Mart and the Death Knell for Amending the FCPA

In a development that can only be called stunning, the New York Times (NYT) on Sunday, April 22, 2012, reported, in an article entitled “Vast Mexico Bribery Case Hushed Up by Wal-Mart After Top-Level Struggle”, on an alleged multi-year bribery and corruption scheme advanced by Wal-Mart in its Mexico operations. The alleged bribery scheme was truly breath-taking in its scope and operation. I am certain others will write about it extensively, beginning as soon as today, and I certainly will review the article in greater depth in upcoming blog posts, the first thing that struck me is that this case will sound the death knell for any efforts to amend the Foreign Corrupt Practices Act (FCPA). Whether you believe such efforts constitute badly needed reform because the Department of Justice (DOJ) has gone too far in enforcement; that any amendments would water down the FCPA and simply make bribery easier; or perhaps some minor clarification of certain terms and definitions is needed; I think you can kiss all of that good-bye.

Allegations

As reported in the NYT article, Wal-Mart executives at its Mexico subsidiary, Wal-Mart de Mexico, “had orchestrated a campaign of bribery to win market dominance. In its rush to build stores, he said, the company had paid bribes to obtain permits in virtually every corner of the country.” This alleged bribery scheme included routine payments to Mexican governmental officials for “every conceivable type of permit, license, piece of paper, or any other type of approval needed or required to plan, build and operate a Wal-Mart in Mexico. Literally, millions of peso was paid out for everything from routine approvals to extraordinary consents.”

To facilitate this alleged bribery scheme Wal-Mart de Mexico kept two sets of books on the illegal payments through third party agents, which were made to Mexican governmental officials. As reported, Wal-Mart de Mexico “targeted mayors and city council members, obscure urban planners, low-level bureaucrats who issued permits  - anyone with the power to thwart Wal-Mart’s growth. The bribes, he said, bought zoning approvals, reductions in environmental impact fees and the allegiance of neighborhood leaders.” These payments were coded in a manner which hid their true basis. Later, reporting sent to the home office, in Bentonville, AR, were scrubbed so that the illegal payments were moniked as “legal fees”.

The time frames of the events reported were from the 1990’s to 2006. It is unclear if any alleged bribes were paid after this time. The purpose of the alleged bribes “was to build hundreds of new stores so fast that competitors would not have time to react. Bribes, he explained, accelerated growth. They got zoning maps changed. They made environmental objections vanish. Permits that typically took months to process magically materialized in days. What we were buying was time”. The article also reported that “Wal-Mart de Mexico was the company’s brightest success story, pitched to investors as a model for future growth. (Today, one in five Wal-Mart stores is in Mexico.)”

The End of FCPA Amendment

So how does all of this portend the end of efforts to amend the FCPA? As reported, “Wal-Mart’s ethics policy offered clear direction. “Never cover up or ignore an ethics problem,” the policy states.” What do you think a compliance defense would do for Wal-Mart about now? Wal-Mart prided itself on its world-wide FCPA anti-corruption compliance program. The claim that companies would act more ethically and in compliance if they could rely on a compliance defense would seem to be negated by facts reported about Wal-Mart. Do these facts seem like a rogue employee or even junta of rogue Mexican employees going off on their own? Whatever your thoughts on that question may be, it certainly appears that having a best practices compliance program did not lead to Wal-Mart doing business more ethically. And what if Wal-Mart’s corporate headquarters in Bentonville AR was not involved in any illegal conduct or even kept in the dark by Wal-Mart de Mexico? What does that say about having a robust compliance program?

Amending the FCPA to protect corporate headquarters in the US from liability under the doctrine of Respondeat Superior? You can forget about that happening in a heartbeat. No one can argue with anything close to a straight face that this problem was exclusive to Mexico. The corporate parent received the benefits from any profits made due to the bribery so it is difficult to imagine why a corporation should not be a part of any enforcement action. And as the FCPA Professor recently noted in a blog post, entitled “A Q&A with Claudius Sokenu on Where Else?””, that question may be close to someone’s thoughts at the DOJ about now.

