Archive for the ‘Foreign Official’ Category

“Foreign Official” Roundup

Friday, May 23rd, 2014

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),[1] 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.

“Foreign Official” – The Current Landscape

Tuesday, May 20th, 2014

Last week’s 11th Circuit “foreign official” decision (see here and here for prior posts) was the first decision of precedent (at least in federal courts in Florida, Georgia and Alabama) to address the enforcement theory that employees of alleged state-owned or state-controlled entities (“SOEs”) are “foreign officials” under the FCPA.

As readers likely know, last week’s 11th Circuit decision was preceded by two separate trial court decisions (both in the Central District of California in 2011) that also directly addressed the above enforcement theory.

In all of the cases, the issue of whether an alleged SOE was an “instrumentality” of a foreign government – and thus its employees  ”foreign officials” under the FCPA – was found to be a factual issue dependent on a number of non-exclusive factors.

The below chart highlights the current landscape as to the FCPA’s “foreign official” element relevant to “instrumentality.”

Esquenazi 

(11th Circuit – 2014)

Carson 

(C.D. Cal – 2011)

Lindsey Manuf.

(C.D. Cal – 2011)

“An ‘instrumentality’ [under the FCPA] is an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own. Certainly, what constitutes control and what constitutes a function the government treats as its own are fact-bound questions. It would be unwise and likely impossible to exhaustively answer them in the abstract. [...] [W]e do not purport to list all of the factors that might prove relevant to deciding whether an entity is an instrumentality of a foreign government. For today, we provide a list of some factors that may be relevant to deciding the issue.To decide if the government “controls” an entity, courts and juries should look to the foreign government’s formal designation of that entity; whether the government has a majority 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, and, by the same token, the extent to which the government funds the entity if it fails to break even; and the length of time these indicia have existed.[...]We then turn to the second element relevant to deciding if an entity is an instrumentality of a foreign government under the FCPA — deciding if the entity performs a function the government treats as its own. Courts and juries should examine whether the entity has a monopoly over the function it exists to carry out; whether the government subsidizes the costs associated with the entity providing services; whether the entity provides services to the public at large in the foreign country; and whether the public and the government of that foreign country generally perceive the entity to be performing a governmental function.”

 

“[T]he question of whether state-owned companies qualify as instrumentalities under the FCPA is a question of fact.”“[S]everal factors bear on the question of whether a business entity constitutes a government instrumentality” including the following.• The foreign state’s characterization of the entity and its employees;• The foreign state’s degree of control over the entity;

• The purpose of the entity’s activities;

• The entity’s obligations and privileges under the foreign state’s law, including whether the entity exercises exclusive or controlling power to administer its designated functions;

• The circumstances surrounding the entity’s creation; and

• The foreign state’s extent of ownership of the entity, including the level of financial support by the state (e.g., subsidies, special tax treatment, and
loans).

[…]

“[The] factors are not exclusive, and no single factor is dispositive.”

[…]

[T]heir chief utility is simply to point out that several types of evidence are relevant when determining whether a state-owned company constitutes an ‘instrumentality’ under the FCPA – with state ownership being only one of several considerations.

[…]

“[A] mere monetary investment in a business entity by the government may not be sufficient to transform that entity into a governmental instrumentality. But when a monetary investment is combined with additional factors that objectively indicate the entity is being used as an instrument to carry out governmental objectives, that business would qualify as a governmental instrumentality.”

 

The court provided a”non-exclusive list” of “various characteristics of government agencies and departments” that fall within the description of instrumentality:• 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]

 

 

11th Circuit “Foreign Official” Decision – The Key Language

Monday, May 19th, 2014

Last Friday, the 11th Circuit issued its long-awaited “foreign official” decision – the first time in FCPA history in which an appellate court addressed the prominent enforcement theory that employees of alleged state-owned or state-controlled entities are “foreign officials” under the FCPA.

This prior post – the first to report on the decision – extracted the entirety of the court’s decision relevant to the “foreign official” issue.

The decision, of course, was based on the unique facts of the case and in this regard the court stated that Haiti Teleco “would qualify as a Haitian instrumentality under almost any definition we could craft …”.  Elsewhere, the court stated it had “little difficulty concluding sufficient evidence supported the jury’s necessary finding that Teleco was a Haitian instrumentality.”

Prior to discussing this case specific issue, the court stated:

“[W]e must define ‘instrumentality’ for purposes of the FCPA.

We begin, as we always do when construing statutory text, with the plain meaning of the word at issue.  According to Black’s Law Dictionary, an instrumentality is ‘[a] means or agency through which a function of another entity is accomplished, such as a branch of a governing body.’ Webster’s Third New International Dictionary says the word means ‘something that serves as an intermediary or agent through which one or more functions of a controlling force are carried out: a part, organ, or subsidiary branch esp. of a governing body.’

[...]

In the FCPA,  the company ‘instrumentality’ keeps is ‘agency’ and ‘department,’ entities through which the government performs its functions and that are controlled by the government. We therefore glean from that context that an entity must be under the control or dominion of the government to qualify as an ‘instrumentality’ within the FCPA’s meaning. And we can also surmise from the other words in the series along with ‘instrumentality’ that an instrumentality must be doing the business of the government.

[...]

The Supreme Court has cautioned that ‘the concept of a ‘usual’ or a ‘proper’ governmental function changes over time and varies from nation to nation.’  That principle guides our construction of the term ‘instrumentality.’ 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. And the most objective way to make that decision is to examine the foreign sovereign’s actions, namely, whether it treats the function the foreign entity performs as its own. Presumably, governments that mutually agree to quell bribes flowing between nations intend to prevent distortion of the business they conduct on behalf of their people. We ought to respect a foreign sovereign’s definition of what that business is.’

“[M]indful of the needs of both corporations and the government for ex ante direction about what an instrumentality is,” the court then provided the following definition – the key language of the decision.

“An ‘instrumentality’ [under the FCPA] is an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own. Certainly, what constitutes control and what constitutes a function the government treats as its own are fact-bound questions. It would be unwise and likely impossible to exhaustively answer them in the abstract. [...] [W]e do not purport to list all of the factors that might prove relevant to deciding whether an entity is an instrumentality of a foreign government. For today, we provide a list of some factors that may be relevant to deciding the issue.

