The U.S. government’s crackdown on bribery of foreign government officials—which has resulted in a dramatic increase in criminal prosecutions and SEC enforcement actions under the Foreign Corrupt Practices Act (“FCPA”)—has been premised, in part, on an aggressive view of who is considered a “foreign official” for purposes of the FCPA. Since the vast majority of FCPA cases are resolved through pleas and/or settlements, there have been few legal challenges to the U.S. government’s broad definition of “foreign official.” On April 20, 2011, however, a federal court in California addressed this issue and agreed with the Department of Justice (“DOJ”) that officers and employees of a state-owned utility corporation in Mexico are “foreign officials” under the FCPA.1
This ruling highlights the real risk that U.S. businesses face when doing business abroad, as FCPA liability can attach even when dealing with corporations that are, for all practical purposes, acting as counterparties, not government agencies.
The Prosecution of the Lindsey Manufacturing Company and Two of its Officers
The DOJ charged the Lindsey Manufacturing Company (“LMC”), a U.S. company based in California, and two of its officers with conspiracy to violate the FCPA, as well as substantive violations of the FCPA. LMC was in the business of manufacturing certain equipment used by electrical utilities. The Comisión Federal de Electricidad (“CFE”), an electric utility company wholly-owned by the Mexican government, was responsible for supplying electricity to all of Mexico (other than Mexico City).
The DOJ alleged that the defendants arranged for illegal payments to two high-ranking employees of CFE, in exchange for valuable contracts to supply CFE with equipment. The defendants allegedly funneled the payments through Grupo International (“Grupo”), a company owned and controlled by LMC’s sales representative in Mexico, who was also indicted. According to the indictment, large portions of LMC’s payments to Grupo were used to bribe CFE employees, and the LMC officers knew that those payments were being made.
The defendants filed a motion to dismiss the charges, arguing, among other things, that officers or employees of a state controlled utility corporation are not “foreign officials” for purposes of the FCPA.
“Foreign Officials” Under the FCPA
Congress enacted the FCPA to deter and punish bribery of foreign officials by U.S. companies, foreign companies whose shares are traded on U.S. exchanges and any individual—domestic or foreign—if the conduct is directed by U.S. persons or any corrupt activities take place in the United States.2 The statute makes it a crime to “corruptly” offer, directly or indirectly, any kind of payment to a foreign official “in order to assist . . . in obtaining or retaining business.”3
The FCPA defines a “foreign official” as “any officer or employee of a foreign government or any department, agency, or instrumentality thereof . . . or any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality . . .”4 The statute, however, does not define what type of entity is considered an “instrumentality” of a foreign government and does not specifically state that the officers and employees of a corporation controlled by a foreign government are “foreign officials.”
The Court’s Analysis of “Instrumentality”
In their motion to dismiss, the LMC defendants argued that a state-owned corporation could not be an “instrumentality” of a foreign government. They argued that “instrumentalities” must be understood to include only entities that share characteristics of governmental departments and agencies. Corporations, they insisted, do not share such characteristics and thus can never fall within the definition of an “instrumentality” of a foreign government.
The court rejected the defendants’ argument. Instead, the Court analyzed the characteristics of the particular corporation at issue. As to CFE, the court found that it “was created by statute as a ‘decentralized public entity’ . . .; 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.”5
The court found it unnecessary to base its ruling on the legislative history of the FCPA. It nevertheless summarized the pertinent legislative history and found it inconclusive: “Although it does not demonstrate that Congress intended to include all state-owned corporations within the ambit of the FCPA, neither does it provide support for Defendants’ insistence that Congress intended to exclude all such corporations from the ambit of the FCPA.”6
Based on this analysis, the court denied the motion to dismiss, finding that a state-owned corporation may be an “instrumentality” of a foreign government within the meaning of the FCPA, and that officers of such a state-owned corporation, may therefore be “foreign officials” within the meaning of the FCPA.
What the Decision Means for U.S. Businesses Operating Abroad
The Noriega decision highlights how critical it is that U.S. businesses conducting business abroad understand the nature of their counterparties and third parties hired to represent them. FCPA issues lurk even when it is not immediately obvious that foreign government officials are involved. Meaningful due diligence of counterparties is essential, as are implementing effective compliance policies and procedures.
In doing business with foreign companies that are wholly or partly nationalized—which can include hospitals in countries with socialized medicine and banks and financial institutions in countries where “bailouts” have led to state-control—U.S. companies should tread carefully and review, on a continuing basis, the type and amount of government funding received by counterparties and business partners.