Since the enactment of the FCPA in 1977, the U.S. Department of Justice (DOJ) has applied a broad interpretation of the Foreign Corrupt Practices Act’s definition of the phrase “foreign official.” Companies conducting business overseas should be careful in their dealings with personnel from state-owned companies and private/public joint ventures, and should ensure that their anticorruption compliance policies and procedures provide adequate due diligence to properly identify government officials and guide dealings with them.

Two recent failed challenges to DOJ’s broad interpretation of what it means to be a “foreign official” underscore why companies should be vigilant in their risk assessments and compliance plans. The two cases, both in the U.S. District Court for the Central District of California, are United States v. Noriega et al. (10-cr-01031) (“the Lindsey case”) and United States v. Carson et al. (09-cr-00077) (“the CCI case”).

The FCPA

The Foreign Corrupt Practices Act1 prohibits corruptly offering, paying, promising to pay, or authorizing the payment of anything of value to foreign government officials for the purpose of influencing the official’s actions, securing “any improper advantage,” or inducing the official to use his influence with foreign government authorities to obtain or retain business. The FCPA also prohibits the use of third parties such as agents to accomplish the same objective by prohibiting payments made to any person knowing that all or some of the funds will be offered or paid to foreign government officials.

The FCPA broadly defines the term “foreign official” as:

[A]ny officer or employee of a foreign government or any department, agency, or instrumentality thereof, or of a public international organization, or any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality or for or on behalf of any such public international organization. 15 U.S.C. §§ 78dd-1(f)(1); 78dd-2(h)(2)(A).

As noted in both the Lindsey and CCI cases, the FCPA does not define what it means to be an “instrumentality” of a foreign government.

On its face, the FCPA applies to “domestic concerns,” i.e., citizens, nationals and residents of the United States and companies (broadly defined) with principal places of business in the United States or that are organized under U.S. state laws; and to “issuers” – companies that issue securities registered on U.S. stock exchanges. The FCPA also applies to foreign individuals and companies who commit an act in furtherance of a prohibited payment while in the territory of the United States.

The FCPA’s criminal anti-bribery provisions are enforced by the Justice Department – primarily by the Fraud Section of the Department’s Criminal Division. The SEC’s Enforcement Division is responsible for enforcing the accounting provisions of the FCPA, which impose certain accounting and record keeping requirements on publicly held companies. Often, the Department and the SEC work together on investigations.

The U.S. government recovered over $1 billion through FCPA enforcement actions in 2010.2 Recent enforcement efforts have focused on the oil and gas industry,3 the pharmaceutical and medical device industries,4 freight forwarders,5 and financial institutions that invest in sovereign wealth funds.6

Recent Litigation Over the Definition of “Foreign Official”

Defendants in the Lindsey and CCI cases sought to dismiss charges against them that relied on payments made to employees of state owned enterprises. On April 20, 2011, the judge in the Lindsey case denied the defendants’ motion. The Lindsey defendants were convicted at trial on May 10, 2011. On May 9, 2011, the judge in the CCI case issued a tentative order denying the defendants’ motion to dismiss and took the matter under submission. Trial in that case is scheduled for October 4, 2011.

The Lindsey Case

Lindsey Manufacturing Company is a privately-held company headquartered in Azusa, California; it manufactures emergency restoration systems and other equipment used by electrical utility companies. On October 21, 2010, the government filed a superseding indictment charging defendants Keith Lindsey, Steve Lee and Lindsey Manufacturing Company (collectively “the Lindsey Defendants”) with conspiracy to violate the FCPA, as well as substantive violations of the FCPA. During the time period relevant to the case, Keith Lindsey and Steve Lee served as the company’s president and chief financial officer, respectively. The government also charged two Mexican citizens with related conspiracy, FCPA and money laundering offenses – Enrique Aguilar (a fugitive) and his wife, Angela Aguilar (collectively, “the Aguilar Defendants”).

The government alleged the Lindsey Defendants paid bribes to two high-ranking employees of the Comisión Federal de Electricidad (CFE), an electric utility company wholly owned by the Mexican government. The company funneled the alleged bribes to these CFE employees (Nestor Moreno and Arturo Hernandez) by making payments to Grupo International (“Grupo”), a company owned and controlled by the Aguilar Defendants. The payments from the company to Grupo were supposed to be commissions for services performed by Enrique Aguilar in his capacity as the company’s sales representative in Mexico. But the government alleged that large portions of the payments were used to bribe Moreno and Hernandez. According to the government, the alleged bribes were illegal because Moreno and Hernandez, as employees of state-owned CFE, were “foreign officials” for purposes of FCPA liability.

In February 2011, the defendants moved to dismiss the superseding indictment. The issue presented by the motion was whether an officer or employee of a state-owned corporation can be a “foreign official” for purposes of FCPA liability. The defendants argued that the plain meaning of the “instrumentality” prong of the “foreign official” definition shows that Congress did not intend for FCPA liability to be based on payments made to employees of state-owned corporations like the CFE. The defendants also asserted that the history, structure and purpose of the FCPA demonstrate that Congress did not intend the statute to include state-owned corporations. Moreover, the defendants argued that the FCPA’s legislative history shows that Congress deliberately chose not to target bribes intended to influence state-owned corporations. For purposes of their motion, defendants did not dispute the factual allegations in the superseding indictment regarding the characteristics of the CFE.