To decide if the government ‘controls’ an entity, courts and juries should look to the foreign government’s formal designation of that entity; whether the government has a majority 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, and, by the same token, the extent to which the government funds the entity if it fails to break even; and the length of time these indicia have existed.

[...]

We then turn to the second element relevant to deciding if an entity is an instrumentality of a foreign government under the FCPA — deciding if the entity performs a function the government treats as its own. Courts and juries should examine whether the entity has a monopoly over the function it exists to carry out; whether the government subsidizes the costs associated with the entity providing services; whether the entity provides services to the public at large in the foreign country; and whether the public and the government of that foreign country generally perceive the entity to be performing a governmental function.”

11th Circuit Affirms Esquenazi / Rodriguez Convictions – Defines “Instrumentality”

Friday, May 16th, 2014

Numerous prior posts (see here for instance) have highlighted the historic appeal in U.S. v. Joel Esquenazi and Carlos Rodriguez.

Although there were several issues on appeal, the appeal is best known as the first time in FCPA history in which an appellate court has the opportunity to weigh in on the prominent enforcement theory that employees of alleged state-owned or state-controlled entities are “foreign officials” under the FCPA.  (The defense relied, in part, on my foreign official declaration and, as previously disclosed, I served as a pro-bono expert to the defense in this case).

In an opinion released today, the 11th Circuit affirmed the defendants’ convictions and in doing so defined the term “instrumentality” in the FCPA.

Future posts will analyze the 11th Circuit’s opinion, but for now, this post extracts the relevant portions of the 11th Circuit’s opinion. (Internal citations have been omitted except where relevant to add context.  Footnotes have been added where they appear in the opinion).

“Messrs. Esquenazi and Rodriguez co-owned Terra Telecommunications Corp. (Terra), a Florida company that purchased phone time from foreign vendors and resold the minutes to customers in the United States. Mr. Esquenazi, Terra’s  majority owner, served as President and Chief Executive Officer. Mr. Rodriguez, the company’s minority owner, served as Executive Vice President of Operations.  James Dickey served as Terra’s general counsel and Antonio Perez as the  company’s comptroller.

One of Terra’s main vendors was Telecommunications D’Haiti, S.A.M. (Teleco). Because the relationship of Teleco to the Haitian government was, and remains, at issue in this case, the government presented evidence of Teleco’s ties to Haiti. Former Teleco Director of International Relations Robert Antoine testified that Teleco was owned by Haiti. An insurance broker, John Marsha, testified that, when Messrs. Rodriguez and Esquenazi were involved in previous contract negotiations with Teleco, they sought political-risk insurance, a type of coverage that applies only when a foreign government is party to an agreement. In emails with Mr. Marsha copied to Messrs. Esquenazi and Rodríguez, Mr. Dickey called Teleco an “instrumentality” of the Haitian government.

An expert witness, Luis Gary Lissade, testified regarding Teleco’s history. At Teleco’s formation in 1968, the Haitian government gave the company a monopoly on telecommunication services. Teleco had significant tax advantages and, at its inception, the government appointed two members of Teleco’s board of directors. Haiti’s President appointed Teleco’s Director General, its top position, by an executive order that was also signed by the Haitian Prime Minister, the minister of public works, and the minister of economy and finance. In the early 1970s, the National Bank of Haiti gained 97 percent ownership of Teleco. From that time forward, the Haitian President appointed all of Teleco’s board members. Sometime later, the National Bank of Haiti split into two separate entities, one of which was the Banque de la Republique d‘Haiti (BRH). BRH, the central bank of Haiti, is roughly equivalent to the United States Federal Reserve. BRH retained ownership of Teleco. In Mr. Lissade’s expert opinion, for the years relevant to this case, Teleco belonged “totally to the state” and “was considered . . . a public entity.”

Mr. Lissade also testified that Teleco’s business entity suffix, S.A.M., indicates “associate anonymous mixed,” which means the “Government put money in the corporation.” Teleco’s suffix was attached not by statute, but “de facto” because “the government consider[ed] Teleco as its . . . entity.” In 1996, Haiti passed a “modernization” law, seeking to privatize many public institutions. As a result, Haiti privatized Teleco sometime between 2009 and 2010. Ultimately, Mr. Lissade opined that, during the years relevant to this case, “Teleco was part of the public administration.” He explained: “There was no specific law that . . . decided that at the beginning that Teleco is a public entity but government, officials, everyone consider[ed] Teleco as a public administration.” And, he said, “if there was a doubt whatsoever, the [anti-corruption] law [that] came in 2008 vanish[ed] completely this doubt . . . by citing Teleco as a public administration” and by requiring its agents – whom Mr. Lissade said were public agents – to declare all assets to avoid secret bribes.”

[...]

During the Internal Revenue Service’s investigation of the case, Mr. Esquenazi admitted he had bribed Mr. Duperval and other Teleco officials. He and Mr. Rodriguez nonetheless pleaded not guilty, proceeded to trial, and were found guilty on all counts.

[...]

This appeal is brought by Messrs. Esquenazi and Rodriguez.

The FCPA prohibits “any domestic concern” from “mak[ing] use of the mails or any means . . . of interstate commerce corruptly in furtherance of” a bribe to “any foreign official,” or to “any person, while knowing that all or a portion of such money or thing of value will be offered, given, or promised, directly or indirectly, to any foreign official,” for the purpose of “influencing any act or decision of such foreign official . . . in order to assist such domestic concern in obtaining or retaining business for or with, or directing business to, any person.” A “foreign official” is “any officer or employee of a foreign government or any department, agency, or instrumentality thereof.” The central question before us, and the principal source of disagreement between the parties, is what “instrumentality” means (and whether Teleco qualifies as one).

The FCPA does not define the term “instrumentality,” and this Court has not either. For that matter, we know of no other court of appeals who has. The definition matters in this case, in light of the challenges to the district court’s jury instructions on “instrumentality”; to the sufficiency of the evidence that Teleco qualified as an instrumentality of the Haitian government; and to Mr. Esquenazi’s contention that the statute is unconstitutionally vague. Before we address these challenges, however, we must define “instrumentality” for purposes of the FCPA.

