In a significant win for the Department of Justice (“DOJ”), the U.S. Court of Appeals for the Eleventh Circuit adopted the DOJ’s broad interpretation of the term “foreign official” under the Foreign Corrupt Practices Act (“FCPA”). The Eleventh Circuit’s decision in United States v. Esquenazi is the first appellate court interpretation of the meaning of “foreign official.” The unanimous panel rejected the defendants’ argument in favor of a limited definition and, instead, adopted the DOJ’s position that “fact-bound questions” must be answered on a case-by-case basis to determine whether a state-owned or state-controlled enterprise is an instrumentality of a foreign government such that its employees are foreign officials.
The Eleventh Circuit affirmed the convictions of Joel Esquenazi and Carlos Rodriguez for bribing officials of Telecommunications D’Haiti, S.A.M. (“Haiti Telco”). The FCPA defines “foreign official” to include, among others, “any officer or employee of a foreign government or any department, agency, or instrumentality thereof.” The central question in the case was whether Haiti Telco was an “instrumentality” of the Haitian government within the meaning of the FCPA.
At the district court, the defendants moved to dismiss the DOJ’s indictment, arguing that Haiti Telco was not an instrumentality of the Haitian government. They argued that, in order to be an “instrumentality,” an entity needs to perform a core government function—as would, for example, a government agency or department created by constitution or statute. The district court denied defendants’ motion to dismiss, and ultimately, a jury convicted the defendants of violating the FCPA. On appeal, the defendants challenged the district court’s jury instruction regarding the definition of instrumentality, contending that it did not adequately convey that the jury needed to find that Haiti Telco performed a core government function in order for it to be an instrumentality of the Haitian government. The defendants also challenged the FCPA’s definition of foreign official as unconstitutionally void for vagueness.
The Eleventh Circuit rejected these arguments, and adopted the DOJ’s fact-based approach, looking to questions such as who runs the company, who appoints the executives, and where the company’s profits end up, in order to determine whether an entity is an “instrumentality” under the FCPA. In addition, the Eleventh Circuit concluded that “[t]he FCPA is not vague as applied to [defendants’] conduct.”
After Haiti Telco was established in 1968, Haiti Telco became the sole provider of landline telephone service in Haiti due to a monopoly and tax advantages provided by the Haitian government. In the 1970’s, the National Bank of Haiti (which later became the Banque de la Republique d’Haiti), which is owned by the Haitian
government, gained 97% ownership of Haiti Telco and has retained ownership ever since then. Despite its ownership, Haiti Telco is not designated as a government entity by statute; nor is there any law stating that Haiti Telco is a public entity. However, Haiti Telco is considered a de facto government entity because the Haitian government invests in the enterprise, and, according to the DOJ’s expert witness, the company has always been considered to be part of the “public administration.”
Based on these facts, the Eleventh Circuit held that employees of Haiti Telco are “foreign officials” under the FCPA and that the defendant’s improper payments to Haiti Telco employees violated the FCPA. Adopting the DOJ’s argument, the Eleventh Circuit defined the term “instrumentality” as “an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own.” The court further elaborated that “what constitutes control and what constitutes a function the government treats as its own are fact-bound questions.”
Based on this definition, the court developed two separate tests, which it indicated are intended to serve as “helpful” and “non-exhaustive” guidelines. First, to determine whether a government “controls” an entity, the court laid out five factors to be considered:
- the foreign government’s formal designation of the entity,
- whether the government has a majority interest in the entity,
- the government’s ability to hire and fire the principals,
- the extent to which the government profits from or subsidizes the entity, and
- the length of time these indicia have existed.
Second, to determine if an entity performs “a function the government treats as its own,” the court outlined four factors to be considered:
- whether the entity has a monopoly over the function it exists to carry out,
- whether the foreign government subsidizes the costs associated with the entity providing the services,
- whether the entity provides services to the public at large in the foreign country, and
- whether the foreign government generally perceives the entity to be performing a governmental function.
This decision is a significant victory for the DOJ. The interpretation of what is an “instrumentality” is the bedrock of many FCPA enforcement actions, and the Eleventh Circuit’s definition is broad enough to encompass a wide spectrum of entities with varying degrees of foreign government ownership and/or control. Unfortunately for business stakeholders, the current trend in the courts, as evidenced by the Esquenazi decision, is to approach the question of whether a state-owned enterprise is an instrumentality of the government ultimately as a question of fact. The Eleventh Circuit seems to be proposing a totality of circumstances test with no single dispositive factor. It remains to be seen whether the defendants will petition for a writ of certiorari to the Supreme Court, but a central question well-preserved in the courts below is whether the FCPA’s definition of a foreign official is unconstitutionally vague. It is likely that the defendants will seek further review of the Eleventh Circuit decision.