A roundup of commentary regarding the 11th Circuit’s recent “foreign official” ruling.
In this Morrison Foerster alert, Charles Duross (who as recently as four months ago was the DOJ’s FCPA Unit Chief – see here) calls the FCPA a “complex statute” and states that “companies hoping for additional clarity through the creation of either a bright-line rule or a clearly defined test [as to "instrmentality"] will be disappointed …”. Duross further states:
“Implications for Future FCPA Enforcement
As with the FCPA Resource Guide, many businesses were hoping that the Esquenazi decision would bring additional clarity to the question of “who is a foreign official” under the FCPA. But close observers were not surprised by the Eleventh Circuit’s decision, both because of the series of district court decisions across the country that had followed the same course before and because of the strong facts supporting the conclusion that Teleco was, indeed, an instrumentality of the Haitian government.
That said, the Esquenazi court repeatedly referenced Commentary 15 to the OECD Anti-Bribery Convention, which states that a public enterprise (i.e., an instrumentality) does not include an enterprise that “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 substantial subsidies or other privileges.” This factor could be significant in countries like China, where there exist 144,000 state-owned enterprises, many of which may operate on a normal commercial basis without any support from the state. It remains to be seen whether the Esquenazi decision and its embracing of Commentary 15 will result in the DOJ and the SEC being more restrained in applying the “instrumentality” label to state-owned enterprises that otherwise look and operate like ordinary commercial enterprises.
Moreover, Esquenazi demonstrates that companies cannot rely on “public” or “private” labels to determine whether an entity is an instrumentality under the FCPA. On one hand, the court affirmed that the mere provision of a service by a government-owned entity is not sufficient to meet its new test. On the other hand, as was the case in Esquenazi, the provision of an ostensibly private or commercial service may be found to be a government function depending on the particularities of the local jurisdiction. In the face of this uncertainty, and with an appellate court adopting an expansive definition of instrumentality, companies should ensure that their compliance programs are structured to sufficiently evaluate whether the entities with which they are conducting business are under the control of a foreign government and performing a government function – even if that function is considered commercial in nature.”
Brian Whisler (Baker & McKenzie)
“While not surprising, the Eleventh Circuit’s decision reflects an attempt to instill objectivity into the analysis of the “foreign official” element of the FCPA, but seems to fall short of a desire for more predictability and consistency in this area of the law. The analysis of who/what constitutes a ‘foreign official’ will continue to be largely informed by local perceptions, setting up a patchwork of legal hurdles when conducting business abroad. Multinational companies are understandably concerned about the sweeping effect of the FCPA generally and I’m not sure this decision will be perceived as offering further clarity for purposes of defining “foreign officials” in a more uniform, predictable fashion.”
Jan Handzlik (Venable)
“It is remarkable that, 37 years after the passage of the Act, an appellate court had to cobble together definitions of several key terms to save FCPA convictions. The 11th Circuit relied on such things as Black’s Law Dictionary, Webster’s and the OECD Convention on bribery of public officials to give meaning to some essential elements of the Act. This resulted from Congress’ failure to define key elements of the offense with specificity, something that presumably would have put Messrs. Esquenazi and Rodriguez on notice of what constitutes an FCPA violation. Even though their convictions and harsh prison sentences appear to be based on a substantial factual record, they deserved better.”
This Wilmer Hale publication states:
“The court went on to say that “it will be relatively easy to decide what functions a government treats as its own” by looking at objective factors, including “control, exclusivity, governmental authority to hire and fire, subsidization, and whether an entity’s finances are treated as part of the public fisc.” The court said that courts and businesses “have readily at hand the tools to conduct that inquiry.” In practice, this analysis may be more difficult than the court allows because information on these factors is not always publicly available or easy to discern.”