How about that grace period for those companies which have a compliance program and self-reporting violations? Wal-Mart corporate was made aware of the allegations set forth in the NYT article in 2004 and chose not to self-report. As noted in the article “Neither American nor Mexican law enforcement officials were notified. None of Wal-Mart de Mexico’s leaders were disciplined. Indeed, its chief executive, Eduardo Castro-Wright, identified by the former executive as the driving force behind years of bribery, was promoted to vice chairman of Wal-Mart in 2008.” Indeed Wal-Mart did not report (I cannot say self-disclose) any FCPA investigation to the DOJ and Securities and Exchange Commission (SEC) until after the NYT notified those agencies that it was investigating these allegations back in 2011. As stated in the article, “Until this article, the allegations and Wal-Mart’s investigation had never been publicly disclosed.” How’s that for transparency in a publicly held US company? If a company as ethical as Wal-Mart will not self-disclose, what does that say about the rest of corporate America and its thinking on self-disclosure?

How about those claims that US companies were being unfairly prosecuted because they did not know their counter-parties were employees of state owned enterprises or that the person they were lavishly entertaining was an official of a foreign government? You mean those “targeted mayors and city council members, obscure urban planners, low-level bureaucrats who issued permits – anyone with the power to thwart Wal-Mart’s growth”? Whatever the merits of those companies who said “it’s not fair – we didn’t know” they were a government official – waive that proposed amendment bye-bye, with both arms over your head.

So whether you were pro or anti-FCPA amendment, I think that you have Wal-Mart to thank for the fact that any such thoughts now will Rest in Peace as this new saga in FCPA enforcement moves forward.

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

Wynn Casinos and Charitable Donations under the FCPA

The recent events surrounding Wynn Casinos and its now former director, Kazuo Okada, have almost been breath-taking in their family feud nature. Indeed in an article in the March 2, 2012 edition of the Wall Street Journal (WSJ), entitled “The Family Feud That Could Cost Combatants Billions”, reporter John Bussey called it the “slug-it-out-divorce” by Steve Wynn from his former partner, Okada. Wynn provided the opening salvo in this battle of titans by summarily booting Okada off the Wynn Casino Board of Directors and “forcibly cashed out” his stake in the company, all for alleged violations of the Foreign Corrupt Practices Act (FCPA).

However, Okada appears to have fired back a FCPA-based salvo of his own. In the same edition of the WSJ, another article reported on Wynn Casinos and another potential FCPA violation. It involved a gift of $135 Million by Wynn Casinos to a foundation which supports the University of Macau. The article on this donation was entitled “Macau School Ties Roil Wynn Resorts” and was co-authored by Kate O’Keefe and Alexandra Berzon. They reported that Okada had gone to a Nevada state court to request an order that Wynn Casinos “give him access to documents tied to the donations.” One of the reasons Okada detailed in his court request was to determine if the gift by Wynn Casinos to the University of Macau was “an appropriate use of corporate funds.”

I would also ask whether the gift was proper under the FCPA. There is not much definitive guidance for charitable donations under the FCPA. I have summarized the available information as follows.

I.                   Opinion Releases

There have been four Opinion Releases in the area of charitable donations under the FCPA. In each Opinion Release, the Department of Justice (DOJ) indicated that it would not initiate prosecutions based upon the fact scenarios presented to it.

A. 95-01

This request was from a US based energy company that planned to operate a plant in

South Asia, in an area where was no medical facility. The energy company planned to donate $10 million for equipment and other costs to a medical complex that was under construction nearby. The donation would be made through a US charitable organization and a South Asian LLC.

The energy company stated it would do three things with respect to this donation.

1. Before releasing funds, the energy company said it would require certifications from the officers of all entities involved that none of the funds would be used in violation of the FCPA.
2. It would ensure that none of the persons employed by the charity or the LLC were affiliated with the foreign government.
3. The energy company would require audited financial reports detailing the disposition of the funds.

B.   97-02

This request was from a US based utility company that planned to operate a plant in

Asia, in an area where there was no primary-level school. The utility company planned to donate $100,000 for construction and other costs to a government entity that proposed to build an elementary school nearby. Before releasing funds, the utility company said it would require certain guarantees from the government entity regarding the project, including that the funds would be used exclusively for the school.

