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

Lindsey Manufacturing: Judge refers to Mexican Constitution

Ed. Note-today we host a Guest Blog from our Colleague Mary Shaddock Jones, Assistant General Counsel and Director Of Compliance at Global Industries, Ltd.

On April 1, 2011 the FCPA Blog wrote that the Judge in the Lindsey Manufacturing case denied 16 motions including the “Foreign Official” dismissal motion.  There has been quite a bit written about the Lindsey Manufacturing case, such as “Is a Commercial Enterprise Owned by Foreign Government by Covered by the FCPA?” in the FCPA Compliance and Ethics Blog. For those of you who have not followed the case, the “Foreign Official” issue centered on whether or not CFE was an “instrumentality of a foreign government” under definition of “Foreign Official” of FCPA.

The “FCPA Explained” published by Foley & Lardner, LLP provides the following explanation:

The Antibribery provisions of the FCPA define the term foreign official to include, in pertinent part:

“…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, department, agency, or instrumentality …”

The enforcement agencies broadly interpret this term to include not only traditional government officials, but also employees of state-owned or state controlled entities (“SOE”) under the theory that SOEs are an “instrumentality” of the foreign government. Even if a foreign company is not wholly-owned by a foreign state, it may still be considered an “instrumentality” of the foreign government if it exercises substantial control over the entity. FCPA enforcement actions and other enforcement agency pronouncements instruct that once a foreign company (such as an oil and gas entity, a hospital or laboratory, etc.) is deemed an “instrumentality” of a foreign government, every single employee of the entity (regardless of rank or title) will be considered a foreign official regardless of how local law may characterize the employee.

According to the FCPA Blog, “the Judges decision was primarily based on the nature of CFE and the essential governmental functions it performs”. As predicted in the FCPA Compliance and Ethics Blog, the Judge relied on the Mexican Constitution (which was the argument by the DOJ) and related statutes recognizing the exploitation of natural resources and delivery of electricity as essential public functions since Mexican law recognized that these functions are performed by and through CFE.

Lindsey Manufacturing allegedly hired Grupo Internactional de Asesores S.A. (“Grupo”) to serve as its sales representatives in Mexico in order to obtain contracts from the Mexican state-owned utilities company Comision Federal de Electricidad (“CFE).  The DOJ’s press release on October 21, 2010 alleged that part of the commissions paid to its agent, Grupo, was used to pay bribes to Mexican officials in exchange for CFE awarding contracts to Lindsey Manufacturing Co.

Mary Shaddock Jones is Assistant General Counsel and Dir. Of Compliance at Global Industries, Ltd. Mary can be reached at maryj@globalind.com. The views and opinions expressed here are her own and not necessarily those of her employer.
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Stephen Martin and I will be continuing our FCPA presentations, hosted by World Check next week. All of the events are free and CLE is provided. If you are in one of these areas I hope you can join us.

Tuesday, April 5-Portland. For details, click here.

Wednesday, April 6, Seattle. For details, click here.

Thursday, April 7, Denver. For details, click here.