This decision provides a clear definition of the term “instrumentality,” within the context of the FCPA, and provides guidance on what factors to consider when deciding how to treat employees of entities that are partially owned by foreign governments. This case will make it more difficult for defendants to argue that the definition of “instrumentality” is an open question of law, and enforcement authorities are likely to treat the issue as settled, even in cases outside the Eleventh Circuit. From a compliance perspective, companies would therefore be wise to proceed under the assumption that the FCPA prohibits payments to government-owned and -controlled entities, even if those entities operate in a commercial arena. In practice, this has been the standard in compliance programs for some time given that the enforcement agencies have pressed this view for many years, even memorializing it in their 2012 Resource Guide to the US Foreign Corrupt Practices Act.
Whether or not the recipient of a payment is a “foreign official,” however, may be becoming less significant from a compliance perspective. The Department of Justice and Securities and Exchange Commission have pursued numerous cases involving commercial bribery with no connection to a government, under the Travel Act or the accounting provisions of the FCPA. Relatedly, the anti-bribery laws of many other countries, such as the UK Bribery Act, prohibit commercial bribery. Thus, the analysis inEsquenazi is a key pronouncement regarding an important statute that has historically had few judicial interpretations, but its practical significance may be limited, particularly for global companies seeking to maintain clear compliance standards across jurisdictions.
All that said, given the dominant role of the government in this case, the outcome certainly could be different in other contested cases, for example in cases where the government may own less than a majority stake, or the function of the entity may be more tangential to the government. Thus, the court’s fact-specific inquiry will be important in fully analyzing potential liability under the statute in cases to come.”
This Sidley & Austin update states:
“This decision is a significant victory for the DOJ. The interpretation of what is an “instrumentality” is the bedrock of many FCPA enforcement actions, and the Eleventh Circuit’s definition is broad enough to encompass a wide spectrum of entities with varying degrees of foreign government ownership and/or control. Unfortunately for business stakeholders, the current trend in the courts, as evidenced by the Esquenazi decision, is to approach the question of whether a state-owned enterprise is an instrumentality of the government ultimately as a question of fact. The Eleventh Circuit seems to be proposing a totality of circumstances test with no single dispositive factor. It remains to be seen whether the defendants will petition for a writ of certiorari to the Supreme Court, but a central question well-preserved in the courts below is whether the FCPA’s definition of a foreign official is unconstitutionally vague. It is likely that the defendants will seek further review of the Eleventh Circuit decision.
The Esquenazi decision is an important victory for law enforcement that will encourage the Department and the Securities and Exchange Commission in their continuing pursuit of potential FCPA violations. Arguably, the victory was not absolute since the panel refused to adopt a definition of “instrumentality” that would have categorically covered every state-controlled entity that merely provided any service. Nevertheless, the opinion supports the government’s long-held position that “instrumentality” should be read broadly, and makes clear that even those entities that do not have a formal designation as a state enterprise may also fall within the FCPA.”
This Willkie Farr memo states:
“The Eleventh Circuit’s decision largely vindicates U.S. enforcement authorities, who have long asserted that the term “instrumentality” can include state-controlled entities and that the term “foreign official” can likewise include employees of state-controlled entities. In light of the decision, companies should generally continue to take a broad view of these terms in their internal compliance programs. Given that the definitions rely on “fact-bound questions,” and given the relative amorphousness of the test created by the Eleventh Circuit, functionality concerns should generally weigh in favor of taking a conservative approach—at least until additional precedent or enforcement actions provide more guidance. Accordingly, payments or transfers provided to employees of state-controlled companies (including gifts, meals, travel, or entertainment) should continue to receive close scrutiny from company compliance personnel.
That said, the decision contains significant limitations on the scope of the terms. In particular, the Eleventh Circuit’s second requirement—that an entity perform a function that the government treats as its own—could very well exclude small non-monopolist companies in many instances. For example, in China, many small companies are owned partially or wholly by government entities; but they act just like private companies, they are not providing services to the public at large, and the public and government do not necessarily view these companies as performing government functions. In light of the Eleventh Circuit’s opinion, mere state ownership alone would not make them instrumentalities under the FCPA. Overall, the decision limits the scope of the terms “instrumentality” and “foreign official” and could prove to be very important in limiting the scope of many enforcement actions under the FCPA.”