We begin, as we always do when construing statutory text, with the plain meaning of the word at issue.  According to Black’s Law Dictionary, an instrumentality is “[a] means or agency through which a function of another entity is accomplished, such as a branch of a governing body.” Webster’s Third New International Dictionary says the word means “something that serves as an intermediary or agent through which one or more functions of a controlling force are carried out: a part, organ, or subsidiary branch esp. of a governing body.” These dictionary definitions foreclose Mr. Rodriguez’s contention that only an actual part of the government would qualify as an instrumentality — that contention is too cramped and would impede the “wide net over foreign bribery” Congress sought to cast in enacting the FCPA. Beyond that argument, the parties do not quibble over the phrasing of these definitions, and they agree an instrumentality must perform a government function at the government’s behest.  The parties also agree, however, and we have noted in other cases interpreting similar provisions, that the dictionary definitions get us only part of the way there. Thus, we turn to other tools to decide what “instrumentality” means in the FCPA.

[In a footnote the opinion states: "both defendants urge us to apply the rule of lenity to cabin the definition of 'instrumentality.'  That rule applies, however, only when there is a 'grevious ambiguity' in the meaning of the statutory text.]

To interpret “instrumentality” as used in the Americans with Disabilities Act, we relied upon what the Supreme Court has called the “commonsense cannon of noscitur a sociis,” — that is, “‘a word is known by the company it keeps.’”

[In a footnote the opinion states:  "The defendants rely heavily upon our decision in Edison, arguing it dictates the definition of “instrumentality” they advocate. In that case, we held the word “instrumentality” under the ADA meant “governmental units or created by one.” Although we recognize that decision should inform our construction of instrumentality in this case, it ultimately is of little help. First, Edison construed a different statute with a far different purpose.  Second, Edison recognized that “instrumentality” had to be “constrained by the plain meaning of the statutory language in the context of the entire statute, as assisted by the canons of statutory construction.”  Although the meaning of the word “instrumentality,” which the Edison court recognized was not entirely clear, might in isolation vary little if at all in this case, the context is vastly different. The ADA defines “public entity” to include “any department, agency, special purpose district, or other instrumentality of a State.” The word “other” preceding “instrumentality” in the ADA is a critical difference – “other” indicates that, in the ADA, instrumentality is intended as a general catchall for things very much like the preceding words. In Edison, we noted that the canon ejusdem generis produced the same result as noscitur a sociis. In the FCPA, by contrast, the word preceding “instrumentality” is “any,” not “other.” Thus, “instrumentality” is not a generalized catchall in the FCPA as it is in the ADA, but instead a distinct class of entities.  The Supreme Court has explained that the ejusdem generis canon does not apply where, as here, the term at issue “is not a general or collective term following a list of specific items to which a particular statutory command is applicable (e.g., ‘fishing rods, nets, hooks, bobbers, sinkers, and other equipment’).”  Just like in that example, the word “other” is critically important to construing the word “instrumentality” based on its context. In that vein, “[t]he United States Supreme Court and this Court have recognized on many occasions that the word ‘any,’” which modifies “instrumentality” in the FCPA, “is a powerful and broad word, and that it does not mean ‘some’ or ‘all but a few,’ but instead means ‘all.’”  Finally, Edison actually decided that “a private corporation is not a public entity merely because it contracts with a public entity to provide some service.” Our interpretation of “instrumentality” under the FCPA here is, in this respect, fully consonant with Edison. It, too, would exclude a private contractor not controlled or created by the state that provided a service to the public.]

In the FCPA,  the company “instrumentality” keeps is “agency” and “department,” entities through which the government performs its functions and that are controlled by the government. We therefore glean from that context that an entity must be under the control or dominion of the government to qualify as an “instrumentality” within the FCPA’s meaning. And we can also surmise from the other words in the series along with “instrumentality” that an instrumentality must be doing the business of the government. What the defendants and the government disagree about, however, is what functions count as the government’s business.

To answer that question, we examine the broader statutory context in which the word is used.  In this respect, we find one other provision of the FCPA and Congress’s relatively recent amendment of the statute particularly illustrative. First, the so-called “grease payment” provision establishes an “exception” 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.”  “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). “It is a cardinal rule of statutory construction that significance and effect shall, if possible, be accorded to every word.” Thus, that a government-controlled entity provides a commercial service does not automatically mean it is not an instrumentality. In fact, the statute expressly contemplates that in some instances it would.

Next, we turn to Congress’s 1998 amendment of the FCPA, enacted to ensure the United States was in compliance with its treaty obligations. That year, the United States ratified the Organization for Economic Cooperation and Development’s Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (OECD Convention).  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.” “Foreign public official” is defined to include “any person exercising a public function for a foreign country, including for a . . . public enterprise.” The commentaries to the OECD Convention explain that: “A ‘public enterprise’ is any enterprise, regardless of its legal form, over which a government, or governments, may, directly or indirectly, exercise a dominant influence.”  The commentary further explains: “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.” In addition to this, the OECD Convention also requires signatories make it a crime to pay bribes to agents of any “public international organisation.”

To implement the Convention’s mandates, Congress amended the FCPA in 1998. The only change to the definition of “foreign official” in the FCPA that Congress thought necessary was the addition of “public international organization.” This seems to demonstrate that Congress considered its preexisting definition already to cover a “foreign public official” of an “enterprise . . . over which a government . . . exercise[s] a dominant influence” that performs a “public function” because it does  not “operate[] on a normal commercial basis . . . substantially equivalent to that of . . . private enterprise[s]” in the relevant market “without preferential subsidies or other privileges.” Although we generally are wary of relying too much on later legislative developments to decide a prior Congress’ legislative intent, the circumstances in this case cause us less concern in that regard. This is not an instance in which Congress merely discussed previously enacted legislation and possible changes to it. Rather, Congress did make a change to the FCPA, and it did so specifically to ensure that the FCPA fulfilled the promise the United States made to other nations when it joined the Convention. The FCPA after those amendments is a different law, and we may consider Congress’s intent in passing those amendments as strongly suggestive of the meaning of “instrumentality” as it exists today.

