Recently, the United States Court of Appeals for the Eleventh Circuit rendered a decision that will now make it more likely for companies dealing with government controlled entities abroad to face liability under the Foreign Corrupt Practices Act (“FCPA”). The case, United States v. Esquenazi, involved two defendants who co-owed a business that sold phone time, purchased from foreign vendors, to U.S. customers. In order to assuage the cost of its business dealings in Haiti, the defendants offered side payments to officials at Haiti’s government owned Telecommunications D’Haiti, S.A.M. (“Teleco”). United States v. Esquenazi et al., No. 11-15331, at 5 (11th Cir. May 16, 2014). The side payments were offered to Teleco’s presidentially appointed Director General, and other officials. Id. at 7. The FCPA forbids payments to officials of non-U.S. governments and their instrumentalities. The definition of “instrumentality” was at issue here. The defendants presumably were heartened because the Haitian Prime Minister sent a declaration stating that Teleco was not a state enterprise. Unfortunately for them, the Court was not persuaded.
On May 16, 2014, the Eleventh Circuit held that an “instrumentality” under 15 U.S.C. § 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.” Id. at 20. The defendants had argued that illegal monetary transfers to Teleco were not covered by the FCPA because Teleco did not perform a government function. See id. at 13.
Government Entities that Provide Commercial Services Are Not Excluded from the FCPA
The actual language of the FCPA forbids “any domestic concern” from bribing a foreign official. Id. at 10; see also § 78dd-2(a)(1), (3). A “foreign official” is defined as “any officer or employee of a foreign government or any department, agency, orinstrumentality thereof.” Esquenazi, No. 11-15331 at 10; see also § 78dd-(2)(h)(2)(A) (emphasis added). Using Black’s Law Dictionary and Webster’s Third New International Law Dictionary, the court quickly ruled out any definition that would require the entity to be an actual part of the government. Esquenazi, No. 11-15331 at 11. Thus, an instrumentality does not have to be an “agency” or “department” of the government. See id. at 11-13 n.5. The instrumentality can be in its own distinct class as long as it is doing the business of government. See id. at 14.
The court held that government instrumentalities contain two important components. An instrumentality is “an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own. Id. at 21 (emphasis added). When deciding whether or not a government controls the entity, the Court said that companies “should look to the foreign government’s formal designation of that entity; whether the government has a majority interest; 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 the length of time these indicia have existed.” Id. When assessing whether or not the entity “performs a function the government treats as its own” companies 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.”
The Court’s Reasoning for Adopting a Broad Definition of the Word “Instrumentality”
To explain this expansive view, the court first cited the “grease payment” amendment, which establishes an “exception to FCPA liability for any . . . expediting payment to a foreign official . . . the purpose of which is to expedite or to secure the performance of a routine governmental action.” This includes actions “ordinarily and commonly performed by a foreign official,” such as “providing phone service.” Id. (no emphasis added); see also § 78dd-2(h)(4)(A). The court reasoned that such a provision would be meaningless if Congress intended for government owned commercial service entities to be completely excluded from the statute.
Second, the court considered the United States’ ratification of the Organization for Economic Cooperation and Development’s Convention on Combating Bribery of Foreign Officials in International Business Transactions (“the Convention”). Commentary in the Convention dictates that a “foreign official” also includes an individual who exercises a public function for a public enterprise.” Esquenazi, No. 11-15331 at 15. A public function is only absent where, “the enterprise operates . . . on a basis which is substantially equivalent to that of a private enterprise, without preferential subsidies or other privileges.” Id. at 16. The court explained that Congress did not change the FCPA to comply with the Convention’s definition of a public function, because the FCPA’s preexisting language already covered it. Id.
Based on the court’s ruling in Esquenazi, U.S. companies doing business in foreign countries should critically analyze any government owned commercial services entities they chose to do business with. These entities could be considered instrumentalities of the local government. In analyzing FCPA liability, the court will conduct a factual inquiry and will consider objective factors. Thus, companies should not look to the subjective intent of the foreign government when analyzing whether or not a government owned commercial service entity performs a government function since inEsquenazi, the defendant’s convictions were affirmed even after the Haitian Prime Minister sent a declaration stating that Teleco was not a state enterprise.