Interview with James Koukios

Ed. Note-today I continue my series of interviews with people prominent in the FCPA space. Today is James Koukios, formerly a Manager in the DOJ’s FCPA unit, who recently went into private practice at Morrison & Foerster 

Where did you grow up?

I was born and raised in Grand Rapids, Michigan.

Where did you go to college, what did you study and how did it influence your career going forward?

I graduated from the University of Michigan in 1996.  Like a lot of people who end up at law school, I was a political science major.  Studying poli sci influenced my career in at least two ways.  First, my interest in the political process is what initially brought me to Washington, as a summer intern in 1995.  That was my first time living outside the state of Michigan, and, although I later went to law school in Boston and spent my law school summers in New York and Chicago, my positive experience that summer eventually led me back to Washington, where I have spent the majority of my legal career.  Second, during my summer internship, at the Atlantic Council of the United States, I was assigned a project researching corruption in Asia.  One of the questions I was asked to address was why corruption in Asia should matter to the United States, and it was in answering that question that I first encountered the U.S. Foreign Corrupt Practices Act.  I found the topic fascinating, but little did I know how important it would eventually become to my career.

What were the highlights of your clerkship with Judge Clement?

During law school, I realized that I wanted to be a trial lawyer.  So, when I started looking for clerkships, I applied only to federal district court judges (Judge Clement was later elevated to the Fifth Circuit, but at the time, she sat on the U.S. District Court for the Eastern District of Louisiana).  My clerkship did not disappoint.  Among the many trials that I worked on, the highlight was the criminal prosecution of Edwin Edwards, the former four-term governor of Louisiana, and Jim Brown, Louisiana’s then-sitting Insurance Commissioner, for an allegedly corrupt scheme to bail out a failed insurance company.  The trial was full of colorful characters, complex legal issues, and superb lawyering.

Two other highlights were Judge Clement herself and the city of New Orleans.  Judge Clement has been a mentor to me throughout my legal career, and I attribute much of my success not only to what I learned while clerking for her but also to the continuous support she has always given me.  As for New Orleans, what a terrific city.  Food, music, and culture unlike any other in the United States.  It is a special place.

What was your early DOJ career like in Miami and how did you get to Main Justice?

Being an AUSA in Miami was a dream come true for an aspiring trial lawyer.  Miami has one of, if not the, heaviest criminal dockets in the country, and a large portion of those cases go to trial, often very quickly after indictment.  I tried over 15 felony jury cases in my first three years alone and was in court every day.  Early on, I focused on all manner of reactive crimes, violent crimes, and arms trafficking cases.  During my last two years, I started focusing on more complex and time-consuming cases – including a narcotics wiretap case that revealed police corruption and a high-profile defense procurement fraud case, United States v. AEY, Inc., that garnered national attention.

Around the end of 2008, I was thinking of transitioning full time to prosecuting economic crimes, and my wife and I also started talking about moving back to Washington.  Out of the blue, Chuck Duross, who had moved from the Miami U.S. Attorney’s Office to the Fraud Section in 2007 (and who would later become Deputy Chief of the FCPA Unit), called to tell me that the Fraud Section was looking to bring in experienced AUSAs to prosecute FCPA cases and asked whether I would be interested.  Needless to say, I was, and about six months later, I was fortunate enough to transfer to the Fraud Section.

What were some of your highlights from your time in the FCPA Unit?

Definitely the Esquenazi and Duperval trials.  Both came at a time when the Fraud Section’s ability to win an FCPA case at trial was being heavily questioned, and, going back to that first conversation I had with Chuck Duross in 2008, I felt I had been brought to the Fraud Section for precisely this reason.  As an added bonus, I was able to return to Miami, where I learned how to be a prosecutor, to try these cases.  I joined the Esquenazi trial team one month before trial (I had been on detail as Special Counsel to FBI Director Robert Mueller for the previous year and came back to Fraud to try the case) and was immediately impressed by the thorough investigation that my colleagues had done—the evidence was truly overwhelming.  Over the next month, we focused on how best to present that evidence, and I was extremely proud of the finished product.  It was also rewarding when the Eleventh Circuit agreed with our position that the Haitian state-owned telecommunications company, Haiti Teleco, was an “instrumentality” of the Haitian government and, therefore, that its officers and employees were “foreign officials” under the FCPA.  Much like our trial victories, the appellate ruling helped validate a crucial aspect of our enforcement program.

