Compliance with the Foreign Corrupt Practices Act (“FCPA”) became more difficult for life sciences companies on May 16, 2014 because of the 11th Circuit Court of Appeals decision in U.S. v. Esquenazi. At issue was the scope of the term ‘instrumentality’ within the FCPA’s definition of ‘foreign official’ (defined by the statute as ‘any officer or employee of a foreign government or any department, agency, or instrumentality thereof’ [emphasis added]). ‘Instrumentality’ has been the focal point for the Justice Department’s expansion of the jurisdictional reach of the FCPA, and the 11th Circuit’s decision ratifies their expansive construction of the term.
The FCPA prohibits bribery of foreign government officials and, in most cases, foreign government officials are easily identifiable: customs officials, employees of a nation’s food and drug approval and oversight authority, and government ministers and others with a government title. Most life sciences companies have a good handle on defining those types of foreign officials, and have compliance programs controlling their interactions with such officials. But because of its vagueness, the “…instrumentality thereof…” part of the foreign official definition under the FCPA has been a difficult compliance point for life sciences companies. Courts traditional have not adopted any bright-line rule for defining ‘instrumentality,’ leaving the Justice Department to fill that regulatory gap. As stated by the Justice Department, many foreign governments operate through state-owned or state-controlled entities, and ‘instrumentality’ is meant to account for such operations in an attempt to treat foreign governments in as consistent a manner as possible. Among other actions, the vagueness of ‘instrumentality’ has been used by the Justice Department to bring foreign hospital administrators (not just officials with a national health service) within the definition of ‘foreign official.’
In Esquenazi, the 11th Circuit defined ‘instrumentality’ as “an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own.” The concepts of ‘control’ and ‘a function the government treats as its own’ are, according to the court, fact-specific. So, there is still no bright-line rule for life sciences companies to follow.
The court listed the factors it considered relevant to deciding the issue. In determining whether a government ‘controls’ an entity, life sciences companies should examine (i) the foreign government’s formal designation of that entity; (ii) whether the government has a majority interest in the entity; (iii) the government’s ability to hire and fire the entity’s principals; and (iv) how the government manages the profits and losses of the entity.
In analyzing whether an entity ‘performs a function the government treats as its own,’ life sciences companies should examine whether: (i) the entity has a monopoly over the function it exists to carry out; (ii) the government subsidizes the costs associated with the entity providing services; (iii) the entity provides services to the public at large in the foreign country; and (iv) the public and the government of that foreign country generally perceive the entity to be performing a governmental function. Guidance prior to the Esquenazi decision suggests that life sciences companies, when reviewing this ‘government function’ test should also consider (i) the foreign state’s characterization of the entity and its employees; (ii) the circumstances surrounding the entity’s creation; (iii) the purpose of the entity’s activities; (iv) the entity’s obligations and privileges under the foreign state’s law; (v) the exclusive or controlling power vested in the entity to administer its designated functions; (vi) the level of financial support by the foreign state (including subsidies, special tax treatment, government-mandated fees, and loans); and (vii) whether the governmental end or purpose sought to be achieved is expressed in the policies of the foreign government.
In large measure, the Esquenazi decision ratifies the Justice Department’s construction of ‘instrumentality,’ and expands the number of foreign entities within the FCPA’s coverage. In separating ‘control’ from ‘performs a function the government treats as its own,’ the court indicates that entities with significant government ownership and control may be deemed instrumentalities even if they perform a government function at the lowest level, or not at all. The court also indicates that an entity with very minor government ownership may be deemed an ‘instrumentality’ for FCPA purposes if it significantly performs a government function. This decision likely will trigger more FCPA-related inquiries and investigations of life sciences companies by the Department of Justice.
Life sciences companies immediately should review their compliance program to confirm whether their ‘instrumentality’ analysis is consistent with the Esquenazi decision. Foreign companies that may have formerly been considered outside the FCPA’s ambit, including the partners/customers/counterparties of U.S. companies, may now be deemed to be ‘instrumentalities’ pursuant to the statute. Companies should also re-train relevant officers, directors and employees on the expanded scope of ‘instrumentality.’