Archive for the ‘Foreign Official’ Category

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.”

Friday Roundup

Friday, March 14th, 2014

Guilty plea in FCPA obstruction case, SEC trims a pending case, across the pond, turnabout is fair play, and for the reading stack.  It’s all here in the Friday roundup.

Cilins Pleads Guilty

Earlier this week, the DOJ announced that Frederic Cilins pleaded guilty “to obstructing a federal criminal investigation into whether a mining company paid bribes to win lucrative mining rights in the Republic of Guinea.”  The DOJ release further states:

“Cilins pleaded guilty to a one-count superseding information …, which alleges that Cilins agreed to pay money to induce a witness to destroy, or provide to him for destruction, documents sought by the FBI.   According to the superseding information, those documents related to allegations concerning the payment of bribes to obtain mining concessions in the Simandou region of the Republic of Guinea.”

Cilins was originally charged in April 2013 (see this prior post for a summary of the criminal complaint) and there was much activity leading up to Cilins’s March 31st trial date.  For instance, on February 18th the DOJ filed a superseding indictment and on March 4th Cilins filed this motion to dismiss.  In pertinent part, the motion stated:

“For almost a year, the government has proceeded against Mr. Cilins under the theory that he criminally obstructed an investigation conducted by a federal grand jury in the Southern District of New York and the Federal Bureau of Investigation, after he first learned of that investigation in the spring of 2013. Now, on the eve of trial, the government has charged Mr. Cilins with conspiracy to commit criminal obstruction. The supposed conspiracy began in 2012, when, as the government admits, he had no intent to obstruct an American investigation—indeed, well before any such investigation had even been contemplated. The charge is instead based on a radical new theory: that Mr. Cilins interfered with a Guinean civil licensing investigation, which somehow amounts to a violation of U.S. obstruction law under 18 U.S.C. § 1519.

The government’s unprecedented and breathtaking attempt to federalize protection for investigations spread far and wide throughout the world has no basis in the text of the obstruction statute itself and no support in the case law. It also runs up against the well-established presumption that, absent strong evidence to the contrary, Congress did not intend to give federal statutes extraterritorial reach. Not only does § 1519 contain no textual evidence that Congress meant to give the law a worldwide sweep, the statute’s legislative history also confirms the obvious: that Congress wrote a federal obstruction statute in order to criminalize intentional interference with American investigations. The government’s new conspiracy count is fatally defective and must be dismissed.”

Cilins has been widely reported to be linked to Guernsey-based BSG Resources Ltd.  As reported here from 100 Reporters:

“The U.S. Justice Department has formally notified the Franco-Israeli billionaire Beny Steinmetz [the founder of BSG Resources] that he is the target of a federal probe of allegations of bribery in the Republic of Guinea, according to a source with knowledge of the matter. The disclosure places Steinmetz … personally at the center of a broad-based multinational corruption investigation involving some of the largest remaining untapped iron ore deposits in the world.  [...] According to the source, who spoke on condition of anonymity, attorneys for Steinmetz have received a so-called “target letter” from federal prosecutors investigating allegations that Steinmetz’s mining company offered millions of dollars in bribes to win and keep the multi-billion dollar concession first awarded by the Guinean government in 2008.  The letter went to Steinmetz’s lawyers in January, the source said.”

For additional coverage of Cilins’s plea, see here from Reuters (noting that the plea agreement does not require any cooperation with the government’s investigation) and here from Bloomberg.

SEC Trims a Pending Case

This recent post highlighted how the SEC has never prevailed in an FCPA enforcement action when put to its ultimate burden of proof.

Against this backdrop, it is notable, as reported by the Wall Street Journal here and citing an SEC official, that the SEC is dropping its claims that former Magyar Telekom executives Elek Straub, Andras Balogh and Tomas Morval bribed Montenegro officials.  (The SEC’s claims that the former executives bribed Macedonian officials remains active).

See this prior post summarizing the SEC’s original 2011 complaint.