Becoming a manager in the FCPA Unit was also a highlight.  In a bit of a surprise, I discovered that I enjoyed supervising cases as much as I enjoyed trying them.  Given my experience, I was able to mentor new prosecutors and help them improve their investigations and cases.  But the learning was not a one-way street.  Several of the attorneys I supervised had recently left large law firms and brought with them insights into corporate governance, internal investigations, data privacy, and a host of other issues that are critically important to the work of the FCPA Unit but do not necessarily come into play in other types of criminal prosecutions.  By combining experienced AUSAs with experienced corporate litigators, we assembled a tremendously talented and well-rounded team in the FCPA Unit, from which we all benefitted.

Finally, becoming more involved in the policy process as a manager was also very rewarding.  Because the Fraud Section has the exclusive mandate for FCPA prosecutions, we were able to formulate—and execute—policy decisions in a manner that, I believe, had a significant impact on corporate compliance programs and the global anti-corruption movement.   

You recently moved over to Morrison & Foerster. In which areas do you intend to focus and what are you looking forward to in private practice?

I am a partner in MoFo’s Securities Litigation, Enforcement and White-Collar Defense practice group.  Generally speaking, I intend to focus on all aspects of that group’s work, from compliance counseling, to internal investigations, to representing corporations and individuals before government regulators and at trial.  Given my extensive FCPA background, much of my work will be focused in the anti-corruption sphere.  In that regard, I am particularly excited about being reunited with two of my former FCPA Unit colleagues and friends, Chuck Duross and Amanda Aikman, at MoFo.  But I also intend to work in other areas in which I have experience, including health care fraud, defense procurement fraud, and export violations, in both the civil and criminal contexts.  And, as someone who still enjoys trial work, I intend to work on any type of trial when there is a need, whether that trial falls within my practice group or another practice area.

Overall, I am looking forward to bringing to bear the experiences and insights I gained during my decade as a federal prosecutor, including my six years as an FCPA prosecutor and supervisor, to help our clients navigate complex issues and to mitigate and avoid problems.  And I’m looking forward to doing all this with my new team.  MoFo has a well-earned reputation for collegiality and for working as one team across all of our offices worldwide to best serve our clients’ needs.  The sense of collegiality and of working together for a common purpose were two of the aspects of government service that I most enjoyed, and I am fortunate to have found a law firm that shares those values.

James Koukios can be reached at JKoukios@mofo.com

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, 2015

Mid-Year FCPA Report, Part II

Today, I continue my look at what I think were some of the most significant highlights from the first half of 2014 relating to the Foreign Corrupt Practices Act (FCPA). Yesterday, the focus was on corporate and individual enforcement. Today we review a very rare court of appeals decision on whether a state-owned enterprise is covered by the FCPA; yet another surprising result in an opinion release and finally take a look at some real world examples of why the FCPA is such a powerful and positive law for US companies doing business overseas.

Esquenazi Decision on State Owned Enterprises Covered by the FCPA

In what can only be called a judicial decision based on common sense the 11th Circuit Court of Appeals, in an opinion released on May 16, upheld the convictions of Joel Esquenazi and Carlos Rodriguez for violations of the FCPA and certain US anti-money laundering (AML) laws. The two had engaged in a long running bribery scheme with the Haitian telephone company, Telecommunications d’Haiti, S.A.M (Teleco). The pair were convicted and sentenced to lengthy jail terms, Esquenazi receiving 15 years and Rodriguez receiving 7 years. One of their myriad defenses was that a state owned enterprise, such as Telco, was not an instrumentality and thereby not covered under the FCPA.

