On May 16, 2014, the U.S. Court of Appeals for the 11th Circuit ruled in U.S. v. Esquenazi that the Foreign Corrupt Practices Act’s (FCPA’s) “instrumentality” provision could include state-owned businesses.
Joel Esquernazi and Carlos Rodriquez co-owned Terra Communications (Terra). In 2011, a jury convicted Esquernazi and Rodriquez on 21 counts related to their business dealings with Telecommunications D’Haiti, S.A.M. (Teleco). Esquernazi and Rodriquez were sentenced to prison terms of 15 and 7 years, respectively.
Esquernazi and Rodriquez challenged their convictions on the ground that the district court’s FCPA jury instructions were erroneous. The jury was instructed that an “instrumentality of a foreign government is a means or agency through which a function of the foreign government is accomplished. State-owned or state-controlled companies that provide services to the public may meet this definition.”
The central question before the court was the meaning of “instrumentality” under the FCPA. The court provided the following list of factors to determine if an entity is an instrument of a foreign government
- Does the government control the entity? Consider:
- the nature of 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 entity principals;
- the extent to which the entity’s profits, if any, go directly to the government;
- the extent to which the government funds the entity if it fails to break even; and
- the length of time these indicia have existed.
- Is the entity an instrumentality of a foreign government? Consider:
- whether the entity has a monopoly over the function it exists to carry out;
- whether the government subsidizes the costs associated with the entity providing services;
- whether the entity provides services to the public at large; and
- whether the public and the government of the foreign country generally perceive the entity to be performing a governmental function.
Teleco is a Haitian telecommunications company formed in 1968. An expert witness testified that the company was given a monopoly on telecommunication services in Haiti, as well as significant tax breaks, and that, at the company’s inception, the Haitian government appointed two members of the board of directors of Teleco.
The court said there was enough evidence to show that Teleco was controlled by the Haitian government and that, by providing nationalized telecommunications, Teleco was an instrumentality of the Haitian government and subject to the FCPA’s anti-bribery laws. The convictions and sentences of Esquernazi and Rodriquez were affirmed.
This case provides a roadmap for domestic companies to use when engaging in business transactions with state-owned companies. The 11th Circuit is the first court of appeals to weigh in on the question of the meaning of “instrumentality” under the FCPA. With this ruling, a foreign company does not have to be an agency or department of the government; being state-owned can be enough to trigger anti-bribery statutes. Domestic companies should use the same care and restraint in business dealings with state-owned companies as they do when conducting business directly with foreign officials.