This Law360 article from Denton attorneys states:
“The Eleventh Circuit’s holding provides important guidance on the scope of “instrumentality” and in turn “foreign official” under the FCPA. Some aspects of the ruling appropriately limit the types of entities that constitute government instrumentalities. For example, under the court’s definition, an entity is not automatically an instrumentality merely because it has some government ownership; it must also perform a function the government treats as its own.
This second element is somewhat subjective in nature, particularly insofar as it requires consideration of “whether the public and the government of [the] foreign country generally perceive the entity to be performing a governmental function.” The competing declarations of Haiti’s prime minister in connection with this case demonstrate that determining the perception of even one individual regarding an entity’s public or private nature can be difficult, let alone the perceptions of the entire “public” and “government.” Although the Eleventh Circuit’s opinion states that the court was “mindful of the needs of both corporations and the government for ex ante direction about what an instrumentality is,” its flexible factor definition leaves substantial room for ongoing debate about the meaning of “instrumentality” and “foreign official.”
The Eleventh Circuit’s rejection of the type of bright-line rule for which the defendants advocated means that businesses and practitioners will continue to struggle to understand precisely when the FCPA does and does not apply to dealings with employees and directors of state-owned entities. Even as to the specific circumstances of Haiti Teleco, the opinion does not go into a detailed discussion of how the factors apply and does not indicate whether certain factors are more significant than others in the analysis.
Thus, from a risk management perspective, while the illustrative factors listed in this decision should be considered (along with the factors enunciated by the U.S. District Court for the Central District of California in U.S. v. Carson and Lindsey Manufacturing), the safest course will be to assume that the DOJ and SEC (as well as future courts) will take the position that employees of any entity that is majority-owned or controlled by a foreign government will be deemed “foreign officials” for purposes of the FCPA.
Taking a cautious approach to this issue is prudent not only from the standpoint of minimizing FCPA risk, but also in light of the fact that global businesses subject to the FCPA must also ensure compliance with a range of other potentially applicable laws that prohibit commercial bribery, such as the Travel Act (18 U.S.C. § 1952), the U.K. Bribery Act, and local anti-corruption laws. For purposes of such statutes, it does not matter whether the bribe recipient is or is not a “government official.”
While other circuits may apply an interpretation that differs from the one adopted by the Eleventh Circuit, the limited case law analyzing the FCPA makes the opinion in Esquenazi particularly significant. As these the types of cases continue to be litigated, expect to see other courts weigh in on the definition of “foreign official.”
This Cadwalader advisory states:
“The panel’s ruling represents a major victory for the Department of Justice, and puts to rest a major issue of contention in recent foreign corruption prosecutions of individuals, by affirming the position taken by the Department since the FCPA was enacted. It also provides a clear warning to companies that conduct business internationally to examine closely the level of government control and functions of the entities with which they deal, regardless of the entities’ official designation or formal ownership.”
This Haynes Boone release states:
“The Eleventh Circuit’s decision is consistent with the government’s more expansive and longstanding position of what entities are government “departments, agencies and instrumentalities thereof” and who is a foreign government official. The government’s view previously was laid out in detail in the FCPA Resource Guide issued jointly by the Securities and Exchange Commission and the Department of Justice in November 2012. Accordingly, the decision bolsters the government’s aggressive approach to FCPA enforcement and its expansive view of who may be a foreign government official.”
This Clifford Chance briefing states:
“The boundaries between public and private entities are often blurred, particularly in developing countries where corruption risks are the target of heightened Justice Department scrutiny. The Eleventh Circuit’s opinion in Esquenazi underscores the importance of conducting due diligence on a company’s business relationships in order to determine whether such contacts may be government-owned or -controlled.”