This opinion was the first time that a Court of Appeals had reviewed the FCPA question of what is an ‘instrumentality’ under the Act. Both defendants had argued that instrumentality could only mean (1) “that only an actual part of the government would qualify as an instrumentality” or (2) the FCPA should be construed to encompass only foreign entities performing ‘core’ governmental functions similar to departments or agencies. The Court rejected both arguments.

The Court constructed a two-prong test to determine if a state owned enterprise is an instrumentality under the FCPA. The first prong is the ‘Control Test’ and the second prong is the ‘Function Test’. Under the Control Test, a compliance practitioner should analyze how much control a foreign government has over a state owned enterprise. The Court suggested questions like: (1) The foreign government’s formal designation of the entity; (2) Whether the government has an interest in the entity; (3) The government’s ability to hire and fire the entity’s principals; (4) The extent to which the entity’s profits, if any, go directly into the governmental fisc; (5) The extent to which the government funds the entity if it fails to break even; and (6) The length of time these indicia have existed. The Court suggested the following for the Function Test: (1) Does the entity have a monopoly over the function it exists to carry out; (2) Does the foreign government subsidize the costs associated with the entity providing the services; (3) Does the entity provide services to the public at large in the foreign Country; and (4) Does the foreign government generally perceive the entity to be performing a governmental function?

I can only say that common sense won out in this decision. The word ‘instrumentality’ must mean something under the FCPA and I believe the Court correctly found that state owned enterprises falls under the rubric of instrumentality under the FCPA.

Opinion Release 14-01

Continuing its run of publishing Opinion Releases where it comes down on the side I had not expected, the DOJ released Opinion Release 14-01. In 14-01, a company wanted to buy-out a now government official from a company he had been a part of before he went into government service. The problem was that his buy-out provision was entered into during the past economic downturn and the value of his buy-out was under water. He wanted to get something for his prior investment. The Relator proposed another formula for his exit compensation and the DOJ agreed it would not be a FCPA violation to do so.

For the compliance practitioner, there are several key points to consider. The first point is found in a footnote detailing the length of time it took to secure the DOJ opinion. This is the first time that I recall seeing a time line laid out in an Opinion Release. This gives a compliance practitioner some idea of the time frames involved in the process. The second is the use of representations and warranties by the parties. In 14-01, the DOJ accepted representations that the foreign official in question would not pass on business in which he either had an interest or help the Relator to ‘obtain or retain’ business with the agency at which the foreign official now worked. This type of evidence is something that a company should now consider when designing protocols to satisfy issues similar to those presented in 14-01. Finally was the quality and quantity of payment(s) to be made to the now foreign official to cash him out and purchase his interest. Here the parties agreed to an independent valuation by an internationally recognized accounting firm. This provides some type of arms-length analysis. It also provides a market based approach to the payment issue so that there is evidence of true (or perhaps truer) market value, not some arbitrary number agreed to by the parties.

The message from 14-01 and last year’s Opinion Release, seems to me, that the DOJ is open to creative arguments about ways to comply with the FCPA. 14-01 also shows that the process can move quickly when the situation warrants it.

The International Effect of the FCPA

In certainly one of the most interesting revelations of the first half of 2014, former US Secretary of Defense, Robert Gates wrote the following in his recently released memoirs, entitled “Duty: A Memoir of a Secretary at War”, in which he said the following, ““In a private meeting, the king [King Abdullah of Saudi Arabia] committed to a $60 billion weapons deal including the purchase of eighty-four F-15’s, the upgrade of seventy-15s already in the Saudi air force, twenty-four Apache helicopters, and seventy-two Blackhawk helicopters. His ministers and generals had pressed him hard to buy either Russian or French fighters, but I think he suspected that was because some of the money would end up in their pockets. He wanted all the Saudi money to go toward military equipment, not into Swiss bank accounts, and thus he wanted to buy from us. The king explicitly told me saw the huge purchase as an investment in a long-term strategic relationship with the United States, linking our militaries for decades to come.”