We are not alone in finding instruction from the obligations the United States undertook in the OECD Convention and Congress’s resulting amendment of the FCPA made in order to comply with those obligations. The Fifth Circuit, in United States v. Kay, concluded that, when Congress amended the FCPA to comply with the duties the United States assumed under the OECD Convention and left intact the FCPA’s language outlawing bribery for the purpose of “obtaining or retaining business,” the preexisting language should be construed to cover the Convention’s mandate that signatories prohibit bribery “‘to obtain or retain business or other improper advantage in the conduct of international business.’” “Indeed, given the United States’s ratification and implementation of the Convention without any reservation, understandings or alterations specifically pertaining to its scope,” the Fifth Circuit concluded the defendants’ narrow construction of the FCPA “would likely create a conflict with our international treaty obligations, with which we presume Congress meant to fully comply.”

Indeed, since the beginning of the republic, the Supreme Court has explained that construing federal statutes in such a way to ensure the United States is in compliance with the international obligations it voluntarily has undertaken is of paramount importance. “If the United States is to be able to gain the benefits of international accords and have a role as a trusted partner in multilateral endeavors, its courts should be most cautious before interpreting its domestic legislation in such manner as to violate international agreements.”  We are thus constrained to interpret “instrumentality” under the FCPA so as to reach the types of officials the United States agreed to stop domestic interests from bribing when it ratified the OECD
Convention.

Based upon this reading, we must also reject the invitation from Messrs. Esquenazi and Rodriguez to limit the term only to entities that perform traditional, core government functions. Nothing in the statute imposes this limitation. And were we to limit “instrumentality” in the FCPA in that way, we would put the United States out of compliance with its international obligations.

The Supreme Court has cautioned that “the concept of a ‘usual’ or a ‘proper’ governmental function changes over time and varies from nation to nation.”  That principle guides our construction of the term “instrumentality.” 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. And the most objective way to make that decision is to examine the foreign sovereign’s actions, namely, whether it treats the function the foreign entity performs as its own. Presumably, governments that mutually agree to quell bribes flowing between nations intend to prevent distortion of the business they conduct on behalf of their people. We ought to respect a foreign sovereign’s definition of what that business is.

[In a footnote the opinion states:  The logic of First National City Bank gives us another reason to reject the notion that “instrumentality” should encompass only entities that perform traditional, core governmental functions. If what constitutes a core function of a foreign government hews to the intent of that government, then the problems with providing adequate notice to businesses about which payments violate the FCPA would be magnified, not eliminated. We think it will be relatively easy to decide what functions a government treats as its own in the present tense by resort to 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 fisc. Both courts and businesses subject to the FCPA have readily at hand the tools to conduct that inquiry (especially because the statute contains a mechanism by which the Attorney General will render opinions on request about what foreign entities constitute instrumentalities. It would be a much more difficult task — involving divining the subjective intentions of a foreign sovereign, parsing history, and interpreting significant amounts of foreign law — to decide what functions a foreign government considers core and traditional.  Busy district courts and lay juries, not to mention companies in the midst of conducting business, would be ill-equipped to make such sensitive distinctions.]

Thus, for the United States government to hold up its end of the bargain under the OECD Convention, we ought to follow the lead of the foreign government itself in terms of which functions it treats as its own.

Although we believe Teleco would qualify as a Haitian instrumentality under almost any definition we could craft, we are mindful of the needs of both corporations and the government for ex ante direction about what an instrumentality is. With this guidance, we define instrumentality as follows. 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. Certainly, what constitutes control and what constitutes a function the government treats as its own are fact-bound questions. It would be unwise and likely impossible to exhaustively answer them in the abstract. Because we only have this case before us, we do not purport to list all of the factors that might prove relevant to deciding whether an entity is an instrumentality of a foreign government. For today, we provide a list of some factors that may be relevant to deciding the issue.

To decide if the government “controls” an entity, courts and juries should look to the foreign government’s formal designation of that entity; whether the government has a majority 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, and, by the same token, the extent to which the government funds the entity if it fails to break even; and the length of time these indicia have existed. We do not cut these factors from whole cloth. Rather, they are informed by the commentary to the OECD Convention the United States ratified. See OECD Convention, art. 1.4, cmt. 14 (stating that an entity is “deemed” to be under governmental control “inter alia, when the government or governments hold the majority of the enterprise’s subscribed capital, control the majority of votes attaching to shares issued by the enterprise or can appoint a majority of the members of the enterprise’s administrative or managerial body or supervisory board”). They are also consistent with the approach the Supreme Court has taken to decide if an entity is an agent or instrumentality of the government in analogous contexts. See Lebron v. Nat’l R.R. Passenger Corp. U.S. 374, 394, 397–99, 115 S. Ct. 961, 972–74 (1995) (concluding Amtrak was an “agency or instrumentality of the United States” because, among other things, it was created by federal statute and a majority of its directors were to be appointed by the President); Cherry Cotton Mills, Inc. v. United States, 327 U.S. 536, 539, 66 S. Ct. 729, 730 (1946) (“[Because Reconstruction Finance Corporation’s (RFC)] Directors are appointed by the President and affirmed by the Senate; its activities are all aimed at accomplishing a public purpose; all of its money comes from the Government; its profits, if any, go to the Government; [and] its losses the Government must bear[, t]hat the Congress chose to call it a corporation does not alter its characteristics so as to make it something other than what it actually is, an agency selected by Government to accomplish purely governmental purposes.”); Reconstruction Fin. Corp. v. J.G. Menihan Corp., 312 U.S. 81, 83, 61 S. Ct. 485, 486 (1941) (concluding RFC was a “corporate agency of the government” because the United States was the “sole stockholder” and the entity was “managed by a board of directors appointed by the President,” even though “its transactions [were] akin to those of private enterprises” and nothing in its organic statute indicated it was an instrumentality of the government).

