The Foreign Corrupt Practices Act (FCPA) has been roundly criticized for its lack of clarity regarding key terms, such as "foreign official" and "instrumentality." The FCPA defines the term "foreign official" in part to mean "any officer or employee of a foreign government or any department, agency, or instrumentality thereof," but the FCPA provides no definition of "instrumentality." Strikingly, the U.S. Department of Justice's own Lay-Person's Guide to the FCPA, intended to provide guidance to exporters and small businesses that may be unable to obtain specialized counsel on FCPA matters, omits the word "instrumentality" from its definition of a "foreign official."1
The increased pace of indictments over the last few years has not translated into many opportunities for judicial insight. The dearth of case law on the FCPA is due largely to the widespread use of extra-judicial settlements such as deferred, non-prosecution, and plea agreements. These settlements generally have resulted from enforcement actions against corporations, which are often more prone to settlement than individual defendants. Acting Deputy Assistant Attorney General Greg Andres has said that the deferred and non-prosecution agreements "provide an effective means to ensure that corporations make compliance enhancements and take affirmative remedial actions."2 While that may be the case for those individual companies, the use of deferred and non-prosecution agreements deprives other companies of the more far-reaching guidance by judicial review and may actually hinder the broader business community's ability to comply with the FCPA. In the absence of trials and their corresponding judicial interpretations, the DOJ can continue to maintain the broadest possible construction of critical FCPA terms.
The DOJ has adamantly rejected the claim that the term "foreign official" needs statutory clarification. In response to questioning before the Senate Subcommittee on Crime and Drugs hearing on November 30, 2010, Andres insisted that the term "foreign official" has been defined through case law and opinion releases and that statutory clarification of the term would not help businesses identify which of their actions might come under the FCPA's umbrella.3 Andres recently returned to the subject of clarity in his prepared remarks for a hearing before the Subcommittee on Crime, Terrorism and Homeland Security for the Committee on the Judiciary for the U.S. House of Representatives on June 14, 2011. He stated that the DOJ provides guidance to companies through public remarks by senior DOJ, SEC, and Department of Commerce officials that highlight relevant considerations and practices. Andres also touted the DOJ's Opinion Release Procedure, which allows companies and individuals to request advance individual determinations as to whether proposed conduct would constitute an FCPA violation, and noted that the DOJ has published at least five such opinions that address the definition of "foreign official."4
Although the availability of these opinions is a novelty in U.S. criminal law, the guidance they provide is not a substitute for judicial review or statutory clarification. For one thing, the FCPA opinions have no binding application to parties other than those requesting the opinion and rest on the facts of each case. Furthermore, the five opinions Andres referenced that discuss the definition of "foreign official" were released in 1980 5, 19826, 19867, 19948 and 20109 and only the 2010 opinion provides analysis of the facts provided by requestors. The four earlier opinions merely include a recitation of the facts represented by the requestors and a cursory statement that the DOJ does not intend to take enforcement action based on those presented facts and circumstances. The 1980 and 1986 opinions also conclude that those opinions shall have "no application" to parties other than the requestor, whereas the other opinions state that the opinion shall have "no binding application" to parties other than the requestor. These opinions hardly constitute a robust resource for companies and their counsel, particularly since major international events occurring after the release of these opinions have changed how and where companies do business abroad.
The other problem, of course, is that the opinions and remarks by DOJ or SEC officials represent how those who enforce the law interpret its terms. While such guidance may shed light on the circumstances that give rise to investigations or prosecutions, it cannot provide definitive authority about what is illegal or legal under the FCPA.
Recent Court Cases
Given the lack of case law and the proliferation of settlements, the fact that the federal courts have handed down opinions in several cases in the last few years where defendants challenged the DOJ's broad interpretation of "foreign official" under the FCPA is quite significant. Since these cases squarely confront the meaning of "foreign official," the resulting opinions lead to an enhanced understanding of the terms "foreign official" and "instrumentality." In all cases, defendants were unsuccessful at checking the DOJ's broad interpretation of "foreign official" under the FCPA.
In United States v. Aguilar,10 the government accused the Lindsey Manufacturing Company, its President, Chief Financial Officer, and a Mexican intermediary of violating the FCPA by bribing two high-level officials of the Comisión Federal de Electricidad (CFE), an electric utility company wholly-owned by the Mexican government, to obtain valuable contracts. In denying the defendants' motion to dismiss, the court held that the CFE may be an "instrumentality" of a foreign government and that officials of that corporation may be "foreign officials" within the meaning of the FCPA. Judge Matz rejected the defendants' argument that a state-owned corporation, regardless of its individual characteristics, can never be an "instrumentality" of a foreign government. The case subsequently went to trial and all defendants were found guilty.11 Notably, the Lindsey Manufacturing Company is the first company to be tried and convicted on FCPA violations.
Judge Matz's ruling tends to validate the DOJ's broad interpretation of "foreign official," but it also implies that not all state-owned corporations will qualify as an "instrumentality" of a foreign government under the FCPA. Although the court found that the legislative history was inconclusive as to whether a state-owned company is included within the meaning of "instrumentality," the court determined that the "structure, object, and purpose of the FCPA ... are consistent with a definition of "instrumentality" that includes at least some state-owned corporations."12 Because the DOJ bears the burden of proving that a state-owned entity is an "instrumentality" of a foreign government, insights gleamed from this and other opinions may provide guidance to companies on possible defenses.