This Davis Polk memo states:
“In the end, the Esquenazi opinion does not alter the current landscape much, if at all. The Esquenazi opinion may even further embolden U.S. FCPA regulators, including DOJ and the SEC, now that they have the backing—for the first time—of an appellate court. Specifically, the court’s analysis largely adopts the government’s opinion and mirrors the government’s analysis reflected in the DOJ/SEC 2012 Resource Guide to the U.S. Foreign Corrupt Practices Act (“the Guide”), which states in relevant part that “[t]he term ‘instrumentality’ is broad and can include state-owned or state-controlled entities. Whether a particular entity constitutes an ‘instrumentality’ under the FCPA requires a fact-specific analysis of an entity’s ownership, control, status, and function.” The Guide then lists eleven non-exhaustive factors that courts have instructed juries to consider when determining instrumentality, which are reminiscent of the above-listed factors from the Esquenazi decision.”
This Arnold & Porter advisory states:
“As the first appellate court interpretation of what constitutes an “instrumentality” of a foreign government, the Eleventh Circuit’s opinion provides additional guidance to companies seeking to do business overseas without running afoul of the FCPA’s anti-bribery provisions. Because the Court declined to adopt the limited, bright-line interpretations of “instrumentality” urged by the defendants, companies should continue to appreciate that a broad range of entities may be considered instrumentalities of a foreign government, and use the Eleventh Circuit’s illustrative factors as guidance when constructing their anti-corruption compliance programs. Companies should assume that both the government and the courts will do the same.”
This Norton Rose Fulbright
“The 11th Circuit decision was groundbreaking in that it represents the first time an appellate court defined “instrumentality” under the FCPA. As a practical matter, however, US regulators have routinely taken an expansive view of who can properly be considered a “foreign official” through their broad view of which entities are “instrumentalities” under the FCPA. As such, there will likely be little change in the US government’s approach. Nevertheless, the judicial decision, of which there are still few in the FCPA arena, lends validity to the government’s broad interpretation of “foreign official” under the statutory prohibitions.
Consequently, caution should be exercised when interacting with entities which are subject to the control of a non-US government and engaged in business that the foreign government likely considers government business. Under Esquenazi, it should be presumed that employees or representatives of that entity are foreign officials.”
This Crowell Moring release states:
“In Esquenazi, the Eleventh Circuit blithely suggested that consideration of the “objective factors” it listed should make it “relatively easy” for U.S. companies doing business abroad to assess whether an entity is an “instrumentality” – particularly in light of the Advisory Opinion process. But even if a particular transaction could await an Advisory Opinion, any resulting Opinion would be expressly conditioned on the accuracy and completeness of the information provided. Those experienced in international business understand how difficult it remains to obtain reliable ownership and similar information in many foreign countries.
Companies will need to continue to be cautious in dealing with employees of any entities that have some level of foreign government control or ownership, and it remains to be seen whether the Eleventh Circuit’s “objective factors” will alleviate or only aggravate the confusion about which persons are “foreign officials” under the FCPA.”
This Mayer Brown update states:
“As the first appellate court to consider the reach of the term “instrumentality,” the Eleventh Circuit recognized that its opinion would provide much-needed guidance to “both corporations and the government.” Corporations operating in foreign jurisdictions should reexamine their compliance polices and business practices in light of the Esquenazi decision to ensure that they properly account for the broadened understanding of instrumentality under the FCPA.”
This Paul Hastings alert states:
“This decision is the first appellate court opinion to address challenges to the DOJ’s and SEC’s interpretation of “instrumentality” which in many ways have defined the reach of the FCPA. As such, this court’s definitive opinion would appear to curtail the on-going debate over what constitutes a government instrumentality and whether improper payments to state-owned entities could be a violation of the FCPA. Businesses have struggled over the extent to which they should treat employees of state-owned entities as public officials. While this decision provides some clarity as to the factors to consider, it is far from the bright line rule that businesses have been seeking in crafting their compliance programs and struggling with the challenges of operating in the international business environment. In this decision, the Eleventh Circuit provided additional factors beyond those proposed by the enforcement agencies and those that this trial court and other trial courts had used in examining the issues at the trial level. The Eleventh Circuit, however, found no need to elaborate on the application of those factors to the matter at issue, and therefore, this opinion provides little guidance to companies seeking certainty. Moreover, the court did not even discuss the relative weight of the factors, for example, whether majority ownership may be of greater importance than the formal designation of the entity. Rather, the court noted that it believed “Teleco would qualify as a Haitian instrumentality under almost any definition we could craft.”