Across the Pond

More from the U.K. trial of former News Corp. executive Rebekah Brooks.  From the Guardian:

“Rebekah Brooks has admitted rubber stamping payments to military sources while she was editor at the Sun at the Old Bailey phone hacking trial. Brooks also admitted on Monday that she did not question whether the source of a series of stories that came from a reporter’s “ace military source” was a public official who could not be paid without the law being broken. Crown prosecutor Andrew Edis, QC, quizzed her about a series of emails from the reporter requesting tens of thousands of pounds for his military source. She responded to one request for payment in under a minute and to another within two minutes, the phone hacking trial heard. ”You really were just acting as a rubber stamp weren’t you,” Edis asked. Brooks replied: “Yes.”

As noted in previous posts here and here:

“What happens in these trials concerning the bribery offenses will not determine the outcome of any potential News Corp. FCPA enforcement action. But you can bet that the DOJ and SEC will be interested in the ultimate outcome. In short, if there is a judicial finding that Brooks and/or Coulson or other high-level executives in London authorized or otherwise knew of the alleged improper payments, this will likely be a factor in how the DOJ and SEC ultimately resolve any potential enforcement action and how News Corp.’s overall culpability score may be calculated under the advisory Sentencing Guidelines.”

Turnabout Is Fair Play

Last week’s Friday Roundup (here) highlighted how Senator Harry Reid (D-NV) called out Koch Industries on the Senate floor and accused the company of violating the FCPA.  The previous post noted that it was not just executives or companies that support Republican causes that have come under FCPA scrutiny (several Democratic examples could be cited as well).

Indeed, that is just what the Washington Examiner did in this article which states as follows.

“Senate Majority Leader Harry Reid, D-Nev., has received campaign contributions from people and political action committees linked to multiple companies suspected of violating the Foreign Corrupt Practices Act.  [...]  [R]ecords reveal that Reid has accepted campaign money from individuals and political action committees associated with 10 companies linked to FCPA investigations.  The contributions total $515,100 between 2009 and 2013.”

The inference from both Senator Reid’s initial volley and the Washington Examiner report would seem to be that companies that resolve FCPA enforcement actions or companies under FCPA scrutiny are bad or unethical companies and that politicians who accept support from such companies are thus tainted as well.

Such an inference is naive in the extreme.

Yes, certain FCPA enforcement actions are based on allegations that executive management or the board was involved in or condoned the improper conduct at issue. However, this type of FCPA enforcement action is not typical.

A typical FCPA enforcement action involves allegations that a small group of people (or perhaps even a single individual) within a subsidiary or business unit of a business organization engaged in conduct in violation of the FCPA. Yet because of respondeat superior principles, the company is exposed to FCPA liability even if the employee’s conduct is contrary to the company’s pre-existing FCPA policies and procedures.

Also relevant to the question of whether companies that resolve FCPA enforcement actions are “bad” or “unethical” is the fact that most FCPA enforcement actions are based on the conduct of third-parties under the FCPA’s third-party payment provisions. Further, certain FCPA enforcement actions are based on successor liability theories whereby an acquiring company is held liable for the acquired company’s FCPA liability.

Finally, given the resolution vehicles typically used to resolve an FCPA enforcement – such as non-prosecution and deferred prosecution agreements – companies subject to FCPA scrutiny often decide it is quicker, more cost efficient, and more certain to agree to such a resolution vehicle than engage in long-protracted litigation with the DOJ or SEC. These resolution vehicles do not require the company to plead guilty to anything (or typically admit the allegations in the SEC context), are not subject to meaningful judicial scrutiny, and do not necessarily represent the triumph of one party’s legal position over the other. Rather resolution via such a vehicle often reflects a risk-based decision often grounded in issues other than facts or the law. Indeed, a former high-ranking DOJ FCPA enforcement official has stated that given the availability of such alternative resolution vehicles, “it is tempting for the [DOJ], or the SEC since it too now has these options available, to seek to resolve cases through DPAs or NPAs that don’t actually constitute violations of the law.”