I would ask you to consider, just how many US interests can be identified in the above quote. I can identify at least five: (1) US security interests; (2) US foreign policy interests; (3) US military interests; (4) US economic interests; and (5) US legal interests as reflected in compliance with the FCPA. For any person or business interest that does not think that the FCPA has a positive aspect, I would commend you to the above Gates quote. His quote, buried at page 395 of a 618-page book, did not even merit an entry in the Index. Yet, I find it to one of the finest, clearest and most concise affirmations of the positive power of the FCPA. Anytime you face criticism of your FCPA compliance program, a senior executive wants to know why you need resources to comply with the FCPA or you hear a business colleague whining about how ‘those people’ do business corruptly, I would suggest that you read to them this quote to show the power of the FCPA in international business.

Tangentially related to this revelation was the work by Scott Killingsworth to lay the legal and theoretical foundations for my real world observation about a business solution to FCPA compliance in his latest article entitled “The Privatization of Compliance”, which he calls this “private-to-private or P2P compliance.” In his introduction he stated, “Embodied in contract clauses and codes of conduct for business partners, these obligations often go beyond mere compliance with law and address the methods by which compliance is assured. They create new compliance obligations and enforcement mechanisms and touch upon the structure, design, priorities, functions and administration of corporate ethics and compliance programs. And these obligations are contagious: increasingly accountable not only for their own compliance but also that of their supply chains, companies must seek corresponding contractual assurances upstream. Compliance is becoming privatized, and privatization is going viral.”

With the long-expected Avon settlement on the horizon and the collapse of the SEC case against the Noble executives, it will be most interesting to see what the second half of the year will bring.

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On another note, I saw Queen play last night and while I will write about them and their show next week, I can only say that if they are coming to a town near you, run don’t walk to see them. The show was fabulous.

And on a final note, if you are in the mid-west or so inclined to travel their and are interested in the FCPA, I urge you to attend the FCPA Professor‘s initial FCPA Institute, which he is holding in Milwaukee next week. For more information, 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, 2014

Esquenazi Part II – the Test for Determining an Instrumentality under the FCPA

In Part I of my review of the 11^th Circuit Court of Appeals decision in the Esquenazi case, I reviewed the Court of Appeals opinion. Today, in Part II, I want to drill down further and examine the test developed by the Court of Appeals to use in determining whether an entity is an instrumentality under the Foreign Corrupt Practices Act (FCPA) and compare it with the two prior formulations developed by District Courts in the Carson and Lindsey cases. The chart below consolidates the factors raised by the courts.

Key Inquiry	Lindsey	Carson	Esquenazi
Characterization of Services	Entity provides services to citizens, in many cases all in country	Foreign states characterization of the entity and its employees	Function Test – Does the entity provide services to the public at large in the foreign Country?Control Test – the foreign government’s formal designation of the entity.
Hiring and Firing	Are key officers/ directors government employees or appointed by government employees	Foreign State’s control over the entity	Control Test – the government’s ability to hire and fire the entity’s principals.
Financial Control/ Funding	Is entity financed, or in large measure, by government appropriations or through government mandates?	The foreign state’s extent of ownership of the entity, including the level of financial support by the state	Function Test – Does the foreign government subsidize the costs associated with the entity providing the services?Control Test – the extent to which the government funds the entity if it fails to break even.
Foreign Government Control of Administrative Functions	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
Perception as Governmental Entity	Is entity widely perceived and understood to be providing official functions?	Purpose of the entity’s activities	Function Test – Does the foreign government generally perceive the entity to be performing a governmental function?Control Test – Whether the foreign government has an interest in the entity
Creation		Circumstances around the entities creation
Length of Time			Control Test – the length of time the indicia have existed.
Monopoly over Market			Function Test – Does the entity have a monopoly over the function it exists to carry out?