The court thought it would be “easy to decide what functions a government treats as its own” based on objective factors like control, exclusivity, governmental authority to hire and fire, subsidization, and whether an entity’s finances are treated as part of the public’s finances. The court added its view that both courts and businesses “have readily at hand the tools to conduct that inquiry.” Businesses, however, have found that, not only is gathering that type of information both time consuming and expensive, but also it is often difficult to determine the level of actual control a government has over a facially commercial operation.
The court also avoided opining on the factors with greater specificity by noting that the FCPA “contains a mechanism by which the Attorney General can render opinions on requests about what foreign entities constitute instrumentalities.” Taking heed of this instruction, under appropriate circumstances, companies should consider using this FCPA Opinion Procedure to gain further guidance from the Department of Justice over what factors are most important in determining the status of a state-owned entity — a process that relatively few companies have taken advantage of during the decades of its existence. This decision, however, ultimately leaves the burden with companies to determine who exactly is a foreign public official by trying to discern ownership and control, often in jurisdictions that lack transparency and sufficient, objective sources of information.
In light of this appellate decision, enforcement agencies can be expected to view the legal wrangling over the definition of “instrumentality” as resolved. Companies can take little comfort in considering this an open area of law as courts may have little patience for further challenges to the definition of “instrumentality.” While future litigants may be able to tinker at the margins of the definition, the Esquenazi decision has made clear that the definition of “instrumentality” is broad enough that the FCPA prohibits bribes paid to certain state-owned entities. In the years to come, businesses will look for further guidance from the courts or through future DOJ Opinion Procedure releases on where exactly that line is drawn.”
This Morgan Lewis alert states:
“The Esquenazi decision is the first appellate court opinion to address challenges to the DOJ’s and SEC’s interpretation of “instrumentality.” Although the “control” and “function” analysis may not provide the bright-line guidance desired by businesses that operate in the global arena, the opinion confirms regulators’ warnings that improper payments to employees of state-owned and state-controlled entities can violate the FCPA.”
This Skadden memo states:
“The Eleventh Circuit’s decision is largely consistent with the broad view articulated by the DOJ and the SEC in the resource guide to the FCPA that they jointly published in 2012, supporting their continued focus on bringing FCPA cases involving the alleged bribery of employees of state-owned or state-controlled entities. Given the breadth of the DOJ’s and SEC’s view of state instrumentalities, and the continued operation of such entities in the commercial sector, the decision is a significant confirmation of entities and individuals caught within the FCPA.”
This Covington advisory states:
“The Eleventh Circuit’s decision contained no surprises and likely will have limited practical impact on how companies approach FCPA compliance. The four-prong standard developed by the court is broadly consistent with the views set forth by the several U.S. district courts that have considered similar questions, and by the U.S. Department of Justice and the Securities and Exchange Commission in their written guidance concerning the scope of the FCPA. A number of open questions remain concerning the FCPA “instrumentality” standard − the facts of the Esquenazi case presented a particularly strong case for a finding that the Haitian telecommunications entity in question was an “instrumentality” of the Haitian government, given the close control that the Haitian government seems to have had over the entity’s management. It remains unclear from the Esquenazi opinion, for instance, whether mere majority ownership by a government, absent more, is sufficient to trigger the FCPA anti-bribery provisions.
Nevertheless, companies are not likely during the normal course of business to undertake the case-by-case instrumentality analysis the Esquenazi court propounds, as the question whether an entity constitutes a government “instrumentality” is of decreasing relevance to corporate compliance programs, most of which clearly prohibit both commercial and government bribery. This case will likely have its greatest impact in a handful of criminal cases that come to the attention of the Department of Justice, in which companies and individuals invoke the decision to argue that a particular bribe recipient, employed by a government-owned company, should not be considered a “foreign official” under the FCPA.”