Last, but certainly not least, many corporate FCPA enforcement actions concern conduct that allegedly took place 5, 7, 10 or even 15 years ago.

Reading Stack

An informative read from Catherine Palmer and Daiske Yoshida (Latham & Watkins) titled “Deemed Public Officials:  A Potential Risk For U.S. Companies in Japan.”  The article states:

“Deemed public officials are officers and employees of entities that are not government owned but serve public functions. This concept is somewhat analogous to state-owned enterprises, but rather than being government owned/controlled entities that participate in commercial activities, these are commercial entities that play quasi-government roles.  [...] The statutes that authorized the establishment of these companies stipulate that their officers and  employees are “deemed to be an employee engaged in public service” for the purposes of the Penal Code of Japan.”

Another informative read from Wendy Wysong (Clifford Chance) titled “Why, Whether, and When the FCPA Matters in Capital Market Transactions: The Asian Perspective.”  The article, in part, covers the FCPA’s tricky “issuer” concept and explores FCPA liability in Rule 144A and Regulation S offerings.

*****

A good weekend to all.

66 North

Thursday, March 13th, 2014

When pondering the future locus of Foreign Corrupt Practices Act enforcement actions, one has to ask where are companies likely to be doing business in the future?

Although all companies doing business in the global marketplace have FCPA risk, resource extraction companies face greater risk in that they are often, pursuant to local law, forced into a marriage with foreign governments.

Thus, the more precise question when pondering the future locus of FCPA enforcement actions is where are the resource extraction companies likely to be doing business in the future?

There are only so many spots on the globe, but the future of the resource extraction industry – because of advances in technology and global warming – frequently points north.

Way north.  As in 66 North – the Arctic Circle.

For instance, this recent Wall Street Journal article (“Mining for Gold at Minus 45 Celsius”) notes:

“As the world warms, miners dream of unlocking trillions of dollars in diamonds, gold, nickel and other metals in the Arctic, a treeless cap that spans northern parts of Canada, Alaska, Russia and Scandinavian countries.”

“For … arctic miners, the biggest problem is the lack of ports, road and rail links.”

It is really a recipe for FCPA risk.  Difficult and harsh working conditions, narrow windows of opportunity to get things accomplished, heavy reliance on public infrastructure, etc.

Same issue with this additional Wall Street Journal article “Energy Companies Try Arctic Shipping Shortcut Between Europe and Asia” which states:

“Japanese and South Korean energy companies have begun shipping oil products through the Arctic’s melting ice—adding credibility to a route that could slash costs while avoiding risks associated with ferrying cargo through the Suez Canal.  The ships are taking the so-called Northern Sea Route, traders and shipbrokers in Singapore said, a shortcut between Asia and Europe along Russia’s Arctic Ocean coast. This marks the first time oil-derived products have been moved in such large volume through what maritime explorers of centuries past dubbed the Northeast Passage.”

“Using the Northern Sea Route could shave as much as 10 days, creating savings to offset such costs as additional insurance and the hiring of ice breakers, ships often needed to clear the path for vessels.”

Travel through the Northern Route is subject to the approval of the Russian Northern Sea Route Administration (“NSR”), established in 2013 by written order of the Russian Government to – among other things –  issue required permits to shippers to travel the Northern Route.

Given the enforcement agencies’ theories on licenses and permitting issues, the FCPA risk is rather obvious.

FCPA enforcement actions often follow business trends (think China).

Thus, it is possible that the locus of FCPA enforcement actions in the future may move north and possibly 66 North.

Much of the territory in the Arctic is owned or controlled, at least in part, by First Nation tribes and other non-traditional government bodies.  Thus, while awaiting firm approval to open up that branch office in Yellowknife, you might want to read this article by Perkins Coie attorneys Barak Cohen and Markus Funk titled “Assessing the Ambiguous Status of Tribal Leaders and Other Traditional Authorities under the Foreign Corrupt Practices Act.”