 

The Esquenazi decision separates the analysis into two basic questions (a) does a foreign government control an entity and (b) does the entity perform a function the foreign government treats as its own? The Court of Appeals then breaks the analysis of these two questions into a series of inquiries. The prior District Court opinions in Lindsey and Carson did not have such an initial dichotomy; nevertheless the 11^th Circuit’s analysis has clear overlap with the prior District Court formulations. (Please note that I have not discussed the district court formulation at the Esquenazi trial level as that analysis has been superseded by the Court of Appeals decision.) Between the Lindsey, Carson and Esquenazi factors, we see the following:

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 (Control Prong), the courts agree on Inquiry 2 above, the ‘Hiring and Firing’ inquiry, while Carson says the inquiry is simply over foreign government control of the entity. Inquiry 5 in both Lindsey and Esquenazi (Control and Function Prongs) is the ‘Perception’ inquiry, while the Carson court denominates this inquiry as the ‘Purpose’ inquiry. Finally, in Inquiry 3 all Courts consider the financial support provided to the entity by the foreign government, with the Esquenazi Court (Control and Function Prongs) adding the analysis around the “Extent of obligations and privileges under its country’s laws”.

Similar – Inquiry 1 – Are the services provided by the entity available to all citizens of the home country?; and Inquiry 4 – 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 Carson, the similar factors are in Inquiry 1, the Characterization of the services provided. The Esquenazi opinion has this Inquiry 1 in both the Function and Control Prong analysis. Under the Function Prong analysis it asks “Does the entity provide services to the public at large in the foreign Country?” and under the Control Test it inquires into what is the foreign government’s formal designation of the entity. In Inquiry 4, both the Lindsey and Carson court said that a foreign government’s control over the administrative functions of the entity was a key inquiry but interestingly, this factor was not present in the Esquenazi analysis, under the analysis of either the Control or Function Prong. In Inquiry 6, the Carson Court looked into the creation of the entity and the Esquenazi opinion (Control Prong) inquired into the foreign government’s designation of the entity

Stand-alones – Interestingly, Esquenazi has two factors for analysis not found in either of the district court opinions. The first, Inquiry 7, is from the Control Prong and asks the question of the length of time the various factors listed have existed. The second, Inquiry 8, is from the Function Prong and is whether the entity has a monopoly in the foreign country. Carson also has a stand-alone inquiry, which is found at Inquiry 6 and inquires into the facts and circumstances surrounding the creation of the entity. While I believe this could well be the last factor in your analysis, it can be one, which most easily 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.

Comparison of Approaches

At first blush it may appear that the Esquenazi court took a slightly different approach by dividing the two initial prongs of inquiry into ‘Control’ and ‘Function’. If one examines the individual Esquenazi factors in detail they are not significantly different from Lindsey and Carson, with the exception noted above of the two stand-alone inquiries. One clear factor that Esquenazi has in common with Lindsey and Carson 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 the foreign government. While Carson 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 11^th Circuit opinion 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.

What to make of the two stand-alones found in Esquenazi; those being lengthy of time the entity has existed (Function Prong) and does it have monopoly power (Control Prong)? I would have to opine that these are the two least important factors listed. I say this because if there is clear indicia that an entity is controlled by, financed in whole or in part by a foreign government, perceived to be run by a foreign government and the entity provides services to the citizens of the foreign country; it really does not matter when it was created, i.e. yesterday or 50 years ago. It will be considered as an instrumentality under the FCPA. Similarly, even if there is no monopoly present, if these other factors are present, it will still be considered an instrumentality under the FCPA.

Lessons Learned

With all this information in mind what inferences can a compliance practitioner for guidance draw 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.

