FCPA Compliance and Ethics Blog

April 2, 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.
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.

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

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