C.   06-01

This request was from a Delaware company doing business in Africa. The company desired to initiate a pilot project under which it would contribute $25,000 to the Ministry of Finance in the country to improve local enforcement of anti-counterfeiting laws. The contribution would fund incentive awards to local customs officials, which is needed because this African country is a major transit point for illicit trade and the local customs officials have no incentive to prevent the contraband.

The company said that along with the contribution, it would execute an agreement with the Ministry to encourage exchange of information and establish procedures and criteria for incentive awards. The company said that if the program is successful, the awards would continue to be funded as needed, and the company will seek the participation of its competitors in this program.

The company would implement at least five safeguards to ensure the funds would be used as intended, including:

1. Payments to a valid government account, subject to internal audits.
2. Payments only upon the confirmation that goods seized were in fact counterfeit.
3. The Ministry would identify award candidates without input from the company and would provide evidence that funds were used properly.
4. The company would monitor the program’s effectiveness.
5. Records will be required to be kept and be available for inspection for a period of time.

D.   10-02

A US Company desired to move from a charitable entity model to a for profit model in the area of micro-financing. To do so it was required to make a large cash donation to a charity in the country in question. The company engaged in three rounds of due diligence in which it determined that the most favorable candidate had a government official on its Board of Directors but that under the laws of the country in question, the government official could not receive compensation to sit as a Board member. After initially listing the 3 levels of due diligence in which the company had engaged prior to finalizing its choice of local entity to receive the donation in question; the DOJ noted that the donation ‘requested’ of the US Company would be subject to the following controls:

1. Payments of the donations would be staggered over a period of eight quarters rather than in one lump sum.
2. Ongoing monitoring and auditing of the funds use for a period of five years.
3. The donations would be specifically utilized for the building of infrastructure.
4. The funds could not be transferred to either the charities parent or any other affiliated entity.
5. The funds would not be paid to the parent of the organization receiving the grant and there was an absolute prohibition on compensating Board Members.
6. The proposed grant agreement under which the funds would be donated had significant anti-corruption provisions which included a requirement that the local organization receiving the funds adopt an anti-corruption policy and that company making the donation shall receive full access to the local organization’s books and records.
7. Right to terminate the agreement and recall the funds if evidence was found that “reasonably suggests” a breach of compliance provisions.

II.                Sole Enforcement Action

There appears to be only one FCPA enforcement action based entirely upon charitable giving. It is the case of Schering-Plough Poland which paid a $500,000 civil penalty assessed by the Securities and Exchange Commission (SEC) in 2008. (For a copy of the SEC Compliant, click here.) As reported in the FCPA Blog, the Company’s Polish subsidiary made improper payments to a charitable organization named the Chudow Castle Foundation, which was headed by an individual who was the Director of the Silesian Health Fund during the time period in question. Schering-Plough is a pharmaceutical company and the Director of the Health Fund provided money for the purchase of products manufactured by Schering-Plough as well as influencing medical institutions, such as hospitals, in their purchase of pharmaceutical products through the allocation of health fund resources. In addition to the above, the SEC found that Schering-Plough did not accurately record these charitable donations on the company’s books and records.

III.              Mendelsohn Guidance

The FCPA Blog reported, in a posting entitled “When is Charity a Bribe?”, that when asked about the guidelines regarding requests for charitable giving and the FCPA, then Deputy Chief of the Criminal Division’s Fraud Section at the DOJ Mark Mendelsohn, said that any such request must be evaluated on its own merits. He advocated a “common sense” approach in identifying and clearing Red Flags. Some of the areas of inquiry would include answers to the following questions.

1. Is there a nexus between the charity and any government entity from which the company is seeking a decision?
2. If the governmental decision-maker holds a position at the charity, that’s a red flag.
3. Is the donation consistent with the company’s overall pattern of charitable contributions?
4. If one donation or a series of them is more than the company has made to any other charity in the past five years, that’s a red flag too.
5. Who made the request for the donation and how was that request made?

So what of Wynn Casinos and its $135 Million donation? Did Wynn perform the types of analysis suggested by the Opinion Releases? The WSJ article reports that the Chairman of Wynn’s Committee “told analysts last month that the donation was vetted in advance by outside experts,” relative to the FCPA. The donation is apparently not for construction or other infrastructure projects but “the gift will support academic activities.” The WSJ article also reports that the Board of the University foundation includes “current and former government officials” and “a member of the committee to elect Macau’s chief executive”, who is the chancellor of the university. Lastly the article reports that the Securities and Exchange Commission (SEC) has “begun an inquiry into the donation.”