The Esquenazi Court of Appeals decision is a very welcome addition to the dearth of case law interpretation of the FCPA. The 11^th Circuit has seemingly put to rest the question of whether an instrumentality means only a government agency or something else. Clearly it means something else. The Esquenazi decision also provides significant guidance on what type of inquiry a company should use to determine if an entity is a part of a foreign government and, therefore, subject to FCPA scrutiny. Whatever specific facts or indicia that you are looking at, it now boils down to (1) does a foreign government control the entity?; and (2) does the entity function as part of the part of the foreign government?

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, 2014

Common Sense in the Definition of ‘Instrumentality’ Under the FCPA

In what can only be called a judicial decision based on common sense the 11^th Circuit Court of Appeals, in an opinion released on May 16, upheld the convictions of Joel Esquenazi and Carlos Rodriguez for violations of the Foreign Corrupt Practices Act (FCPA) and certain US anti-money laundering (AML) laws. The two had engaged in a long running bribery scheme with the Haitian telephone company, Telecommunications d’Haiti, S.A.M (Teleco). The pair were convicted and sentenced to lengthy jail terms, Esquenazi receiving 15 years and Rodriguez receiving 7 years. In this post, I will review the 11^th Circuit’s opinion and tomorrow I will try and articulate some of its lessons for the compliance practitioner.

This opinion was the first time that a Court of Appeals had reviewed the FCPA question of what is an ‘instrumentality’ under the Act. Both defendants had argued that instrumentality could only mean (1) “that only an actual part of the government would qualify as an instrumentality” or (2) the FCPA should be construed to encompass only foreign entities performing ‘core’ governmental functions similar to departments or agencies. The Court rejected both arguments.

As to the first argument, the Court said “that contention is too cramped and would impede the “wide net over foreign bribery” Congress sought to cast in enacting the FCPA.” The court rejected several points that the defense raised in the second argument. In addition to some rejections of technical statutory constructions, the Court went into detail about two separate Congressional actions regarding the FCPA.

Grease Payments

The Court noted that the facilitation payment exemption to the FCPA specifically excepted liability “to FCPA liability for “any facilitating or expediting payment to a foreign official . . . the purpose of which is to expedite or to secure the performance of a routine governmental action by a foreign official.”” Further, a ““Routine governmental action” is defined as “an action . . . ordinarily and commonly performed by a foreign official in,”” among other things, “providing phone service.” If an entity involved in providing phone service could never be a foreign official so as to fall under the FCPA’s substantive prohibition, there would be no need to provide an express exclusion for payments to such an entity. In other words, if we read “instrumentality,” as the defendants urge, to categorically exclude government-controlled entities that provide telephone service, like Teleco, then we would render meaningless a portion of the definition of “routine governmental action” in section 78dd-2(b). [all citations omitted] In other words, to say that Teleco could not be an instrumentality would render meaningless the plain words of the statute.

US Treaty Obligations

Next the Court turned to the 1998 amendments to the FCPA, which Congress enacted, in part, to ensure that the US was in compliance with its treaty obligations, as a signatory to the Organization for Economic Cooperation and Development’s (OECD) Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (the “Convention”). After noting that “In joining the OECD Convention, the United States agreed to “take such measures as may be necessary to establish that it is a criminal offence under [United States] law for any person intentionally to offer, promise or give . . . directly or through intermediaries, to a foreign public official . . . in order that the official act or refrain from acting in relation to the performance of official duties, in order to obtain or retain business or other improper advantage in the conduct of international business.””; the Court then said that under the OECD treaty, a ““Foreign public official” is defined to include “any person exercising a public function for a foreign country, including for a . . . public enterprise.”” Finally, the Court stated, “An official of a public enterprise shall be deemed to perform a public function unless the enterprise operates on a normal commercial basis in the relevant market, i.e., on a basis which is substantially equivalent to that of a private enterprise, without preferential subsidies or other privileges.”