This Dechert update states:
“Although the Court noted that the entity at issue “would qualify as a Haitian instrumentality under almost any definition we could craft,” and although the Court has jurisdiction over only three states, this decision is likely to be influential because it is the first appellate decision to address this crucial definition. The decision likely means that companies will face even stronger headwinds than previously if they attempt to avoid prosecution based on an argument that the government body at issue did not perform “core” governmental functions. Notably, the Court set no bright-line rules, nor did it opine on which factor or factors may be most significant, but instead established a fact-based framework to be applied in each case’s particular circumstances. The Court’s reliance on the guidelines set forth by the OECD could likewise lead future courts to look to the OECD’s guidance on other interpretive issues that arise under the FCPA.”
This Linklaters publication states:
“The Eleventh Circuit’s definition and factor-based approach permits a broad understanding of what constitutes a government instrumentality. Because it is the only appellate level guidance on this issue, the DOJ likely will maintain its expansive view of the FCPA’s anti-bribery provisions.
The exact reach of the FCPA’s anti-bribery provisions remains, however, a case-by-case determination; only time will tell exactly how the government and defendants will interpret the Eleventh Circuit’s definition, and how other courts will apply it. Indeed, because the test is fact-specific, it could lead to different results for different types of entities. For example, a public hospital or university owned and controlled by a foreign government may perform “a function the government considers its own,” while a sovereign wealth fund might or might not perform “a function the government considers its own.” And the test could lead to different results even for similar types of entities in different countries; for example, one country might consider its state-owned telecommunications company to carry out a governmental function, while another might consider its state- owned telecommunications company to carry out non-governmental functions. Indeed, the prosecution and defense in Esquenazi submitted conflicting evidence as to whether the government of Haiti considered the company at issue in that case to be performing a governmental function.
The Eleventh Circuit in Esquenazi adopted a broad definition of “instrumentality,” and clarified that the FCPA applies to bribes, not just of governmental officials themselves, but also of officials or employees of a broad range of state-owned enterprises, provided only that those entities carry out a function that the foreign government considers to be a governmental one. The breadth of the Eleventh Circuit’s definition of “instrumentality” reflects a broad understanding of the FCPA, and is unlikely to alter DOJ enforcement activities.”
This Weil Gotshal alert states:
“The court’s two-part test for a foreign government “instrumentality,” and the factors it considered in applying that test, should not result in any significant modification to the DOJ and SEC’s current FCPA enforcement program and are likely to be viewed by those regulators as affirmation of their current interpretation of the FCPA. The factors articulated by the court are, in fact, very similar to those previously cited by the few district courts that have considered this issue as well as by DOJ and SEC in their 2012 Resource Guide to the U.S. Foreign Corrupt Practices Act.
The court’s two-part test makes clear that government ownership or investment is itself not enough to transform an entity into an “instrumentality” of that government. At the same time, the court’s test does not exclude the possibility that an entity could be an “instrumentality” of a foreign government even if the government’s ownership interest represents only a minority interest in that entity.
Perhaps more noteworthy, the court’s test validates reliance on factors that turn on the foreign government’s “perception” of the entity’s role and purpose. The role played by various entities in the public administration of a foreign state may often
be less discernable than other criteria such as state ownership and management control. Each case will therefore require specific analysis of various factors to determine whether an entity is a foreign government “instrumentality” under the FCPA.”
