If your are trying to figure out whether a company is a private company or an “instrumentality” of a foreign government under the Foreign Corrupt Practices Act you are already in trouble. To reach that point in the FCPA analysis you’ve already paid a bribe, or are thinking of paying a bribe. (If you’re just thinking about it; Don’t do it.) Otherwise you’ll end up in the position of Joel Esquenazi and Carlos Rodriguez.
The two owned a Florida telecommunications company that was doing business with Telecommunications D’Haiti, S.A.M. (“Teleco”), a company closely linked to the Haitian government. They were paying bribes to officials of Teleco. They were hiding these payments, so they were also involved in money-laundering. The bribery scheme was uncovered by the Internal Revenue Service. Esquenazi and Rodriguez were convicted of FCPA violations and money-laundering.
They appealed their convictions arguing that Teleco was not an “instrumentality” of a foreign government under the FCPA. Instrumentality is not defined in the FCPA and this is the first appellate decision to tackle the definition.
The Court started with the premise that “an instrumentality must perform a government function at the government’s behest…. What the defendants and the government disagree about, however, is what functions count as the government’s business.”
Esquenazi and Rodriguez had a losing hand. The Court looked to the “grease payment” exception under the FCPA. That allow facilitation payments of a “routine government action.” That provision goes on to list phone service as a type of routine government action. At this point, it’s clear they are losing the case.
The Court did not stop there, but decided to use its stature as the first case deciding this issue to provide a list of factors to help future courts decide if the government controls an entity:
- the foreign government’s formal designation of that entity;
- whether the government has a majority interest in the entity;
- the government’s ability to hire and fire the entity’s principals;
- the extent to which the entity’s profits, if any, go directly into the governmental fisc,
- the extent to which the government funds the entity if it fails to break even; and
- the length of time these indicia have existed.
Again, I don’t think any company should be looking at these factors to decide whether or not to pay a bribe. If you pay it, your attorneys are going to be looking at this list to see if they can keep you from going to jail. Esquenazi and Rodriguez were sentenced to lengthy jail terms: Esquenazi receiving 15 years and Rodriguez receiving 7 years.
References:
- USA v. Esquenazi (11th Cir. May 16, 2014) (.pdf)
- U.S. Appeals Court Defines ‘Instrumentality’ Under the FCPA for First Time by Samuel Rubenfeld in WSJ.com’s Risk and Compliance Journal
- FCPA: The First Circuit Court Decision Defining Instrumentality by Thomas O. Gorman in SEC Actions
- Common Sense in the Definition of ‘Instrumentality’ Under the FCPA by Tom Fox
- Esquenazi Part II – the Test for Determining an Instrumentality under the FCPA by Tom Fox