We then turn to the second element relevant to deciding if an entity is an instrumentality of a foreign government under the FCPA — deciding if the entity performs a function the government treats as its own. Courts and juries should examine whether the entity has a monopoly over the function it exists to carry out; whether the government subsidizes the costs associated with the entity providing services; whether the entity provides services to the public at large in the foreign country; and whether the public and the government of that foreign country generally perceive the entity to be performing a governmental function. Just as with the factors indicating control, we draw these in part from the OECD Convention. See OECD Convention art. 1.4, cmt. 15 (“[A] public enterprise shall be deemed to perform a public function,” if it does not “operate[ ] 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.”); see also id. art. 1.4, cmt. 12 (“‘Public function’ includes any activity in the public interest, delegated by a foreign country . . . .”). And we draw them from Supreme Court cases discussing what entities properly can be considered carrying out governmental functions. See Brentwood Acad. v. Tenn. Secondary Sch. Athletic Ass’n, 531 U.S. 288, 295–97, 121 S. Ct. 924, 930–31 (2001) (describing situations in which the Court has held “seemingly private behavior may be fairly treated as that of the State itself,” recognizing that decision as “a matter of normative judgment [whose] criteria lack rigid simplicity,” and including among the relevant factors whether “the State provides significant encouragement, either overt or covert” and if the entity “serve[s a] public purpose [such as] providing community recreation” (internal quotation marks omitted)). Compare Reconstruction Fin. Corp., 312 U.S. at 83, 61 S. Ct. at 486 (recognizing that the RFC’s function to make loans and investments to aid state and local governments, banks, railroads, mortgage companies, and other businesses were “transactions . . . akin to those of private enterprises”), with Cherry Cotton Mills, Inc., 327 U.S. at 539, 66 S. Ct. at 730 (stating that the RFC was “an agency selected by the Government to accomplish purely governmental purposes” (emphasis added)).

We now turn to Esquenazi’s and Rodriguez’s specific challenges to their  convictions under the FCPA.

The district court’s “instrumentality” instruction

With the definition of “instrumentality” in mind, we now examine what Messrs. Esquenazi and Rodriguez assert was the district court’s chief error with respect to whether Teleco was an instrumentality of the Haitian government — the jury instructions. Notably, the list of factors we identified, although a bit more detailed, is not so different from what the district court laid out in its instructions to the jury here. We review de novo the district court’s instructions to determine  whether they misstated the law or prejudicially misled the jury.  The district court instructed the jury:

An instrumentality of a foreign government is a means or agency through which a function of the foreign government is accomplished. State-owned or state-controlled companies that provide services to the public may meet this definition.

To decide whether Telecommunications D’Haiti or Teleco is an instrumentality of the government of Haiti, you may consider factors including, but not limited to:

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.

Both Mr. Esquenazi and Mr. Rodriguez contend these instructions caused the jury to convict them based only on the fact that Teleco was a government-owned entity that performed a service, without any determination that the service it performed was a governmental function.  We cannot agree.  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 than 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. Although, read in isolation, the portions of the instruction addressing the provision of services could sweep too broadly, when constrained by the actual definition of “instrumentality” the district court gave and the other guiding factors the district court outlined, we find no error in these instructions.  Indeed, they substantially cover the factors we previously outlined.

[In a footnote the opinion states: The only two factors we provide today that the court’s instructions did not include were the length of the government’s control over Teleco and whether Teleco was formally designated a government owned entity. As we have said, however, the factors we provide here are intended merely as a helpful, non-exhaustive list. We observe that the facts relevant to these factors would be neutral at best in this case. For, although Haiti never specifically designated Teleco a government entity, the company had an entity suffix indicating that it was funded with government money because “the government consider[ed] Teleco as its . . . entity,” and Haiti later passed a law expressly designating its officials as subject to a public anti-corruption law. . And Teleco came into being based upon a contract created by the government. Indeed, the Haitian government has owned almost all equity in the company and has appointed all board members and the chief officer for nearly 40 years, since shortly after it was created. . Ultimately, district courts have “wide discretion” in crafting jury instructions and we cannot say that omission of those two factors leave us “with a substantial and ineradicable doubt as to whether the jury was properly guided in its deliberations.”]

The instructions, we conclude, neither misstated the law nor prejudicially misled the jury regarding the definition of “instrumentality.”

Sufficiency of the evidence Teleco was a Haitian instrumentality

In addition to challenging the “instrumentality” jury instruction, Messrs. Esquenazi and Rodriguez also argue the evidence was insufficient to demonstrate that Teleco was an instrumentality of the Haitian government. We review the sufficiency of the evidence de novo, “viewing the evidence and taking all reasonable inferences in favor of the jury’s verdict.”  In light of our construction of the term, we have little difficulty concluding sufficient evidence supported the jury’s necessary finding that Teleco was a Haitian instrumentality.

From Teleco’s creation, Haiti granted the company a monopoly over telecommunications service and gave it various tax advantages. Beginning in early 1970s, and through the years Messrs. Esquenazi and Rodriguez were involved, Haiti’s national bank owned 97 percent of Teleco. The company’s Director General was chosen by the Haitian President with the consent of the Haitian Prime Minister and the ministers of public works and economic finance. And the Haitian President appointed all of Teleco’s board members. The government’s expert testified that Teleco belonged “totally to the state” and “was considered . . . a public entity.” Although the expert also testified that “[t]here was no specific law that . . . decided that at the beginning that Teleco is a public entity,” he maintained that “government, officials, everyone consider[ed] Teleco as a public administration.” Construed in the light most favorable to the jury’s verdict, that evidence was sufficient to show Teleco was controlled by the Haitian government and performed a function Haiti treated as its own, namely, nationalized telecommunication services.

Mr. Esquenazi’s vagueness challenge

Mr. Esquenazi alone challenges the FCPA as unconstitutionally vague as applied to him.  Mr. Esquenazi’s only contention, however, is that the statute would be vague if we interpreted ‘instrumentality’ to include state-owned enterprises that do not perform a governmental function.  But we have not.  Our definition of ‘instrumentality’ requires that the entity perform a function the government treats as its own.  Although we recognize there may be entities near the definitional line for ‘instrumentality’ that may raise a vagueness concern, non-speech vagueness challenges are only cognizable as applied. Because the entity to which Mr. Esquenazi funneled bribes was overwhelmingly majority-owned by the state, had no fisc independent of the state, had a state-sanctioned monopoly for its activities, and was controlled by a board filled exclusively with government-appointed individuals, the FCPA is not vague as applied to his conduct.