We may reasonably conclude from both of these WSJ articles that Wynn Casinos will be in for a long, long road of FCPA investigations.

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

The Mercury 7, Chuck Duross and Continuous Improvement to Your Compliance Program

Next Monday, February 20, 2012 is the 50^th anniversary of the first American manned orbital space flight. It made John Glenn a national hero and heralded America’s move into direct competition with the (then) Soviet Union for the race to put the first man on the moon. In an article in the New York Times, entitled, “At 90, John Glenn Looks Back” reporter John Noble Wilford wrote about this flight, the Mercury program and Glenn based upon two interviews with the ex-astronaut and former Senator from Ohio. This coming Saturday, Glenn will be honored at Cape Canaveral at a celebration of the remaining members of the Mercury space team.

These original seven astronauts, known as the “Mercury 7” were true American heroes. Anyone interested in science in the slightest bit in the 60s knew who these men were. They were featured in Life Magazine with their families and each of their space flights were covered on live television by all three networks. Glenn is one of two of the original Mercury astronauts still alive, the other being Scott Carpenter, who will also be honored on Saturday. The remaining astronauts of the Mercury 7 were Deke Slayton, Gus Grissom, Alan Sheppard, Gordon Cooper and Wally Schirra. They were immortalized for a later generation by Tom Wolfe, in his book, “The Right Stuff”.

So what is the compliance angle here? It is that NASA created an entire system, consisting of processes and procedures to put a man on the moon. Were there setbacks? Yes, the Apollo 1 tragedy still resonates at NASA today. However NASA moved forward and fulfilled President Kennedy’s vow to put a man on the moon by the end of the decade. NASA did this largely by continuous improvement of its system.

I thought about this article while reading the tweets coming from my “This Week in FCPA” co-host Howard Sklar last night. Howard is in Hong Kong, chairing the Anti-Corruption Asia Congress this week. Yesterday, Chuck Duross, Deputy Chief, Foreign Corrupt Practices Act (FCPA) Unit, United States Department of Justice (DOJ) spoke to the event and Howard tweeted some of the highlights of Chuck’s remarks. They included:

• To combat anti-corruption, there needs to be political will, as it requires prosecution of bribe takers as well as bribe payers.
• Do not assume that your company is immune from FCPA liability just because you are not a US company. Here you should note that 9 out of the 10 FCPA settlements of all-time are with non-US based companies.
• Charging individuals leading to more trials. Last year the DOJ tried 3,000 cases last year and there were 4 FCPA trials. In Chuck’s words, (as tweeted by Howard) “Let’s all take a breath”.
• There was a FCPA trial first: a Foreign official, charged with money laundering, testified against the business bribe-payer. Here it is important to note that the DOJ can and will be charge foreign government offices.
• Turning to some specifics of compliance programs, Duross remarked that companies using half-measures to prevent bribery are at risk.
• Companies will receive a significant benefit for having robust compliance programs: lower fines, DPA/NPA, even not having a monitor. He gave some examples; Noble got an NPA, paid $2.6 MM, no monitor. Pride which sustained substantial cooperation with the DOJ, received below-the-guideline range penalty of 55%.
• Turning to the facilitation payment exception, Duross said that it is a narrow one: it’s usually illegal locally where it is paid, discouraged in US, illegal internationally.
• He emphasized that third party agents need to be properly vetted.
• He noted that other violations of US law often accompany FCPA violations, such as anti-competitive behavior, trade violations, embezzlement, and money laundering.
• He emphasized that your company should do what it can do regarding your compliance program. If necessary, at first, change the tone at the top. Make it clear that illegal acts will not be tolerated. But you must mean it. Vocal support is necessary, but management’s commitment cannot end there. Compliance is a cost center: management must back up vocal support of compliance with budget and resources.
• Next Duross suggested that companies reevaluate internal controls. They should take the time to review and test, think critically about risk.
• The DOJ looks at proactive compliance efforts when deciding how and whether to prosecute. He also suggested that your company might consider joining an integrity pact.
• Howard’s tweets ended with this suggestion; that it is important to TEST your compliance program. You can run a fake invoice through your system which has information which should raise has red flags. You can run information through the hotline and see what happens. That impresses the DOJ.

