FCPA Compliance and Ethics Blog

March 24, 2011

Is a Commercial Enterprise Owned by Foreign Government by Covered by the FCPA?

One of the factors to determine just who is a foreign governmental official under the Foreign Corrupt Practices Act (FCPA), is whether a foreign government is involved. There are currently a triumvirate of pending cases where the defendants have challenged a basic Department of Justice tenet that businesses owned by foreign governments are “instrumentalities thereof” foreign governments and thereby covered under the FCPA. The three cases are the CCI case in Central District of California, the Lindsey Manufacturing case, also in the Central District in California and the John O’Shea case, currently in the Southern District of Texas.

As reported by the FCPA Professor and the FCPA Blog on Wednesday, the Department of Justice was denied the right to file a Declaration from the US State Department in the Lindsey Manufacturing case. As reported by the FCPA Blog the Declaration of Clifton M. Johnson, Assistant Legal Adviser for Law Enforcement and Intelligence in the Legal Adviser’s Office said that “the judge should not grant the defendants’ motion to dismiss because it would adversely impact U.S. foreign policy. [Johnson] asserted that the FCPA was consistent with the OECD anti-bribery convention and that the “foreign official” and state-owned entity coverage of the FCPA must be maintained.” The FCPA Blog opined that this ruling could be a “key defeat in the battle over who’s a “foreign official” under the FCPA”.

We believe however that the point may be much simpler in the Lindsey Manufacturing case. Unlike the CCI case, this case deals with alleged bribery and corruption regarding the Mexican electric utility company, Comisión Federal de Electricidad (CFE). In the CCI case, the defendants are have alleged to violated the FCPA in regards to bribery and corruption of various telecom companies, most generally in Asia. (The O’Shea case also involves allegations of bribery involving CFE.)

The Lindsey case is the first case in which the DOJ has filed any briefing on the issue of who is a foreign governmental official. In its Opposition to the Defendants’ Motion to Dismiss, the DOJ notes that under the Mexican Constitution,

the supply of electricity is solely a government function. Specifically, Article 27 provides: It is exclusively a function of the general Nation to conduct, transform, distribute, and supply electric power which is to be used for public service. No concessions for this purpose will be granted to private persons and the Nation will make use of the property and natural resources which are required for these ends.

The DOJ goes on to point out that the CFE is effectively controlled by the government of Mexico by the appointment of CFE’s Governing Board, as well as the Director General. The DOJ concludes that the “CFE is part of the Mexican government, mandated by its constitution, formed by its laws, owned in its entirety by the people of Mexico” and is constituted to serve the people of Mexico. It would not seem that you can have a much more clear cut case that whatever legal form the CFE might take, it is a part of the government of Mexico.

The defendants accept the argument that the CFE is a government owned enterprise but claim that this disqualifies the CFE “as an entity properly addressed by [the FCPA].” The defendants response seems to boil down to the following, “commercial operations of a foreign government that provide power supply are not instrumentalities” within the meaning of the FCPA. Therefore their employees cannot be foreign officials.

The correct question appears to be precisely before the trial court. A hearing on the defendants’ Motion to Dismiss is currently scheduled for today, at 9:30 AM PDT. If you are attending please tweet away your observations!

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

February 23, 2011

Who is a Foreign Governmental Official Under the FCPA: The Defense Attacks

As was initially reported by the FCPA Professor, lawyers for four of the individual defendants who are former executives of the Orange County, California-based valve company, Control Components Inc. have filed a Motion to Dismiss the DOJ’s case. The basis of this defense, that their actions of participating in a scheme to bribe employees of several state-owned companies in China, Malaysia and the United Arab Emirates to secure contracts, does not fall within the FCPA. This argument is based the definition of foreign official under the FCPA. The DOJ has long taken the position that any employee of a foreign government owned or back enterprise falls within the definition of a foreign governmental official under the omnibus “instrumentality thereof” clause. However, as reported by Joe Palazzolo, in the Wall Street Journal, Federal courts have never squarely considered this issue previously. The defense lawyer have winnowed the case to a single legal question: Are state-owned companies instrumentalities of foreign governments?

The defense has five points, which we set out directly from the defendant’s brief below:

First, in the absence of an express definition, the Court must give the term its ordinary meaning as used in the statute. As used in the FCPA, the term “instrumentality” refers to a governmental unit or subdivision that is akin to a “department” or an “agency,” the two terms that precede it in the statute. Thus, the term covers governmental boards, bureaus, commissions, and other department-like and agency-like governmental entities. The definition does not extend, however, to entities in which a government merely has a monetary investment (i.e., state-owned business enterprises), because such a definition would make the term fundamentally different than the terms that precede it. This conclusion is bolstered by the statute’s use of the term “foreign official,” which suggests a traditional government employee, as well as by language in other portions of the FCPA.

Second, the Government’s proposed interpretation would lead to absurd results. Among other things, if it were adopted, the Government’s definition would transform persons no one would consider to be foreign government employees – including but not limited to U.S. citizens working in the United States for companies that have some component of foreign ownership – into “foreign officials.” Additionally, in certain countries where state-owned businesses are the norm, the majority of employed individuals would be “foreign officials.”

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

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

Fifth, in construing statutes, courts should avoid interpretations resulting in unconstitutional vagueness. Adopting the Government’s amorphous and expansive interpretation of “instrumentality” here would result in exactly the type of unconstitutional vagueness that must be avoided. The reason is simple: The Government has never explained with any clarity what constitutes a “state-owned” business in the context of the FCPA. Is a minority investment by a foreign government enough? Is a majority investment required? Must the state direct the majority of voting rights? Is there a required element of control? Does the purpose or type of commercial enterprise matter? Could a subsidiary of a state-owned business qualify? Without a clear demarcation, especially in an era of large-scale government investments and bailouts of traditional private enterprises, the FCPA’s reach, under the Government’s theory, would be whatever the prosecution says it is in any given case. Accordingly, the Court must construe the CPA’s instrumentality provision narrowly to mean traditional government officials, and not employees of a state-owned (whatever that means) commercial business.

Oral argument on the defendant’s Motion to Dismiss is set for March 21 and as our colleague Howard Sklar has stated, “I wish I could go.”

For a copy of the defendant’s brief, 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


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