Whether Mr. Esquenazi and Mr. Rodriguez possessed the requisite knowledge

Messrs. Esquenazi and Rodriguez also aim challenges at the knowledge element of the FCPA. Both challenge the district court’s jury instructions on the element. And Mr. Rodriguez challenges the district court’s decision to give the jury a deliberate-ignorance instruction as well as the sufficiency of the evidence that he knew Teleco was a Haitian instrumentality. We address these in turn.

The district court’s “knowledge” instructions

In its instructions, the district court told the jury that knowledge was an essential element of each FCPA charge, and that, to convict on the FCPA charges, the jury had to find each bribe payment was “made to any person while knowing that all or a portion of such money or thing of value will be offered, given or promised directly or indirectly to any foreign official.” The district court explained that “knowing” meant actual knowledge or a firm belief of the existence of a particular circumstance or result. Messrs. Esquenazi and Rodriguez contend this instruction was erroneous because it misled the jury to believe it could convict if either knew their intermediary (namely, Grandison at TCSC) would make a payment to a person who just “happened” to be a foreign official without their prior knowledge. In other words, they argue, the instruction failed to make clear that they must have known the recipient of the bribe payment would be a foreign official. Messrs. Esquenazi and Rodriguez failed to timely raise this argument before the district court, so we review only for plain error.  To surmount this standard of review, the challenger must show “instruction was an incorrect statement of the law and [that] it was probably responsible for an incorrect verdict, leading to substantial injustice.” We conclude there was no error here, plain or otherwise. The court’s instructions, read in their entirety, make clear the jury had to find Messrs. Esquenazi and Rodriguez knew or believed the bribes would ultimately reach the hands of a foreign official. The court listed as one of the essential elements of the FCPA charges “that the payment or gift was to a foreign official or to any person while the defendant knew that all or a portion of the payment or gift would be offered, given or promised, directly or indirectly to a foreign official.” This statement, as well as the court’s definition of “knowing,” directly tracked the FCPA’s language. The instruction was a correct legal statement, was clearly delivered, and nothing in its language was misleading to the jury.

[...]

Sufficiency of the evidence that Mr. Rodriguez had the requisite knowledge

Mr. Rodriguez challenges the sufficiency of the evidence that he had knowledge the recipient of the payments he made was a foreign official. We review de novo his sufficiency challenge.

Mr. Rodriguez asserts there was no evidence that he had actual knowledge of the ways Teleco was connected to the Haitian government making it an “instrumentality,” or of the fact that Teleco employees were foreign officials. Although he presents these as distinct elements, they are the same. Provided Mr. Rodriguez knew (or believed) Teleco was a Haitian instrumentality, he knew any Teleco employee was a foreign official.  Mr. Rodriguez concedes, based on Terra’s previous political-risk insurance application for a Teleco contract, that he knew Teleco was government-owned. But he says this shows nothing more than that he knew Teleco employees worked for a state-owned enterprise. He says this is neither in dispute nor dispositive of whether he knew Teleco was a Haitian instrumentality and, therefore, its employees were foreign officials.

As we pointed out above, Mr. Rodriguez’s conception of “instrumentality” — and thus, what the government had to prove he knew — is too narrow. Actually, the government bore the burden of proving Teleco was controlled by the Haitian government and performed a function the government treated as its own. Our review of the record shows sufficient evidence of Mr. Rodriguez’s knowledge of Teleco’s status as an instrumentality (and thus Messrs. Antoine and Duperval’s statuses as foreign officials) supports the jury’s finding of guilt. For example, insurance broker John Marsha testified extensively at trial about the political-risk insurance policy Terra tried to obtain on a Teleco contract that ultimately fell through. According to Mr. Marsha, the type of policy Terra sought is only available when contracting with a foreign government. Mr. Marsha testified that he received a phone call from Messrs. Esquenazi, Rodriguez, and Dickey, who said they wanted to insure contracts with “foreign governments.” After Mr. Marsha sent an application for political-risk insurance, Mr. Dickey emailed Marsha (copying Messrs. Rodriguez and Esquenazi) with an attached insurance application listing Teleco as a “government-owned entity.” Later, when the insurer had doubts about what recourse it might have against the Haitian government if the proposed Teleco/Terra contract was breached, Mr. Dickey (again copying Messrs. Rodriguez and Esquenazi) emailed Mr. Marsha and said: “With respect to Haiti, we may be able to get a letter from the TELECO President to the effect that TELECO is an instrumentality of the Haitian government. Would this help expedite matters?” And, when the insurer became concerned the policy’s force majeure clause might permit “the Haitian government” to cancel the contract with Terra, Messrs. Dickey, Rodriguez, and Esquenazi discussed this possibility at length with Mr. Marsha.  Also based on his status as a Terra executive directly involved in deals with Teleco, the jury reasonably could infer Mr. Rodriguez knew the company had a state-sanctioned monopoly over telecommunications in Haiti. That evidence was sufficient to support a jury finding that Mr. Rodriguez knew Teleco was an instrumentality of the Haitian government. And because it is undisputed that he knew Messrs. Antoine and Duperval were Teleco employees, that evidence supports a finding that he knew they qualified as foreign officials under the FCPA.”

[...]

After careful consideration, and for all of these reasons, we conclude the convictions and sentences of both Messrs. Esquenazi and Rodriguez are due to be affirmed.”

Alleged Bribes For Buses, However A Bumpy Road For The DOJ

Thursday, May 8th, 2014

[This post is part of a periodic series regarding "old" FCPA enforcement actions]

This post highlights related Foreign Corrupt Practices Act enforcement actions brought by the DOJ in the early 1990s concerning an alleged scheme to sell buses to the Saskatchewan, Canada Transportation Company (STC), an alleged instrumentality of the Canadian government.

The enforcement action was a bumpy road for the DOJ.  Among other things, both the trial court and appellate court rebuked the DOJ’s position that the alleged “foreign officials” could be charged with conspiracy to violate the FCPA and both decisions contain an extensive review of the FCPA’s legislative history.  As to the alleged bribe payors, two defendants put the DOJ to its burden of proof at trial and were acquitted.

