Last week, the Eleventh Circuit affirmed the Department of Justice’s (“DOJ”) broad interpretation of “instrumentality,” and, therefore, who qualifies as a “foreign official” under the Foreign Corrupt Practices Act (“FCPA”). United States v. Esquenazi, et al., Case No. 11-15331 (11th Cir. May 16, 2014). This is the first time a U.S. appellate court has addressed the particular question. The court’s opinion makes it even more important for companies to conduct necessary due diligence on their customers, vendors and third- party representatives in foreign countries.
In December 2009, a grand jury indicted two individuals for conspiracy and FCPA violations based on a bribery scheme between the owner/officers of a Florida company, Terra Communications Corp. (“Terra”), and Telecommunications D’Haiti, S.A.M. (“Teleco”), a company owned and controlled by the Republic of Haiti. In exchange for Teleco agreeing to reduce Terra’s debt, Terra officials paid more than $890,000 in bribes to Teleco officials. In October 2011, a Florida jury found Joel Esquenazi, the majority owner and President/CEO of Terra, and Carlos Rodriguez, the minority owner and Terra’s Executive Vice President of Operations, guilty of the bribery scheme. The trial court imposed a 15-year prison sentence for Esquenazi and a 7-year sentence for Rodriguez, and ordered the defendants to forfeit $3.09 million. The defendants appealed to the Eleventh Circuit arguing, in part, that Teleco did not fall under the FCPA’s definition of an “instrumentality” of a foreign government and therefore the Telco officials who received the payments were not foreign officials under the FCPA.
The Question: What Is an “Instrumentality” of a Foreign Government?
Under the FCPA, a “foreign official” is defined as “any officer or employee of a foreign government or any department, agency, or instrumentality thereof.” 15 U.S.C. § 78dd-2(h)(2)(A) (emphasis added). The FCPA does not define “instrumentality,” and no U.S. appellate court had previously interpreted the term. The key question for the appellate court was what qualifies as an “instrumentality” under the FCPA.
The Answer: Government Control & Government Function
The Eleventh Circuit emphasized that the provision of a service by a government-owned or controlled entity is not by itself sufficient to qualify an entity as an instrumentality of the government. As a result, the Court interpreted “instrumentality” to be an entity that: (1) is “controlled by the government of a foreign country” and (2) “performs a function the controlling government treats as its own.” Though it emphasized that these two elements are inherently “fact-bound questions,” the Court nonetheless set out non-exhaustive lists of factors to assist in the determination of these factual questions.
It is notable that the Court shut down the defendants’ attempts to narrow the definition of “instrumentality” under the FCPA. The Court found Rodriguez’s argument that “only an actual part of the government would qualify as an instrumentality” to be “too cramped” and counter to Congress’ intent in enacting the FCPA. It also rejected the defendants’ contention that “instrumentality” should be limited “only to entities that perform traditional, core government functions.”
In arriving at its conclusion and the factors below, the Court noted that the use of the word “any” rather than “other” before the word “instrumentality” in the FCPA meant that instrumentality was not “a generalized catchall for things very much like the preceding terms in the FCPA [government, department, agency] …, but instead a distinct class of entities.” The Court also pointed to the definition of “routine governmental action” in the FCPA that includes “providing phone service” as an example of a routine governmental action, and to Commentaries to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, which the United States has ratified, in arriving at its decision.
Government Control of an Entity. In determining the first element – whether a foreign government “controls” an entity – the Court identified the following factors for consideration:
- Designation – the way the foreign government designates that entity;
- Majority Interest – whether the government maintains a majority interest in that entity;
- Hire/Fire Authority – the government’s ability to hire and fire the entity’s principals;
- Management of Profits & Losses – the extent to which the entity’s profits go directly to the government and the extent to which the government funds the entity if it fails to break even; and
- Length of Time – the length of time the above indicia have existed.
Performance of a Function the Government Treats as Its Own. In determining the second element – whether the entity performs a function the government treats as its own – the Court identified the following factors for consideration:
- Monopoly – whether the entity has a monopoly over the function it exists to carry out;
- Government Subsidy – whether the government subsidizes the costs associated with the entity providing services;
- Services to Greater Public – whether the entity provides services to the public at large in the foreign country; and
- Perception – whether the public and the government of that foreign country generally perceive the entity to be performing a governmental function.
The Analysis: Teleco Was a Haitian Instrumentality
The Court held that “Teleco would qualify as a Haitian instrumentality under almost any definition we could craft.” In assessing the factors set forth above, the Court cited the following facts that demonstrated that Teleco was an instrumentality: (1) Haiti granted Teleco a monopoly over telecommunications service; (2) Teleco received various tax advantages; (3) Haiti’s national bank owned 97 percent of Teleco during the time period in question; (4) Teleco’s Director General was chosen by the Haitian President with consent of the Haitian Prime Minister and other agency ministers; (5) the Haitian President appointed all of Teleco’s board members; and (6) the government and Teleco’s officials all considered Teleco to be a public administration. The Court also cited trial testimony by an insurance broker who claimed that the defendants once sought “political-risk insurance” for its Teleco contract, a type of insurance coverage that applies only when a foreign government is party to an agreement.
The Justice Department and the Securities and Exchange Commission have long taken the position that an “instrumentality” under the FCPA is broad and encompasses all types of state-owned or controlled entities. The Eleventh Circuit’s Esquenazi decision now adds legal heft to this interpretation.