Failing to Clarify: The Courts Try to Define “Foreign Official” in FCPA Cases

Ed. Note-today we have a guest post by our colleague Michael Volkov, noted FCPA specialist and partner in the firm of Mayer Brown LLP

The role of our courts is to define and uphold our laws.  Our Nation’s history is filled with important court decisions which have demonstrated the critical role that our Judicial Branch can play in American history – whether it was Marbury v. Madison, or Brown v. Board of Education, the courts are well equipped to be the “final arbiter of the law.”

Unfortunately, this summer we are watching as our courts are failing to step up and resolve an important controversy surrounding the scope of the FCPA.  At the heart of this controversy is the scope of the FCPA and how it applies, if at all, to state-owned or state-controlled private enterprises.

The FCPA defines the term as “any officer or employee of a foreign government or any department, agency or instrumentality thereof . . . or any person acting in an official capacity for or on behalf of any such government or department, agency or instrumentality.  Relying on this definition, the Justice Department  treats employees of state-owned or state-controlled entities as “foreign officials,” focusing on whether the entity is controlled by a foreign government.

In three separate cases, Lindsey Manufacturing, O’Shea and Carson, defendants filed motions to dismiss challenging the DOJ’s interpretation of “foreign official” under the FCPA.  Two of these cases have now been resolved and the Justice Department’s position has been upheld.  While doing so, the courts have launched separate fact-specific tests to “guide” actors in resolving how the law applies to state-owned enterprises.

In rejecting the defendant’s motion to dismiss in Lindsey Manufacturing, the court  found that CFE (the Mexican electric company) had “various characteristics of government agencies and departments,” such as: (1) it exclusively provides a service, the supply of energy, which the Mexican government recognized as an exclusive government function; (2) the key officers and directors are or are appointed by government officials; (3) it is financed largely through governmental appropriations; and (4) it was created by statute as a “decentralized public entity.”

In Carson, 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).

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.

Aside from the defendants who lost their motions, the big losers are now compliance professionals who have to interpret and apply the law to their companies.  Out of an abundance of caution, companies will be forced to treat more and more entities as state-owned enterprises and their employees as “foreign officials” for purposes of the FCPA.  The result – higher compliance costs.

The courts have now given businesses even more ammunition to support lobbying efforts to amend the law and clarify the definition of “foreign official.”   Congress will listen; whether it will act remains to be seen.

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 editor can be reached at tfox@tfoxlaw.com.