On May 16, 2014, the US Court of Appeals for the Eleventh Circuit became the first federal appeals court to decide a core issue under the US Foreign Corrupt Practices Act (FCPA): whether a state-owned enterprise (SOE) is an “instrumentality” of a foreign government, such that its employees and officers are “foreign officials” for the purposes of the FCPA.
The court developed and applied a two-prong test in making this determination, in which it affirmed the convictions of both the defendant-appellants. First, the court asked whether the SOE in question is “controlled” by a foreign government; and second, whether the function that the SOE performs is one that the foreign government “treats as its own." In concluding the SOE in question – a telecommunications company owned by the Haitian state – was an “instrumentality” under the FCPA, the court provided useful guidance to companies and their legal and compliance advisors on the factors they will need to consider when evaluating whether people their organizations deal with are “foreign officials” under the FCPA. The factors the court announced were not exhaustive, however, nor do they address many common fact patterns. Until further cases clarify these issues, compliance personnel will continue to have to make judgments based on application of the Esquenazi factors.
The decision itself represents an important victory for the US Department of Justice (DoJ) in that the court definitively agreed with DoJ’s broad interpretation of the statutory provision in question, and more generally, its longstanding expansive reading of the FCPA’s jurisdictional and subject matter reach.
Background to the Appeal
Defendants Joel Esquenazi and Carlos Rodriguez appealed their convictions at trial on multiple counts of violation of the FCPA, conspiracy to violate the FCPA and to commit wire fraud, and violations of anti-money laundering statutes. The convictions related to the defendants’ involvement in their company Terra Telecommunications Corp. (Terra), whose business involved purchasing phone minutes from vendors outside the United States and reselling those minutes to individuals in the US at a profit. A principal supplier of Terra was Telecommunications D ’Haiti, S.A.M. (Teleco), a Haitian telecommunications company with close ties to the Haitian government.
The facts developed at trial and reviewed by the Eleventh Circuit indicated that, by October 2001, Terra had accumulated a debt to Teleco of over US$400,000. To alleviate this debt, the defendants entered into an agreement with Teleco Director of International Relations Robert Antoinz to reduce the amounts Teleco would charge to Terra in return for 50 percent of the savings being paid to Antoine through an offshore sham company. In total, the defendants were alleged to have paid Antoine approximately $822,000 in return for over $2 million in savings. After Haitian President Jean-Bertrand Aristide removed Antoine from his post in 2003, the defendants-appellants were alleged to have entered into a similar agreement with another Teleco executive, Jean Rene Duperval, to whom they paid over $75,000. The transfers making up the $75,000 in payments were the acts that were the subject of the substantive FCPA counts set out in the initial indictment.
Despite Mr. Esquenazi having admitted during the Internal Revenue Service’s investigation into the case that he “had bribed” Mr. Duperval and other Teleco officials, Mr. Esquenazi and Mr. Rodriguez pleaded not guilty and were convicted on all counts, resulting in the longest FCPA-related prison sentences ever handed down to individuals. Messrs. Esquenazi and Rodriguez appealed their convictions to the Eleventh Circuit Court of Appeals, arguing that the district court’s jury instructions regarding the definition of “instrumentality” was overbroad, and that Teleco was not an instrumentality of the Haitian government. They also challenged the sufficiency of the evidence presented at trial regarding whether they knew that Teleco was a Haitian government “instrumentality.”
The appeal was heard by a three-judge panel, which unanimously rejected the defendant-appellants’ arguments that “instrumentalities” for the purposes of the FCPA are only those entities or operations which form an “actual part of the government” in question. The court looked to a number of sources in drawing this conclusion. In addition to the plain meaning of the word “instrumentality” as defined in Black’s Law Dictionary and Webster’s Dictionary, the court relied on the only prior appeals court decision to interpret the FCPA, United States v. Kay, 359 F.3d 738, 749 (5th Cir. 2004) and congressional actions in connection with the United States’ ratification of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (the OECD Convention) in affirming the DoJ’s expansive reading of the statute.
The court noted, citing the Kay case, that the FCPA was originally passed – and subsequent amendments confirmed – to address a wide range of conduct that the US Government sought to prohibit, rather than to circumscribe those prohibitions narrowly. The court also relied heavily on the 1998 amendments to the FCPA, including the fact that those amendments were intended to bring the US in line with its obligations under the OECD Convention and that they did not amend the definition of “instrumentality” or “foreign official” in any way. It also looked to the FCPA’s definition of “facilitating payments” – which specifically sets out payments to a government official to secure “phone service” as one example of a payment that might benefit from the exception – as evidence that Congress did not, as the defendant-appellants argued, categorically foreclose the possibility that an entity that provided such services could not meet the definition of “instrumentality.” In doing so, the court also rejected the broader idea that a government-controlled entity that provides commercial services could never be an “instrumentality," noting that the statute contemplates instances in which an entity would both provide commercial services and qualify as a state instrumentality.
Instead, the court cited the OECD Convention and its Commentaries, which clearly indicate that the Convention itself was intended to criminalize bribery of employees and officers of “public enterprises,” and that “public enterprises” were to be defined broadly – to include not just recognized arms of a government or state, but rather all enterprises that “perform a public function,” defined as all state enterprises unless they operate on a “normal commercial basis in the relevant market … substantially equivalent to that of a private enterprise, without preferential subsidies or other privileges.” Applying the rule of statutory construction announced in the early 19th Century in Murray v. Schooner Charming Betsy, 6 US (2 Cranch) 64, 118 (1804), requiring courts to interpret statutory language consistent with the treaty obligations of the United States where at all possible, the court categorically rejected the defendant-appellants’ narrow definition of “instrumentality.”
In its place, the court announced the following two-part test: (1) whether the government in question controls the SOE in question, and (2) whether the functions that the SOE performs are ones that the foreign government has “made its own.” It emphasized that what constitutes “control and what constitutes a function the government treats as its own are fact-bound questions” that need to be reviewed from the perspective of the host country government, offering the following non-exclusive list of factors in consideration of those questions. First, with respect to whether the foreign government “controls” the entity in question:
- The foreign government’s formal designation of that entity
- Whether the foreign 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 in 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
The panel then discussed the factors to be considered in the second prong of the test, whether the entity performs a function that the foreign government “treats as its own”:
- 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
Noting that Teleco most likely would have qualified as an instrumentality of the Haitian government “under most any definition it could craft,” the court (reviewing the evidence de novo, and applying the test it had announced) determined that Teleco was an “instrumentality” of the Haitian government, even though it was not formally designated as such, because:
- Haiti had in the past granted Teleco monopoly status and tax advantages under Haitian law
- The Haitian national bank owned 97 percent of Teleco during the period in question
- Its Director General had been chosen by the Haitian President in consultation with other government officials
- The President had appointed all of its board members; and
- An expert witness had testified that it was considered a public entity in Haiti
Despite the lack of any formal statutory designation that Teleco was a public entity, the court found the evidence sufficient “to show Teleco was controlled by the Haitian government and performed a function Haiti treated as its own.”
On the question of the defendant-appellants’ knowledge, the court cited evidence that showed their contemporaneous belief that Teleco was a state enterprise, including an (ultimately abandoned) application for political risk insurance in connection with their dealings with the entity.
Unlike the federal district courts that had previously considered the issue, 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.