*****

In March 1990, the DOJ charged George Morton in this criminal information with conspiracy to violate the FCPA’s anti-bribery provisions. Morton is described as a Canadian national agent who represented Texas-based Eagle Bus Manufacturing Inc. (a subsidiary of issuer Greyhound Lines, Inc.) in connection with the sale of buses in Canada.  According to the information, Morton conspired with others in paying $50,000 to alleged Canadian “foreign officials” to obtain or retain business for Eagle Bus in violation of the FCPA.

The foreign officials were Darrell Lowry and Donald Castle, both Canadian nationals, and the Vice-President and President, respectively, of Saskatchewan Transportation Company (STC), an alleged instrumentality of the government of the Province of Saskatchewan.

The information specifically alleged that Morton requested “that Eagle pay money, in the sum of approximately two percent of the purchase price of 11 buses to be purchased by STC from Eagle, to officials of STC in order to ensure that Eagle received a contract for the sale of the buses.”  The information also alleged that Morton and others “offered, promised and agreed to pay, and authorized the payment of money to officials of the government of the Province of Saskatchewan in order for Eagle to obtain and retain a contract to sell buses to STC.”

According to the information, Morton and his conspirators used “various methods to conceal the conspiracy in order to insure the continuing existence and success of the conspiracy, including but not limited to: preparing and using false invoices and other documentation; and arranging to have an STC check drawn payable to a corporation owned and controlled by Morton and converting the proceeds into Canadian currency.”

The information alleges, as to overt acts among other things, that Morton traveled from Canada to Texas “to discuss the payment of money to officials of STC in order to obtain and retain a contract to sell the 11 buses.”

In this plea agreement, Morton pleaded guilty and agreed to cooperate with the DOJ.

This “Factual Resume” in the Morton case suggests that the purchase price of the buses was approximately $2.77 million.  It further suggests that Lowry told Morton “that a payment of Canadian $50,000 would be necessary in order for Eagle to ensure that the bus contract would be approved by STC’s Board of Directors” and that “Morton, whose compensation from Eagle was dependent upon the transaction being completed, agreed to attempt to obtain Eagle’s agreement to make the requested payment.” The Factual Resume further suggested that, while in Texas, “Morton met with Eagle’s President, John Blondek, and with Vernon Tull, a Vice-President of Eagle” and that “at the meeting, it was agreed that the requested payment would be made.”

A few days after Morton pleaded guilty, the DOJ filed this criminal indictment against Blondek and Tull (the Eagle executives) and Castle and Lowry (the alleged “foreign officials”).

The allegations were based on the same core conduct alleged in the Morton information and the indictment charged all defendants with conspiracy to violate the FCPA’s anti-bribery provisions.  Original source media reports suggest that videotaped evidence existed in which Tull told an official at Greyhound (who helped the FBI arrange the videotaped exchange) that Lowry was accepting the money for “political purposes.”

Castle and Lowry moved to dismiss the charge against them on the basis that “as Canadian officials, they cannot be convicted of the offense charged against them.”  In this June 1990 Memorandum Opinion and Order (741 F.Supp. 116), the trial court granted the motion.  The issues, as framed by the court, were as follows.

“[It is undisputed] that Defendants Castle and Lowry could not be charged with violating the FCPA itself, since the Act does not criminalize the receipt of a bribe by a foreign official.  The issue here is whether the government may prosecute Castle and Lowry under the general conspiracy statute, 18 USC 371, for conspiring to violate the FCPA.  Put more simply, the question is whether foreign officials, whom the government concedes it cannot prosecute under the FCPA itself, may be prosecuted under the general conspiracy statute for conspiring to violate the Act.”

By analogizing to a prior Supreme Court [Gebardi v. U.S.] which addressed a similar issue, the court stated:

“Congress intended in both the FCPA [and the statute at issue in Gebardi] to deter and punish certain activities which necessarily involved the agreement of at least two people, but Congress chose in both statute to punish only one party to the agreement.  In Gebardi the Supreme Court refused to disregard Congress’ intention to exempt one party by allowing the Executive to prosecute that party under the general conspiracy statute for precisely the same conduct.  Congress made the same choice in drafting the FCPA, and by the same analysis, this Court may not allow the Executive to override the Congressional intent not to prosecute foreign officials for their participation in the prohibited acts.”

The court next reviewed the FCPA’s legislative history and concluded that “Congress had absolutely no intention of prosecuting the foreign officials involved, but was concerned solely with regulating the conduct of U.S. entities and citizens.”

In rejecting the DOJ’s position, the court stated, among other things as follows.

“… Congress knew it had the power to reach foreign officials in many cases, and yet declined to exercise that power.  Congress’s awareness of the extent of its own power reveals the fallacy in the government’s position that only those classes of persons deemed by Congress to need protection are exempted from prosecution under the conspiracy statute.  The question is not whether Congress could have included foreign officials within the Act’s proscriptions, but rather whether Congress intended to do so, or more specifically, whether Congress intended the general conspiracy statute, passed many years before the FCPA, to reach foreign officials.”  (emphasis in original).

The court then stated:

“The drafters of the statute knew that they could, consistently with international law, reach foreign officials in certain circumstances. But they were equally well aware of, and actively considered, the “inherent jurisdictional, enforcement, and diplomatic difficulties” raised by the application of the bill to non-citizens of the United States. See H.R.Conf.Rep. No. 831, 95th Cong., 1st Sess. 14, reprinted in 1977 U.S. Cong. & Admin.News 4121, 4126. In the conference report, the conferees indicated that the bill would reach as far as possible, and listed all the persons or entities who could be prosecuted. The list includes virtually every person or entity involved, including foreign nationals who participated in the payment of the bribe when the U.S. courts had jurisdiction over them. Id. But foreign officials were not included.

It is important to remember that Congress intended that these persons would be covered by the Act itself, without resort to the conspiracy statute. Yet the very individuals whose participation was required in every case—the foreign officials accepting the bribe—were excluded from prosecution for the substantive offense. Given that Congress included virtually every possible person connected to the payments except foreign officials, it is only logical to conclude that Congress affirmatively chose to exempt this small class of persons from prosecution.