On April 20, 2011, U.S. District Court Judge A. Howard Matz denied the defendants’ motion to dismiss. The court rejected the defendants’ argument that a state-owned corporation can never be an instrumentality of a foreign government. It found “persuasive” the government’s argument that the FCPA should be construed broadly in light of the United States’ treaty obligations under the Organization for Economic Cooperation & Development (OECD) Convention. The OECD defines “foreign public official” to include anyone exercising a public function for a foreign “public enterprise,” which means “any enterprise, regardless of its legal form, over which a government or governments may, directly or indirectly, exercise a dominant influence.” Citing the undisputed factual allegations contained in the superseding indictment, the court noted that the CFE was created by statute as a “‘decentralized public entity’ (emphasis added); its governing Board is comprised of various high-ranking governmental officials; it describes itself as a government agency; and it performs a function the Mexican nation has described as a quintessential government function – the supply of electricity.” Based on those facts, the court concluded that the CFE has the attributes of a government agency or department.

On May 10, 2011, after one day of deliberations following a five-week trial, a jury in Los Angeles returned guilty verdicts against the defendants. Keith Lindsey and Steve Lee were convicted of one count of conspiracy to violate the FCPA and five counts of FCPA violations, and are scheduled to be sentenced on September 16, 2011. Angela Aguilar was convicted of one count of money laundering conspiracy and is scheduled to be sentenced on August 12, 2011.7 Lindsey Manufacturing is the first corporate defendant to be tried and convicted by a jury of FCPA violations.

The CCI Case

Controlled Components, Inc., the corporate entity in the CCI case, pled guilty in July 2009 to a three-count information charging conspiracy to violate the FCPA and the Travel Act8 and two substantive FCPA violations. The company, which makes sophisticated valves used in power generation and other applications, admitted to making a total of 236 corrupt payments in 36 countries between 2003 and 2007 totaling approximately $6.8 million.

In April 2009, six former executives of the company were charged in a 16-count indictment, the first 10 of which allege conspiracy to violate the FCPA and the Travel Act, substantive violations of the FCPA, and Aiding and Abetting.9 Many of the alleged improper payments were made to officials at state-owned entities in connection with the sale of valves used in power plants. The entities included JNPC (China), Guohua Electrical Power (China), KHNP (Korea), PetroChina, China National Offshore Oil Corporation (CNOOC), and Dongfang Electrical Corporation (China).

The defendants had served as CCI’s CEO; Manager of Sales for China and Taiwan; Vice President of Worldwide Customer Service; Vice President and Head of Sales for Europe, Africa, and the Middle East; Executive Vice President and Head of Worldwide Sales; and the President of CCI’s Korean office. One of the six individual defendants recently pled guilty, joining two other former CCI officials – the company’s Finance Director and Director of Worldwide Factory Sales – who did the same in December 2008 and January 2009. The trial of the five remaining individual defendants is scheduled to begin on October 2, 2011.

The individual CCI defendants filed their motion to dismiss the FCPA-related counts of the indictment on February 21, 2011 – shortly before the defendants in the Lindsey case. As with the Lindsey defendants, they argued that the entities referenced in the indictment failed to meet the FCPA’s definition of “foreign official.” Because the Act does not define what it means to be an “instrumentality” of a foreign government, the defendants argued that the rule of lenity required dismissal of the indictment, and that the FCPA was unconstitutionally vague. Like the Lindsey defendants, the CCI defendants assumed for purposes of their motion to dismiss that the companies in question were wholly owned by the foreign governments and that the court could rule on their motion as a matter of law, and not fact.

On May 9, 2011, U.S. District Court Judge James V. Selna tentatively denied the defendants’ motion to dismiss, but took the defendants’ arguments under submission, concluding that “the question of whether state-owned companies qualify as instrumentalities under the FCPA is a question of fact” for a jury to determine. The court listed several factors that shed light on whether a state-owned entity meets the FCPA’s definition:

  • the foreign state’s characterization of the entity and its employees
  • the foreign state’s degree of control over the entity
  • the purpose of the entity’s activities
  • the entity’s obligations and privileges under the foreign state’s law, including whether the entity exercises exclusive or controlling power to administer its designated functions
  • the circumstances surrounding the entity’s creation
  • the foreign state’s extent of ownership of the entity, including the level of financial support by the statute (e.g., subsidies, special tax treatment, and loans)

In rejecting the defendants’ contention that state-owned enterprises could not be instrumentalities of foreign governments, Judge Selna quoted and agreed with the following reasoning by Judge Matz in the Lindsey case:

Defendants’ very language reveals an illogical flaw in their “all or nothing” approach. That is, they argue that a state-owned corporation can never be an “instrumentality” because state-owned corporations “do not always” share the characteristics of departments and agencies. This formulation implicitly concedes that some state-owned corporations can and do share the characteristics of departments and agencies. And Defendants never explain why those corporations must be excluded from the definition of “instrumentality.”

The court likewise rejected the CCI defendants’ arguments that the rule of lenity required dismissal of the indictment, and that the FCPA’s definition of “foreign official” is void for vagueness.

Companies Should Review FCPA Compliance Policies and Procedures

The Lindsey and CCI cases make clear that improper payments made to officials or employees of government-owned entities will be subject to prosecution under the FCPA. Companies doing business with those entities should examine their compliance policies and procedures to ensure that they recognize potential FCPA exposure – just as they should when conducting business with obvious foreign government entities.