The last few points raised by Duross emphasized to me the process of compliance. But as important as putting the program in place is testing the program and using the lessons learned to upgrade and update your compliance program. While we celebrate John Glenn, the Mercury 7 and NASA for what they achieved, we should remember that NASA used continuous improvement in its space program. These same techniques can be brought to bear in your compliance program. Based upon the remarks of Chuck Duross, such monitoring, improvement and upgrades will be counted in a positive light by the DOJ if you are involved in a FCPA enforcement action.

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

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

Stranger than Fiction: Questions in the FCPA World

I had intended to post Part II of my series the recent court rulings on instrumentalities. However, sometimes events overtake you. In the world of the Foreign Corrupt Practices Act (FCPA), some of the fact scenarios are so preposterous that if they were in a book, labeled as fiction, they would probably be placed on the Science Fiction shelf. I was reminded of the maxim that sometimes life is stranger than fiction when we saw the article “Lawyer for Mexico arm of US drugmaker Baxter recorded allegedly offering payment in lawsuit” by reporter Ricardo Alonso-Zaldivar, in the Chicago Tribune’s August 17, 2011 edition. While I cannot say that the players came out of central casting, the facts certainly seem to have been dreamed up by a screen writer.

Alonso reported that a Chicago based US company, Baxter, is in litigation in Mexico with a local company Translog. Baxter alleges that Translog breached a contract for delivering certain time sensitive medical supplies. Translog alleges that Baxter breached the contract between the parties. Alonso reports that a trial lawyer for Baxter, Jorge Hernandez Martin, is alleged to have offered an expert, retained by Translog, Rafael Aspuru Alvarez money to “leave the country on a key court date to undermine the case”. At another point Alonso reports that Hernandez told Aspuru, “If you tell me, ‘You know I was going to charge 100,000 pesos (about $8,100),’ I’ll you double.”

All of the above was allegedly recorded by Aspuru during a meeting he held with Hernandez in February of this year. A Translog representative provided a copy of the recording to the Associated Press (AP). Hernandez is also reported to have said to Aspuru, “I told the company” presumably about the offer. Providing comment for article, a Baxter spokesman said to AP that “[Hernandez] now has absolutely no role in this matter or representing Baxter in any capacity.”

Inspired, as always by the FCPA Professor to question, question and question; we ask the following:

1.         Does the FCPA apply to judicial proceedings overseas?

2.         Is a private individual, who is an expert to assist a foreign court, a “foreign official” under the Act?

3.         Is such a private official an “instrumentality thereof” of a foreign government?

We could not find any FCPA enforcement actions relating to US lawyers involved in overseas litigation so there does not appear to be any case law, enforcement actions or Opinion Releases discussing this issue, we believe that US courts would find that the FCPA does apply to foreign judicial proceedings because you cannot get more ‘foreign government’ than a foreign country’s court system. We also believe that the Department of Justice (DOJ) would take the position that it does and give severe sanctions against an individual who attempts to use bribery to influence a foreign judicial proceeding. The FCPA Blog, in a post entitled, “Disorder in the Court” puts it more succinctly by noting, ”judges, court clerks and others in the judicial system are ‘foreign officials’ under the U.S. Foreign Corrupt Practices Act. Bribing them can violate U.S. law and certainly violates local law.”

However, the FCPA requires an action “in order to assist such domestic concern in obtaining or retaining business for, or with, or directing business to, any person”. Right now all we have to go on is Alonso’s article. He reports that Baxter had a contract with Translog to have certain critical medical supplies shipped. Baxter alleges that Translog, after “running into financial problems” refused to make the shipments and Baxter was forced to use other shippers. Translog counters that it had an exclusive contract with Baxter and Baxter’s use of other shipping companies violates this exclusive contract. Alonso reports that the dispute is valued at $25 million. That certainly sounds like obtaining or retaining business.