Most likely Congress made this choice because U.S. businesses were perceived to be the aggressors, and the efforts expended in resolving the diplomatic, jurisdictional, and enforcement difficulties that would arise upon the prosecution of foreign officials was not worth the minimal deterrent value of such prosecutions. Further minimizing the deterrent value of a U.S. prosecution was the fact that many foreign nations already prohibited the receipt of a bribe by an official. See S.Rep. No. 114 at 4, 1977 U.S. Cong. & Admin.News at 4104 (testimony of Treasury Secretary Blumenthal that in many nations such payments are illegal). In fact, whenever a nation permitted such payments, Congress allowed them as well.

Based upon the language of the statute and the legislative history, this Court finds in the FCPA what the Supreme Court in Gebardi found in the Mann Act: an affirmative legislative policy to leave unpunished a well-defined group of persons who were necessary parties to the acts constituting a violation of the substantive law. The Government has presented no reason why the prosecution of Defendants Castle and Lowry should go forward in the face of the congressional intent not to prosecute foreign officials. If anything, the facts of this case support Congress’ decision to forego such prosecutions since foreign nations could and should prosecute their own officials for accepting bribes. Under the revised statutes of Canada the receipt of bribes by officials is a crime, with a prison term not to exceed five years, see Criminal Code, R.S.C. c. C–46, s. 121 (pp. 81–84) (1985), and the Royal Canadian Mounted Police have been actively investigating the case, apparently even before any arrests by U.S. officials. Defendant Castle’s and Lowry’s Supplemental Memorandum In Support of Motion to Dismiss, filed May 14, 1990, at 10. In fact, the Canadian police have informed Defendant Castle’s counsel that charges will likely be brought against Defendants Castle and Lowry in Canada. Id. at 10 & nn. 3–4. Thus, prosecution and punishment will be accomplished by the government which most directly suffered the abuses allegedly perpetrated by its own officials, and there is no need to contravene Congress’ desire to avoid such prosecutions by the United States.

As in Gebardi, it would be absurd to take away with the earlier and more general conspiracy statute the exemption from prosecution granted to foreign officials by the later and more specific FCPA. Following the Supreme Court’s admonition in an analogous criminal case that “[a]ll laws are to be given a sensible construction; and a literal application of a statute, which would lead to absurd consequences, should be avoided whenever a reasonable application can be given to it, consistent with the legislative purpose,” [...] the Court declines to extend the reach of the FCPA through the application of the conspiracy statute.”

Accordingly, Defendants Castle and Lowry may not be prosecuted for conspiring to violate the Foreign Corrupt Practices Act, and the indictment against them is Dismissed.”

It is also interesting to note that the trial court observed as follows regarding the FCPA’s legislative history.

“The legislative history repeatedly cited the negative effects the revelations of such bribes had wrought upon friendly foreign governments and officials.  [...]  Yet the drafters acknowledged, and the final law reflects this, that some payments that would be unethical or even illegal within the United States might not be perceived similarly in foreign countries, and those payments should not be criminalized.”

The DOJ appealed the trial court’s dismissal of the conspiracy charge against Castle and Lowry. In this March 1991 5th Circuit opinion (925 F.2d 831) the court stated:

“We hold that foreign officials may not be prosecuted under 18 USC 371 for conspiring to violate the FCPA.  The scope of our holding, as well as the rationale that undergirds it, is fully set out in [the trial court opinion] which we adopt and attach as an appendix hereto.”

In this July 1991 superseding indictment, the DOJ charged Blondek and Tull with conspiracy to violate the FCPA’s anti-bribery provisions, Blondek with two substantive FCPA anti-bribery violations and Tull with three substantive FCPA anti-bribery violations.  In addition, the superseding indictment charged Blondek, Tull, Castle and Lowry with violating 18 USC 1952 (interstate and foreign travel or transportation in aid of racketeering enterprises – also known as the Travel Act).

In October 1991, the DOJ filed this Civil Complaint for Permanent Injunction against Eagle Bus based on the same core conduct. Without admitting or denying the allegations in the complaint, in this Consent and Undertaking Eagle Bus agreed to a Final Judgment of Permanent Injunction enjoining the company from future FCPA violations.  Of note, the Consent and Undertaking states:

“[Eagle Bus] has cooperated completely with the Department of Justice in a criminal investigation arising from the circumstances described in the complaint [...] and will continue to cooperate.  The DOJ has agreed that, in the event neither Eagle Bus, nor its parent corporation Greyhound Lines shall violate the FCPA during the period of the following three years, the DOJ will not object to the defendant’s subsequent motion to dissolve the permanent injunction.”

This February 1992 DOJ Motion for Downward Departure in Morton’s case states as follows.

“Morton cooperated with the United States in the investigation and indictment of defendants John Blondek, Donald Castle, Darrell Lowry and Vernon Tull.  Blondek and Tull were tried and acquitted of all charges on October 12, 1991.  Castle and Lowry have not been been apprehended and remain fugitives.  Morton rendered substantial assistance to the United States in the preparation and prosecution of the case against Blondek and Tull.  [...]  Morton also appeared as a witness for the Crown in criminal proceedings in Regina, Saskatchewan, Canada, against Castle and Lowry.  The United States is informed that Morton was of substantial assistance in that case.  In the Canadian case, Castle was acquitted of all charges, while Lowry was convicted of all charges.  Lowery has been sentenced to approximately 16 months incarceration.”

Morton was sentenced to three years probation.

According to docket entries, in April 1996, the DOJ moved to dismiss the charges against Castle and Lowry.

Other than a single sentence in the above mentioned DOJ motion for a downward departure in the Morton case, I was unable to find any public reporting or reference to the Blondek and Tull trial in which they were acquitted of all charges.  There is no reference to the trial on the DOJ’s FCPA website and efforts to learn more about the trial from former DOJ enforcement attorneys or those representing Eagle Bus were either not fruitful or unsuccessful.

FCPA trials are rare.  Thus if anyone has any information about the Blondek and Tull trial, please contact me at fcpaprofessor@gmail.com.

*****

One final note about the “buses for bribery” enforcement action.  In an original source media article, George McLeod, the provincial cabinet minister responsible for STC, said “he has seen no information that Saskatchewan paid an inflated price for the luxury buses.”  He is quoted as follows.  ”I don’t think the product is on trial.  As far as I’m aware, we received an excellent product for the price.”