This Drinker Biddle article states:
“Less convincing was the court’s discussion of defendants’ contention that the rule of lenity required the court to “cabin” the definition of “instrumentality.” Addressing the argument in a footnote, the court observed that the rule of lenity applied only when there is a “grievous ambiguity” in the meaning of the statutory text. Id. at 11, n. 5. It is difficult to describe the ambiguity in this portion of the FCPA as anything but “grievous.” The term is not defined anywhere in the statute and, in order to search out the meaning of “instrumentality,” the Esquenazi court had to consult two dictionaries, see id. at 10-11; consider “the broader statutory context in which the word is used” (including amendments to the statute, and international treaty obligations undertaken by the U.S. to prohibit bribery), see id. at 13-18; and examine “the concept of a ‘usual’ or a ‘proper’ governmental function [that] changes over time and varies from nation to nation,” see id. at 19-20. The image of a dowser, divining rod in hand, comes to mind.
The Eleventh Circuit’s Esquenazi decision, like the Fifth Circuit’s decision in United States v. Kay, 513 F.3d 432 (5th Cir. 2007), is likely to have enduring influence over the construction of a key provision of the FCPA by lower courts throughout the country. And because the Eleventh Circuit adopted a “fact-bound” approach to defining instrumentality, rather than the strict construction argued by the defendants, companies and individuals doing business overseas will continue to grapple with the question of when their business counterparts abroad will be considered foreign officials under the FCPA. Until another Circuit Court, or the Supreme Court, addresses the question, prudent companies should treat any entity owned or controlled by a foreign government, even in part, as a foreign government agency or department for purposes of FCPA compliance.”
This Jones Day publication states:
“Esquenazi can be viewed as a significant victory for the government because it affirms the largest prison sentence ever handed down in an FCPA case, and it also affirms the Department of Justice and Securities and Exchange Commission’s broad position that the FCPA applies to improper payments made to state-owned commercial entities. [...] On the other hand, the decision may also place some limitations on the government’s broad reading of “instrumentality” because the court required proof that “that the entity perform[s] a function the government treats as its own.” Following this logic, state ownership, in and of itself, does not render an entity an “instrumentality” under the FCPA, which is not the position the government has taken in the past. This could potentially affect a variety of existing and future FCPA investigations.”
This Steptoe & Johnson alert states:
“The Esquenazicourt provided a definition of “instrumentality” and enunciated a set of factors to evaluate when applying that definition. While such guidance is helpful, Esquenazi addressed a relatively clear-cut situation. The decision leaves a number of relatively common – and not at all clear – situations up for debate.
How courts will treat in the future, and more importantly how companies and practitioners should treat now, the less-clear-cut instances where a government has negative control (e.g., golden shares or significant veto rights) over an enterprise or its governance, or a minority, non-controlling interest in an enterprise or its operations, or subsidiaries of such enterprises, necessarily will turn on the facts in question, and are not susceptible to simple or easy answers. The Ezquenazi decision, by eschewing a bright-line test relating to the functions carried out by the entity, and focusing instead on issues such as host government ownership, control, and funding, requires a more searching analysis. Where the facts are not clear, or are not readily available, or reflect fact patterns less compelling than those in Esquenazi, legal and compliance personnel may be well-advised to continue to adopt a conservative approach to the question of which entities qualify as an “instrumentality” of a foreign government for the purposes of the FCPA.”
An entire edition of the always informative Debevoise & Plimpton FCPA Update states:
“Although the opinion represents the first binding appellate court ruling on what constitutes an “instrumentality,”
the Esquenazi court’s definition leaves some questions unanswered and certainly leaves room for businesses and individuals to challenge FCPA prosecutions. The Court did not discuss the relative weight to be afforded the factors it advanced as important in its decision that Teleco was an instrumentality of Haiti’s government. For example, is majority ownership or control by the foreign government of greater importance than some of the other factors; does it operate as a threshold for control status, as the FCPA Resource Guide suggests it typically should? Similarly, would a government official’s ownership of an otherwise private entity, or a government official’s membership on the board of directors of an otherwise private entity, without more, qualify the entity as an instrumentality if it performed a governmental function?
Outstanding questions like these might bolster calls for some kind of legislative effort to clarify what constitutes a “foreign official,” including clarification of what constitutes an “instrumentality” – for example, whether ownership by a foreign official can qualify an entity as an instrumentality, and if so, whether the foreign official must be of a certain rank or ownership must reach a certain percentage.