Having opined that the answers to the above queries would be answered in the affirmative, is a private citizen, who provides a judge in a judicial proceeding “impartial technical advice” a private official under the FCPA?  Is this the ‘other’ referred to by the FCPA Blog? This is a closer question. In the US, an expert is generally viewed as one who can bring technical advocacy to a jury but an expert’s role may be different under the Mexican legal system. This difference might make such an expert a part of the Mexican judicial system and therefore covered by the FCPA.

So once again, unlike Socrates, we do not know the answers but at least we can pose some interesting questions. Sometimes I wonder if the FCPA Professor has to make up questions for his Final Examinations or he just reads the newspapers and get his ideas from the strange world of international business. The Baxter matter indicates that he only need look in the newspaper.

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

Can a Libyan Rebel Be a Foreign Governmental Official under the FCPA?

What should a company do if it has done, or is on the verge of doing business in Libya? This is not a rare question here in Houston, the self-proclaimed “Energy Capitol of the World.” Many energy companies were faced with this issue beginning in March and continuing through to the present date. While there are perhaps Foreign Corrupt Practices Act (FCPA) issues regarding US entities which conducted business with the Libyan Sovereign Wealth Fund, another potential FCPA issue caught my eye recently. The said issue was published in the July 6, 2011 edition of the Wall Street Journal (WSJ) by reporters Christopher Rhoads and Neneda Salvaterra entitled, “Prolonged Libya War Puts Defected Diplomats in Limbo”.

The article discussed some of the travails of Libyan diplomats who either resigned their positions in the Libyan government or have defected since the conflict arose in the country earlier this year. The article reports that some have acted to support the rebels. So I began to wonder, can a person be a Foreign Governmental Official when  the persons they are assisting, the Libyan rebels, are not recognized as the national government of a country.

Even if a government is under economic sanctions by almost every country in the world that does not necessarily mean that it is not the government of that country. However, as pointed out in the WSJ article, many of the former Libyan diplomats are carrying on activities which would seem to be governmental in nature. Here in the United States, former diplomats are helping to unfreeze certain Libyan assets and are working on asylum cases for Libyan citizens. Some diplomats are working to obtain diplomatic recognition for rebels, while others are still actively working at the United Nations.

Also what about the oil refineries which are in rebel control? If they were assets of the Libyan National Oil Company before the revolt do they remain State Owned Enterprises, or “instrumentalities thereof” under the FCPA? What about the rebels who may be negotiating to sell some of the oil to finance the revolt, are they foreign governmental employees? So once again, inspired by the FCPA Professor, we pose these questions in light of the two federal district court opinions, from earlier this spring, on whether a State Owned Enterprise is covered by the FCPA? Initially we will review the courts’ opinions to see if they provide any guidance.

 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.

It would certainly appear that the Libyan rebels business interests do not fit either definition as set out above. However, it may be that the rebels are simply now the operators of the Libyan National Oil Company. So unlike the FCPA Professor, and Socrates, I do not know the answer, all I have is questions, questions and more questions…

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

Factors to Use in a Foreign Government Instrumentality Analysis under the FCPA

In a guest post on this Blogsite yesterday, my colleague Michael Volkov, criticized the two district courts which have passed on the question of whether a state owned enterprise (SOE) can be an “instrumentality thereof” under the Foreign Corrupt Practices Act (FCPA). The two cases were the Lindsey Manufacturing case and the Carson case. Volkov stated, “By deciding these cases using fact specific standards, the courts have failed to clarify this issue by adopting a more focused and simple inquiry.  Unfortunately, the courts have now obscured even more the application of the FCPA.” No doubt inspired by my “This Week in the FCPA” partner, Howard Sklar, I will take a contrarian view from Mike.

I.                The Defendants’ Claims

The issue was presented as starkly as possible to both courts. The defendants in both cases argued that employees of state-owned enterprises could never be ‘foreign officials’ under the FCPA. The defendants made five general arguments, which were

First, in the absence of an express definition, the Court must give the term its ordinary meaning as used in the statute. As used in the FCPA, the term “instrumentality” refers to a governmental unit or subdivision that is akin to a “department” or an “agency,” the two terms that precede it in the statute.