The court reasoned that an "instrumentality" need not share "all of its characteristics with both a department and an agency," less the term be "robbed of independent meaning."13 The court identified several characteristics of both government departments and agencies possessed by the CFE: the CFE "was created by statute as a 'decentralized public entity' (emphasis added); its governing Board is compromised 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. Indeed, the Mexican Constitution recognizes the supply of electric power as 'exclusively a function of the general nation.'"14 Furthermore, the court also found that the CFE fit neatly within the definition of instrumentality proposed by the Defendants' and so it was unnecessary to rely on the legislative history of the FCPA. Since this was such a fact-specific ruling, it remains to be seen how other courts will construe this opinion. We also anticipate that the defendants will appeal their conviction to the Ninth Circuit, which could reach a different conclusion than Judge Matz.
In United States v. Esquenazi, the defendant also challenged the DOJ's interpretation of "foreign official" in its motion to dismiss.15 The court denied the motion on the basis that the government sufficiently alleged that the foreign employees were "foreign officials" under the FCPA. The bribery scheme involved directors in Telecommunications D'Haiti (Haiti Teleco), the Republic of Haiti's state-owned national telecommunications company and only provider of non-cellular telephone service to and from Haiti.16 Although the court did not provide much analysis in its decision, it explicitly stated that the plain language of the statute and the plain language of the term "instrumentality" supported the conclusion that Haiti Teleco "could be an instrumentality of the Haitian government."17
On May 18th, 2011, the U.S. District Court for the Central District of California denied defendant's motion to dismiss in United States v. Carson. The defendants, the CEO and executives of a California-based company, were accused of making $4.9 million in bribes to officials of state-owned companies in China, South Korea, Malaysia and United Arab Emirates to obtain or retain business for their employer. The defendants argued that state-owned companies are not instrumentalities of a foreign government as a matter of law. The court rejected this proposition. According to the court, adopting defendants' construction of "instrumentality" would be an "impermissible narrowing of a statute intended to mount a broad attack on government corruption."18 The court held that whether a state-owned company is an instrumentality of a foreign government is a question of fact. And for the first time, a court provided explicit guidance on the meaning of the term "instrumentality."
As a starting point, the court stated that the term "instrumentality" refers to entities that are distinct from agencies or departments but that still "carry out governmental functions or objectives."19 The court provided a non-exclusive list of relevant factors that bear on the question of whether a business entity is an "instrumentality" of a foreign state:
- "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; and
- The foreign state's extent of ownership of the entity, including the level of financial support by the state (e.g., subsidies, special tax treatment, and loans)." 20
Because no single factor is dispositive, a state-owned corporation must be more than simply financed or controlled by the foreign government to qualify as an "instrumentality." Above all, the court looked for evidence that objectively indicates that the state-owned corporation is being used "as an instrument to carry out governmental objectives."21 The government's evidentiary burden to prove that a state-owned corporation is a government instrumentality is "substantial," according to the court.
The Carson court cited the Aguilar and Esquenazi opinions in support of its ruling. Future defendants may be advised to pay keen attention to arguments explicitly rejected by those courts. As in Esquenazi, the Aguilar court noted that the statutory language of the FCPA is clear and that the term "foreign official" is not unconstitutionally vague. And as in Noriega, the court found it unnecessary to rely on the legislative history of the FCPA in construing the term "foreign official" or "instrumentality." Rather, future defendants may focus on challenging the Government's substantial evidentiary burden to prove that the state-owned corporation in question is an "instrumentality" of the foreign state under the FCPA. Until more cases are tried though, the legacy of Carson remains unknown.
Lessons for the UK
In anticipation of the UK Bribery Act entering into force on July 1, 2011, the Ministry of Justice issued its final guidance on March 30, 2011, including a set of procedures, clarifications and case studies designed to help commercial organizations reduce their risk of liability under the Act (the Guidance).22 The Guidance expands on the six principles that the Government believes should inform every commercial organization's anti-bribery procedures and reiterates the Government's core principal of proportionality, namely that a company is expected to implement procedures that are proportionate to the risk it faces.
It remains to be seen how well companies are adjusting to the Guidance with just a three-month period between its issuance and the commencement of the Act itself. If the FCPA's trajectory and evolution since 1977 serve as any example, however, the lengthy Guidance is best understood as merely a starting point for understanding the contours of the Act.
Ultimately, the interpretation of the UK Bribery Act is the responsibility of the judiciary. Clarification of the Act's terms and parameters will depend on cases working their way through the courts. Richard Alderman, Director of the Serious Fraud Office (SFO), has stated that the SFO intends to vigorously enforce the Act.23 If the SFO follows the lead of the DOJ by utilizing resolutions such as non-prosecution, deferred prosecution and plea agreements, then those under the reach of the UK Bribery Act may experience frustrations similar to those experienced in relation to dealing with the FCPA. It will undoubtedly take a long time before a clear understanding of the Act's terms and parameters emerges. In the meantime, companies will no doubt struggle to design and implement effective and proportional compliance regimes.