The Court’s interpretation of “instrumentality” in light of the United States’ obligations under the OECD Convention also raises questions as to how courts might apply that theory in interpreting other parts of the FCPA. For example, should the facilitation payments exception in the FCPA be narrowly construed in light of its arguable conflict with the OECD Convention, which recommends that such payments be treated as unlawful? The DOJ and SEC FCPA Resource Guide takes a disapproving view of facilitation payments and cites to the OECD’s recommendation against them. The Esquenazi “treaty obligation” analysis could cause enforcement agencies to assert an even narrower interpretation of the exception – and potentially other parts of the FCPA – in future cases.
Because the Eleventh Circuit panel endorsed a fact-based approach similar to that enforcement agencies and prior district courts have taken in recent years, the Court’s decision is unlikely to alter significantly compliance-related best practices.
The decision did not provide the type of bright-line rule that businesses long have sought in order to most effectively craft corporate compliance programs. Moreover, the Court’s factors are sufficiently lacking in detail and conceivably different enough from the FCPA Resource Guide that, at least until other courts of appeals or district courts outside the Eleventh Circuit adopt the Esquenazi opinion’s analysis, businesses arguably now face a more complicated task in trying to decide whether they are dealing with an instrumentality of a foreign government. Companies certainly should review their compliance programs to ensure they address the factors laid out by the Esquenazi court.
The Court also made clear, in the event it was not before, that companies bear the burden of researching foreign entities with which they seek to conduct business. The Court suggested that businesses “have readily at hand the tools to conduct that inquiry” and pointed specifically to the DOJ’s FCPA Opinion Procedure. That procedure has well-documented limitations, though: the difficulty of obtaining an opinion that would remain reliable if the facts of a situation change in any potentially material way; the infeasibility of the 30- day timeline for opinions in fast-moving situations such as joint ventures and mergers and acquisitions; potential exposure of a company’s international business activities to competitors; and potential exposure of the opinion seeker to enforcement actions.
Similarly, the Court also suggested that “it will be relatively easy to decide what functions a government treats as its own … by resort to objective factors” like those advanced by the Court in deciding that Teleco was an “instrumentality” of Haiti’s government. As companies long have known, it can be expensive and time consuming to make such determinations, particularly in countries such as Russia, China, and various countries in Central and Latin America and in Africa where information about companies and state ownership is less than transparent and objective.”
From Dorsey Whitney’s Anti-Corruption Digest:
“While the opinion provides some clarity to firms doing business abroad as to whether it is transacting with an instrumentality of the government, and therefore a foreign official, it does not announce a bright line rule as many had hoped. In practice, the Court’s holding does little to assist businesses in evaluating their obligations and risks because it is difficult to gather information on many of these factors, including how much actual government control is exercised over an apparently private enterprise.”
This Hogan Lovells update states:
“Although the Eleventh Circuit’s decision does not break new ground in FCPA enforcement trends, it does represent a significant development in the legal rules governing that enforcement. To date, the DOJ’s and SEC’s enforcement practices have been rarely tested in court. The prosecutorial interpretations of the FCPA’s provisions have held sway in the many settlements and non-prosecution agreements entered into by the U.S. government and corporate defendants. Many companies and commentators have expressed hope for greater judicial clarification of the FCPA. The Eleventh Circuit’s decision provides such a clarification while simultaneously affirming the U.S. enforcement authorities’ broad understanding of the FCPA’s reach.”
This Wilson Sonsini alert states:
“[W]hile these factors [that the court articulated] are helpful in analyzing whether a particular entity may be an instrumentality, the court’s decision does not provide particularly useful guidance on how to apply these factors. Rather than provide a factor-by-factor analysis, the court stated, “Teleco would qualify as a Haitian instrumentality under almost any definition we could craft.”As such, the court did not address the relevant weight of each of these factors and noted that these factors were non-exhaustive.”
See also posts here and here from the FCPA Compliance and Ethics Blog and Corruption, Crime & Compliance.