Second, the Government’s proposed interpretation would lead to absurd results. Among other things, if it were adopted, the Government’s definition would transform persons no one would consider to be foreign government employees – specifically citing the example of employees of the US company CITGO, because it is owned by the Venezuelan national oil company PDVSA.

Third, the extensive legislative history of the FCPA makes clear that Congress did not intend the statute to cover payments made to employees of state-owned business enterprises. Rather, the FCPA was aimed at preventing the special harm posed by the bribery of foreign government officials.

Fourth, as other statutes and proposed legislation make clear, Congress knows how to define the term “instrumentality” in terms of government ownership of a commercial enterprise where it desires to do so. But it did not do so in the FCPA.

Fifth, in construing statutes, courts should avoid interpretations resulting in unconstitutional vagueness. Adopting the Government’s amorphous and expansive interpretation of “instrumentality” here would result in exactly the type of unconstitutional vagueness that must be avoided.

But courts made quick and direct refutations of the defendants’ points 2-5. The major guidance provided by courts was in creating an inquiry to define the term instrumentality in response to defendants’ Point 1. We therefore turn to the respective courts holdings on what factors should go into an analysis to determine if a state-owned enterprise is a foreign government instrumentality under the FCPA.

II.             Court Ruling in Lindsey Manufacturing

The court in Lindsey Manufacturing responded to the defendants’ claims by pointing 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. (I would also note that the US entity CITGO does not meet this test, so much for the absurd result prong.)

III.           The Carson Case

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.

IV.            Conclusion

I do not find these factors set out by either court obscure or vague. I believe that both courts provided guidance to the compliance practitioner in the form of a guideline or checklist that can be used to determine if a counter-party has these characteristics of a foreign government instrumentality. In fact, these are factors (or ones similar as they are non-exclusive) that a compliance officer should have been using to make a determination of a counter-party’s status even before these cases came down the pike. With CFE, the decision seems very straight forward. In the Carson case, there were several entities which had employees to which bribes were paid. These entities included CNOOC, PetroChina, China Petroleum Material and Equipment Corp., National Petroleum Construction Corp., Dongfang Electric Corp., Gouohua Electric Power and Petronas. Some of these companies clearly meet the Carson test, some may take additional research. The moniker “Know Your Customer (KYC)” is one that is well known in marketing circles and should becoming equally as well known in the compliance arena.

Mike and I hope to post several point-counter-point blogs over the next couple of weeks setting out our respective positions on other issues. I hope that you will find them both enjoyable and informative.

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

National Electric Company Covered by the FCPA

On April 20, 2011 the District Court released its written decision on the defendant’s Motion to Dismiss in the Lindsey Manufacturing case. The FCPA Professor reported on the decision last week and discussed the seemingly unusual request made by the Department of Justice. This request was that the DOJ asked the Court to take judicial notice that the Mexican entity “CFE is a decentralized public entity, not a corporation.” The trial court termed this request “astounding” and declined this request.

Our focus will be on the trial court’s finding that the Mexican entity CFE was an “instrumentality” as defined under the Foreign Corrupt Practices Act (FCPA). The trial court rejected the defendants’ contention that an “instrumentality” under the FCPA must share all the characteristics of a foreign government department or agency. The trial court further rejected the defendants’ contention that “instrumentality” must be defined as to what consistent with department and agency. The trial court held that since “instrumentality” is a different word; it is logical to assume that it means something other than department or agency.

The trial court did provide a non-exclusive list of factors which could determine if an entity is an “instrumentality” under the FCPA. They are:

• 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, 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 (i.e., governmental) functions.

After listing out these factors the trial court found that CFE had all of these characteristics. CFE was created by Mexican statute as a “decentralized public entity”. The governing Board is comprised of high level Mexican government officials. CFE describes itself as a governmental agency. CFE performs a function, the supply of electricity, which is enshrined in the Mexican Constitution as “exclusively a function of the general nation”.

The trial court’s ruling does seem logical. Although the District Court in the Lindsey Manufacturing case is the first to rule on this issue, the CCI case was the first case where a similar Motion to Dismiss was filed. As the state owned entities in the CCI case are not the CFE there may be a different District Court ruling. We eagerly await the outcome of that Motion to Dismiss.

For a copy of the District Court’s ruling, 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