FCPA Compliance and Ethics Blog

August 29, 2014

Extraordinary Rendition and Ripples From the Chinese Corruption Investigations

Extraordinary_Renditions_CvrAs many of you know, I am a recovering trial lawyer. So I was very interested when I received a book for review by Paul Batista, entitled Extraordinary Rendition. Not only is Batista a practicing trial lawyer specializing in federal criminal defense, he also authored one of the leading treatise on the federal racketeering statute, “Civil RICO Practice Manual,” first published in 1987 by John Wiley & Sons, and now in its third edition (Wolters Kluwer 2008).

I learned long ago that there are two basic story lines: Hero Takes A Trip and Stranger Comes To Town. They both are great formats and I enjoy them equally if the writing and story-telling is good. Extraordinary Rendition falls into camp one and I found it to be the journey of discovery of a nearly burned out trial lawyer, Byron Carlos Johnson, who comes to defend Ali Hussein, a Syrian national who had lived in the US for 10 years prior to 9/11 and was accused of being a banker for Al Qaeda. The story follows twists and turns of not only the trial but the various agents and agencies of the US Government as they try to derail Johnson and his attempts to defend Ali Hussein. While it certainly could be called a legal thriller, it is a rollicking good ride and I give my hardiest recommendation to anyone interested in the legal issues involved or a thriller about a man caught up in forces far beyond his control; yet does take control of what he can.

I thought about Batista’s book when I read a recent article in the Financial Times (FT), entitled “Beijing probe touches west’s cereal bowls” by Lucy Hornby. Her basic thesis was set out in the first line of her piece, “Never before have China’s domestic politics had such ramifications for global business.” She wrote about two tangible examples of what she termed the “ripple effects” of the Chinese anti-corruption investigation, which began in earnest last summer with the revelations of corruption by the UK pharmaceutical giant GlaxoSmithKline PLC (GSK).

Hornby reported on the Canadian company, Athabasca Oil Corporation, “the partner company for major Chinese investments in Canadian oil sands – fell 13 per cent this week. They are down 24 per cent since the beginning of April, when Athabasca announced PetroChina, a listed unit of CNPC, would buy the 40 per cent of the Dover oil sands project that it did not already own. Since then, two executives from PetroChina’s Canadian operations have fallen prey to the corruption purge – and the C$1.32bn (US$1.23bn) transfer payment has not been made.” But it has also reached the British breakfast table as Chinese authorities announced they were investigating the owner of the company that makes the breakfast staple Weetabix.

Business ventures in other countries such as Cambodia and Australia have been put off due to the Chinese corruption investigation. This has been because of both corrupt payments made to Chinese officials and in some cases corrupt payments alleged to have been made by Chinese officials. For instance in Cambodia a project that was mired in such problems that the primary funding partner, The World Bank, had suspended funding has now run into such problems that Standard Chartered may lose up to $250MM in funding which it provided. Further, Hornby reported that “In Australia last year, a A$1.4bn bid for Sundance Resources – which had proposed a $A5bn iron ore mine on the border of Cameroon and the Republic of Congo – collapsed after high-flying Chinese entrepreneur Liu Han abruptly vanished. Mr Liu had built his mining business by cultivating ties with Mr Zhou while the latter governed southwestern Sichuan province. He was sentenced to death in May for organised crime. His defence was that he was carrying out orders for unnamed “leaders”.”

Things are particularly difficult at PetroChina, a major investor in Canadian oil sands, because, as Hornby noted, “dozens of senior executives have been detained or questioned in the past year. Many, including the head of its Indonesian business, played key roles in its international projects.” However Hornby believes that “capital expenditure commitments by state-owned enterprises are likely to be honoured as the investigation continues, because China’s large and growing economy has a fundamental need for resources.”

Another large Chinese energy concern CNPC has also been hard hit by the corruption scandal. Attached, as a diagram, to Hornby’s article is a graphic that shows the extent of the company’s investments of the past 10 years or so. The graphic also notes that the company “has been hardest hit by the ongoing corruption purge, with dozens of senior executives detained or questioned.” The chart below shows the “ripple effects” of CNPC investment.

Country Investment Amount
Kazakhstan $12.7bn
Peru $2.6bn
Turkmenistan $1.2bn
Scotland $1bn
Ecuador $0.7bn
Australia $4.1bn
Canada $3.3bn
Syria $0.6bn
Mozambique $4.2bn

Hornby’s article touched on another area, which has significance for the Foreign Corrupt Practices Act (FCPA) practitioner, that beg the question of whether a state-owned enterprise is an instrumentality or in any other way covered by the FCPA? She wrote that “the unusually public nature of this corruption investigation has given outsiders a clearer insight into the way money and power have become entwined, and influence dealmaking, in today’s China.” She quoted Luke Patey, author of the book The New Kings of Crude, for the following, ““For years, Chinese national oil companies have fought hard against the label that they are political instruments of the Chinese government and Communist party. That political nature is now on full display.””

Hornby’s article demonstrates not only the pervasive nature of Chinese corruption but also how many countries such corruption may have effected. For those FCPA naysayers who argue that the law brings a competitive disadvantage to US companies, they should read her article to open their eyes. Many of these Chinese investments are now on hold with no hope of completion or even funding because of the domestic turmoil inside China over corruption. Companies and countries want a reliable business partner, starting with one which does not engage in bribery and corruption to obtain a contract and then onto a company which fulfills its contractual obligations. Think about that as a selling point the next time you are oversees.

And while you are traveling overseas, read a copy of Batista’s Extraordinary Rendition on the trip over. You can purchase a copy by clicking here or 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

July 10, 2014

Mid-Year FCPA Report, Part II

Mid Year ReportToday, 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

May 20, 2014

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

FCPA SettlementIn Part I of my review of the 11th 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
  1. 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.
  1. 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.
  1. 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.
  1. 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
  1. 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
  1. Creation
Circumstances around the entities creation
  1. Length of Time
Control Test – the length of time the indicia have existed.
  1. 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 11th 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 11th 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 11th 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

May 19, 2014

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

7K0A0032In 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 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 11th 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

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