A California federal judge issued an opinion on April 20, 2011, providing guidance on an important aspect of the anti-bribery provisions of the Foreign Corrupt Practices Act (“FCPA”) - who is considered a foreign official under the statute. In United States v. Noriega, District Judge A. Howard Matz held that two high-ranking employees of the Comisión Federal de Electricidad (“CFE”), Mexico’s state owned utility, were foreign officials because the CFE is an “instrumentality” of the Mexican government. Judge Matz provided a rare judicial test for the expansive definition of “foreign official” and affirmed the expansive views of government agencies, including the Department of Justice (“DOJ”) and the Securities and Exchange Commission (“SEC”), under the FCPA. In Noriega, the DOJ passed the test with ease.
Executives at Lindsey Manufacturing are standing trial for allegedly bribing two CFE employees. The defendants moved to dismiss the charges arguing that the FCPA only prevents bribes paid to foreign officials, who are defined by the statute as officers and employees of a “government or department, agency or instrumentality, or. . .[a] public international organization.” The defendants’ argument was that a state-owned corporation cannot be a department, agency or instrumentality of a foreign government, so officers and employees of state-owned corporations cannot be foreign officials for purposes of the FCPA.
Key Points from the Decision
The Court firmly rejected the defendants’ argument that state-owned companies are not, of necessity, instrumentalities of a government. The defendants argued that because some state-owned companies do not share all of the defining characteristics of “departments” or “agencies” - terms mentioned just before “instrumentalities” in the statute - no state-owned companies could fall within reach of the FCPA. The Court resisted this “all or nothing” approach, reasoning that the implication of the premise - some companies do not share the defining characteristics that would make them akin to a department or agency - is that some state-owned companies do have those characteristics.
In making this determination, the Court set out five (non-exclusive) characteristics that would suggest that a state-owned corporation was in fact an instrumentality for FCPA purposes:
- It provides service to citizens of the jurisdiction.
- The key officers and directors are, or are appointed by, government officials.
- It is financed, at least largely, by government appropriations or government mandated taxes, licenses, fees or royalties.
- It is vested with and exercises exclusive or controlling power to administer its designated functions.
- It is widely perceived and understood to be performing official, that is governmental, functions.
Since the CFE satisfied all of these criteria, the Court found it to be a government instrumentality.
The Government successfully argued in opposition to the defendants’ motion that the Court should follow the Charming Betsy principle which requires that a court reconcile implementing legislation and international obligations. The Court agreed with the DOJ’s assertion that the FCPA should be construed in a manner that conforms to the United States’ obligations under the OECD Convention.1 The Convention prohibits bribery of “foreign public officials” who are defined as including “any person exercising a public function for. . .a public agency or enterprise[.]” The Convention’s Commentaries further define a public enterprise as “any enterprise, regardless of its legal form, over which government, or governments, may, directly or indirectly, exercise a dominant influence.”
Significance and Implications of the Decision
The DOJ and the SEC have been aggressively pushing an expansive interpretation of “foreign official” for years. In the past, the Government’s targets have chosen to settle rather than press the issue and face a jury. That has kept the Government’s analysis from judicial scrutiny. Noriega is the first of several ongoing cases that bucks this trend, puts the Government to its proof, and tests its interpretation of the statute. The result should be a clearer understanding of who is a foreign official for FCPA purposes.
The decision released last week is a strong affirmation of the Government’s more forward-leaning stance on the question. The decision’s five-factor test to determine whether a state-owned corporation is an instrumentality of the state offers clarity on a narrow but important question facing global companies doing business overseas. If the foreign company is created by statute, overseen by government officials or appointees, financed through taxes, exercises exclusive control over its designated functions, and is widely understood to be performing government functions, then that company is likely an instrumentality of a government and the FCPA applies.
The potential game-changer in the opinion is the Court’s willingness to accept the Government’s contention that “foreign official” should be construed in light of the OECD Convention. The Convention definition of “public enterprise” includes “any enterprise” over which a government “may, directly or indirectly, exercise a dominant influence.” In certain jurisdictions where governments play a more active role in the economy, the Government may have many different ways to directly or indirectly exercise dominant influence. This could potentially expand the scope of covered foreign officials under the FCPA in many jurisdictions.
At a minimum, the decision provides a timely reminder to companies to reevaluate their compliance procedures to make sure they know whether they are doing business with government instrumentalities or not. A recent Haynes and Boone study of Fortune 500 companies conducted by Ryan McConnell and Katharine Southard, showed that not only did a mere 14 of the 40 oil and gas companies reviewed have Codes of Conduct that even defined “foreign official,” but also those definitions varied widely across firms. After Noriega, the definition is more certain and potentially broader than ever before, and the DOJ and SEC now have some form of judicial blessing for their more aggressive positions on who counts as a “foreign official” under the FCPA.