With these definitions as a backdrop, the Court found that in making the 1988 changes to the FCPA, the law itself was changed to meet the OCED Convention. The Court stated that since Congress affirmatively changed the law to meet certain requirements in the Convention which the prior version of the FCPA did not cover; the fact that Congress did not see the need to change the definition of instrumentality to meet the treaty obligations was evidence that Congress believed that the FCPA definition of instrumentality met the language of the OECD Convention. To conclude otherwise “would put the United States out of compliance with its international obligations.”

The Test to Determine Instrumentality

Here the Court started with the premise that “Specifically, to decide in a given case whether a foreign entity to which a domestic concern makes a payment is an instrumentality of that foreign government, we ought to look to whether that foreign government considers the entity to be performing a governmental function.” From this starting point, the Court said that “An “instrumentality” under section 78dd-2(h)(2)(A) of the FCPA is an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own.”

From this the Court developed two key analyses. First, does a foreign government ‘control’ an entity, what I call the “Control Test”? Second, is “deciding if the entity performs a function the (foreign) government treats as its own”; what I call the “Functions Test”?

1. Control Test

With the caution that “It would unwise and like impossible to exhaustively answer them in the abstract”; the Court said, “For today, we provide a list of some factors that may be relevant to deciding the issue” of the Control Test. These factors are:

• The foreign government’s formal designation of the entity;
• Whether the government has an interest in the entity;
• The government’s ability to hire and fire the entity’s principals;
• The extent to which the entity’s profits, if any, go directly into the governmental fisc;
• The extent to which the government funds the entity if it fails to break even; and
• The length of time these indicia have existed.

2. The Functions Test

As to this second analysis, the Court set out the following factors to determine if the entity performs a function the government treats as its own:

• Does the entity have a monopoly over the function it exists to carry out;
• Does the foreign government subsidize the costs associated with the entity providing the services;
• Does the entity provide services to the public at large in the foreign Country; and
• Does the foreign government generally perceive the entity to be performing a governmental function?

The Court then went on to analyze the trial court’s jury instructions in light of their two-part formulation, which was the following:

One, whether it provides services to the citizens and inhabitants of Haiti.

Two, whether its key officers and directors are government officials or are appointed by government officials.

Three, 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.

Four, Teleco’s obligations and privileges under Haitian law, including whether Teleco exercises exclusive or controlling power to administer its designated functions.

And five, whether Teleco is widely perceived and understood to be performing official or governmental functions.

The Court of Appeals found that the trial court jury instructions met the formulation it had set out by stating, “Read in context, the district court’s instructions make plain that provision of a service by a government-owned or controlled entity is not by itself sufficient. The district court explained only that an entity that provides a public service “may” meet the definition of “instrumentality,” thus indicating that providing a service is not categorically excluded from “a function of the foreign government.” But the sentence just before explained with no equivocation that only “a means or agency [that performs] a function of the foreign government” would qualify as an “instrumentality.”

Tomorrow I will present the lesson that can be gleaned from this opinion, for the compliance practitioner in a FCPA compliance program.

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, 2014

Interview with FCPA Litigator David Simon

Ed. Note-this post continues my efforts to write about thought leaders in the area of anti-corruption compliance. Today, I post an interview with David Simon, a partner in the Milwaukee office of Foley and Larder. David not only practices in the area of FCPA defense but writes and consistently articulates innovative approaches to FCPA compliance.

Where did you grow up and what were your interests as a youngster?

I grew up in the suburbs of Milwaukee.  As a kid, I was pretty focused on sports and music — talented in neither, but an enthusiastic consumer of both.  I come from a long line of crazed Green Bay Packers fans.  One of my earliest memories involves Sunday dinner at my Grandmother’s house – squeezed in during halftime, dessert on our laps in front of the TV.  I’m pretty sure I have attended, watched, or listened to something approaching 90% of all Packers games played during my lifetime.

Where did you go to college and what experiences there led to your current profession?

