On May 16, the U.S. Court of Appeals for the Eleventh Circuit issued an opinion in United States v. Joel Esquenazi, et al, No. 11-15331 (11th Cir. May 16, 2014), affirming the government’s broad interpretation of what constitutes a government "instrumentality" under the Foreign Corrupt Practices Act (FCPA). For several years, the Department of Justice (DOJ) and the SEC have brought enforcement actions against employees of companies alleged to be engaged in corrupt practices involving state-owned enterprises, including state-owned hospitals and construction firms, on the basis that such entities were government "instrumentalities” under the FCPA. In cases such as United States v. Lindsey Manufacturing (C.D. Cal. 2011), defense lawyers have countered that such broad definitions cannot apply where a company acts as a commercial participant in a country’s economy. The DOJ’s and SEC’s broad interpretation, however, had never been tested in a court of appeals, until it found a receptive hearing by the Eleventh Circuit in Esquenazi, which can be viewed here.
The FCPA prohibits any “domestic concern” from making use of the mails or interstate commerce to make or offer a bribe to any “foreign official” or to any person, while knowing that all or a portion of such payment 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 to assist the domestic concern in obtaining or retaining business for or with, or directing business to, any person. The statute defines “foreign official” to include “any officer or employee of a foreign government or any department, agency, or instrumentality thereof.” The term "instrumentality” is not defined in the statute.
The DOJ and SEC previously have settled investigations of alleged corrupt conduct involving payments made to employees of state-owned hospitals and state-owned construction companies under the theory that such entities are owned by the foreign government and acting on its behalf. The enforcement authorities’ past practice in this area has been consistent with the definition of government instrumentality offered by the DOJ and SEC in the 2012 Resource Guide to the U.S. Foreign Corrupt Practice Act (Resource Guide). The Resource Guide offers a list of factors that may weigh in favor of finding a government instrumentality, including the extent of foreign government ownership, the foreign government’s degree of control over the entity, the foreign government’s characterization of the entity, and the purpose of the entity’s activities. What remained an open question until now was whether the agencies' broad understanding of government instrumentality would survive challenge in a court of appeals.
Court of appeals’ holding regarding government "instrumentality" in Esquenazi
In Esquenazi, the defendants Joel Esquenazi and Carlos Rodriguez co-owned a Florida-based company that purchased phone time from foreign vendors and resold the minutes to U.S. customers. The company fell behind in payments to one of its vendors, Telecommunications D’Haiti, S.A.M. (Teleco). The company arranged to make side payments to Teleco’s Director of International Relations through sham consulting agreements it entered into with entities designated by the Director. The government contended that Teleco was an instrumentality of the Haitian government and that the bribes paid to the Teleco Director were therefore made to a foreign official within the FCPA’s definition. The defendants, on the other hand, argued that Teleco was not such an instrumentality since it provided a commercial service and there was no law specifically designating Teleco as a public institution.
The Eleventh Circuit refused to categorically narrow the definition of a government instrumentality. The court stated that the plain meaning of an “instrumentality” included entities that were not an actual part of the government. The court relied on United States v. Kay (5th Cir. 2004) to find that, in enacting the FCPA, Congress intended to cast a “wide net over foreign bribery.” It noted, moreover, that Congress had amended the FCPA in 2008 to align the statute with the Organization for Economic Cooperation and Development Anti-Bribery Convention, which contains a broad understanding of government instrumentalities.
The court also refused to limit government instrumentalities to those entities that perform “traditional” or “core” governmental functions, expressing the view that there was no basis in the statute for imposing such a limitation and that such an interpretation would put the United States out of compliance with its international obligations. For this reason, the touchstone for determining whether a government-controlled entity provides a governmental function is to look to whether the foreign government considers the entity to be performing a governmental function.
In defining the test for government instrumentality in this way, the Eleventh Circuit agreed with the government’s broad interpretation. In its opinion, the court of appeals held that a government 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.” The court further stated that “what constitutes control and what constitutes a function the government treats as its own are fact-bound questions.” Factors that may weigh in favor of control include the following:
- The foreign government’s formal designation of the entity
- Whether the foreign government has a majority interest in the entity
- The foreign government’s ability to hire and fire the entity’s principals
- The extent to which the entity’s profits, if any, go directly to the foreign government
- The extent to which the entity’s losses are borne by the foreign government
- The length of time these indicia of control have existed
The following factors may weigh in favor of finding a function the government treats as its own:
- Whether the entity has a monopoly over the function it exists to carry out
- Whether the foreign government subsidizes the costs associated with the entity providing the services
- Whether the entity provides services to the public at large in the foreign country
- Whether the public and the foreign government generally perceive the entity to be performing a governmental function
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.