On May 16, 2014, the United States Court of Appeals for the Eleventh Circuit issued a long-awaited opinion addressing what constitutes an “instrumentality” of a foreign government under the Foreign Corrupt Practices Act (FCPA).1 The FCPA prohibits bribing “foreign officials,” and it defines a “foreign official” as “any person acting in an official capacity for or on behalf of any such government or department, agency or instrumentality thereof.”2 The FCPA does not, however, define the term “instrumentality.”

The Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) have taken the position that a broad range of state-owned or state-controlled entities qualify as instrumentalities of foreign governments.3 For example, recent DOJ and SEC enforcement actions have involved payments to employees of hospitals in Poland and Argentina and banks in China and Indonesia.4

Several defendants in FCPA cases have challenged the breadth of the government’s interpretation, and the Eleventh Circuit is the first appellate court to reach the issue. The Eleventh Circuit held that an “instrumentality” of a foreign government is “an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own.” The Court explained that this is a fact-specific inquiry and outlined a number of factors that should be considered, including the extent to which the foreign government owns the entity, controls the entity’s staffing, and receives the entity’s profits. In affirming convictions based on payments made to officials of a state-owned telecommunications company in Haiti, the Eleventh Circuit’s opinion takes an expansive view of who may qualify as a “foreign official” and provides the US government with support for its broad interpretation of the FCPA’s reach.

Background

On August 5, 2011, a jury convicted Joel Esquenazi and Carlos Rodriguez of violating the FCPA, money laundering, and conspiracy. 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. One of Terra’s customers was Telecommunications D’Haiti S.A.M. (Haiti Teleco), and beginning in 2001, Esquenazi and Rodriguez authorized the payment of over US$890,000 in bribes to Haiti Teleco officials through a series of shell companies and bank accounts in order to reduce what Terra owed to Haiti Teleco by over US$2,000,000.5

A central issue at trial was whether Haiti Teleco was an “instrumentality” of the Haitian government. The trial judge instructed the jury that:

[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.6

The judge further instructed that the jury could consider factors including whether Haiti Teleco was providing a service to the Haitian people; whether the key officers and directors of Haiti Teleco were government officials or were appointed by government officials; whether the Haitian government owned a majority of Haiti Teleco’s shares or provided financial support for Haiti Teleco; whether Haiti Teleco was provided exclusive or controlling power under Haitian law to exercise its functions; and whether Haiti Teleco was widely perceived to be performing a government function.7

The jury found that Haiti Teleco was an “instrumentality” of the Haitian government and convicted Esquenazi and Rodriguez for their bribery of the “foreign officials” who worked at Haiti Teleco. On October 26, 2011, the trial judge sentenced Esquenazi to a total of 15 years’ imprisonment (five years for violating the FCPA and ten years for money laundering).8 Rodriguez was sentenced to a total of seven years’ imprisonment (five years for violating the FCPA and two years for money laundering). Esquenazi’s sentence remains the longest sentence ever imposed in an FCPA case to date.9

The Eleventh Circuit’s Opinion

Esquenazi and Rodriguez appealed their convictions, arguing that Haiti Teleco was not an “instrumentality” of a foreign government because Haiti Teleco was not an actual part of the Haitian government and because it did not perform traditional government functions similar to a government department or agency.10 The Eleventh Circuit disagreed. The Court reasoned that requiring an “instrumentality” to be an actual part of the government “would impede the ‘wide net over foreign bribery’ Congress sought to cast in enacting the FCPA.”11 The Court also found that nothing in the FCPA limited “instrumentality” to traditional, core government functions. Rather, the Court concluded that accepting a traditional function limitation would run contrary to the Organization for Economic Cooperation and Development Convention on Combating Bribery of Foreign Public Officials in International Bribery Transactions (OECD Convention), which the United States ratified in 1998 and which designates as a “public function” “any activity in public interested delegated by a foreign country.”12

The Court defined an “instrumentality” of a foreign government as “an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own.”13 It noted that the two elements of that test – whether the foreign company was controlled by a foreign government and whether the foreign company was performing a function that the foreign government treated as its own – were fact-intensive inquiries that did not lend themselves to bright-line rules.14 The Eleventh Circuit’s opinion provided the following non-exhaustive list of factors that “may be relevant” in determining whether an entity is under the control of a foreign government:

  1. how the foreign government itself formally designated the company;
  2. whether the foreign government actually owns a majority share of the company;
  3. whether and to what extent the foreign government can make staffing decisions at the company (including hiring and firing the company’s principal employees);
  4. the extent to which the company pays its profits to the foreign government;
  5. the extent to which the foreign government would step in to help fund the company if the company failed to turn a profit; and
  6. how long these “indicia” of control have existed.15

The Eleventh Circuit then turned to the second element of the “instrumentality” test – whether the entity “performs a function the government treats as its own” – and provided several additional non-exhaustive factors that may be considered in making that determination:

  1. whether the entity has been granted a monopoly to perform its basic function;
  2. whether the government subsidizes the costs of the entity providing those services;
  3. whether services are being provided by the entity to the public at large; and
  4. whether the public and the foreign government “generally perceive” the entity to be one that performs a public function.16

Applying these factors, the Eleventh Circuit upheld the trial court’s jury instructions and found that there was ample evidence to support the jury’s determination that Haiti Teleco was a Haitian instrumentality, including evidence that suggested Haiti granted Haiti Teleco a monopoly, provided it with tax advantages, appointed key company officials and board members, and generally considered Haiti Teleco to be a public entity that provided nationalized telecommunications services.17

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As the first appellate court interpretation of what constitutes an “instrumentality” of a foreign government, the Eleventh Circuit’s opinion provides additional guidance to companies seeking to do business overseas without running afoul of the FCPA’s anti-bribery provisions. Because the Court declined to adopt the limited, bright-line interpretations of “instrumentality” urged by the defendants, companies should continue to appreciate that a broad range of entities may be considered instrumentalities of a foreign government, and use the Eleventh Circuit’s illustrative factors as guidance when constructing their anti-corruption compliance programs. Companies should assume that both the government and the courts will do the same.