I graduated from the University of Wisconsin (Madison).  It was a great fit for me – a big, diverse place where students are given tremendous freedom to chart their own educational course.  My liberal arts education provided a great foundation for a career as a lawyer.  I was taught the key skills for a litigator — how to think critically and how to express my thoughts in writing and orally.

During college, I was heavily involved in a student organization called AIESEC (a French acronym that stands for the International Association of Students in Economics and Commerce).  AIESEC is a fantastic organization that runs a global internship exchange program.  Our chapter was charged with raising internships with Wisconsin companies for foreign students.  In turn, we got to send our members abroad to work in similar internships.  AIESEC gave me the international bug – my first opportunity for international travel (a global conference in Norway), a Polish roommate, and an internship in Germany.  The path to my FCPA practice started with AIESEC.

Before joining Foley Lardner, you clerked for a federal judge. How did that experience help you as a lawyer and what did you learn from it?

I was lucky to have the opportunity to clerk for U.S. District Judge Robert Warren (now deceased).  He was a great man who exemplified fairness, decency, respect, and duty.  I can’t imagine a better place to start a legal career.  Besides learning how cases are litigated and tried (and what works and –  perhaps more importantly –  what doesn’t work), I learned so much about the human aspect of the law and the right way to treat people.

Could you describe your current practice?

My practice is focused principally on two core services:  First, I  represent companies (and, from time to time, individuals) that find themselves under scrutiny by the government or are in a situation that could lead to scrutiny by the government.  This includes internal investigations, the defense of enforcement proceedings, and, sometimes, litigation.  Second, I help companies stay out of the government’s cross-hairs by counseling on specific issues and by helping them build and implement effective compliance programs.

From a subject-matter perspective, I focus heavily on the FCPA and other anti-corruption laws. That is a little unusual for a Wisconsin resident who practices principally out of Foley & Lardner’s Milwaukee office.  It was an interesting path to this practice:  As a relatively junior lawyer, I had the good fortune of working with Martin Weinstein, one of the deans of the FCPA bar, during his first years out of the government and while he was starting his practice at Foley.  So as an associate learning how to be a government enforcement lawyer, I had the opportunity to work on a number of FCPA matters with one of the leading experts in the field.  This was well before the explosion in FCPA enforcement.  I always say we were FCPA before FCPA was cool.   We’ve been able to continue that tradition at Foley, which has been really great.

My practice is not 100% FCPA, though.  I also do enforcement, investigation, counseling and compliance work in the fields of antitrust, health care, and the False Claims Act.

You were one of the defense counsel you presented oral arguments in the Esquazi case in the 11^th Circuit last fall. Can you describe how you prepared and what was your experience in handling a federal court of appeals oral argument.

It was a great privilege to represent Carlos Rodriguez in the appeal of his criminal conviction. I hope we will achieve a positive result for him on appeal.

I am very grateful to Foley for investing really significant resources in this pro bono appeal.  Our representation of Carlos was a major team effort, with more than ten different lawyers contributing in various ways.  My colleagues Pam Johnston, Ken Winer, Lauren Valiente and Jamie Circincione made really significant contributions to the development of our FCPA “foreign official” arguments.  (We argued that an “instrumentality” of a foreign government must be limited to entities that are actually part of the government.)

It was a great experience having the opportunity to participate in the development of this important aspect of the law.  That is an unfortunately rare opportunity, since there has been so little actual litigation in the FCPA context.  It is a really good thing that there have been more litigated issues in the last couple of years, and we were glad to be able to join in the debate.

The oral argument itself was a terrific experience.  One never feels more like a lawyer than when arguing a case in a federal appellate court.  We had a great panel that was fully engaged and was clearly aware of the importance of the issues presented.  And I had the opportunity to follow Markus Funk, who did a great job representing co-defendant Joel Esquinazi, making similar, though slightly different, arguments on the “foreign official” issue.  What more could you ask for?  (Other than a reversal and remand!)

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, 2014