Tag: Foreign Official

What is an “Instrumentality” under the FCPA?

compliance and bribery

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:

Royalty Is Not Always a Foreign Official

I’m not quite sure how royalty works in various parts of the world. From the latest FCPA Opinion release, the parties to a business deal also did not fully understand. The proposed business relationship has some serious red flags so I’m not surprised the parties requested the opinion. According to the release, submission for a release was part of the contract.

The requestor was going to make payments to a member of the country’s royal family. (Red flag – But a key issue is whether he is Foreign Official.) The Royal Family Member was going to lobby his home country’s embassy to engage the requestor as the country’s lobbyist in the United States. (Lobbying the government = another red flag) The Royal Family Member would be working on a commission for 20% of what requestor receives for business. (red flag) The Royal Family Member can also identify other opportunities for the Requestor in the foreign country subject to a separate engagement. (red flag)

The whole opinion hinges on the definition of “Foreign Official” under the FCPA and whether the Royal Member falls under that definition. 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 . . . .

15 U.S.C. § 78dd-2(h)(2)(A)

The Department of Justice looks to FCPA Opinion Release 10-03 and United States v. Carson, et al., No. 09-cr-00077 (C.D. Cal. 2011) and distills the factors in those sources to three factors to determine whether a member of a royal family is a “foreign official”:

(i) how much control or influence the individual has over the levers of governmental power, execution, administration, finances, and the like;

(ii) whether a foreign government characterizes an individual or entity as having governmental power; and

(iii) whether and under what circumstances an individual (or entity) may act on behalf of, or bind, a government.

This royal family member:

  1. has no official or unofficial title or role in the Foreign Country’s government
  2. has no official or unofficial power over any aspect of the Foreign Country’s governmental decision-making process, executive function, administration, finance
  3. has no direct or indirect power to award the business the Requestor seeks
  4. cannot, by virtue of his membership in the royal family, ascend to a governmental position
  5. has no benefits or privileges because of his status as a Royal Family Member
  6. has no relationship—personal, professional, or familial—with the decision-makers in the Foreign Country’s Embassy and the Foreign Country’s government who will decide whether to award the business

As the FCPA Professor Mike Koehler points out, this opinion procedure release creates more uncertainty in the definition of a foreign official. Past advice has focused on the purpose of the payments and not just the mere status of the official. The Carson decision looks to the entity to determine if it is a government organization.

The facts and circumstances about the royal family member sound unique to me. (Again, pointing out that I don’t understand how the various royal family members related to their home countries.) We don’t know the foreign country based on the opinion release. It would seem based on points 4 and 5 that the royal family is largely ceremonial in the country and not in a position of power in the government. Otherwise, the royal family itself would be foreign government instrumentality.

There is new guidance expected this month from the DOJ and SEC that is meant to consolidate the advice given on the FCPA. Perhaps that will help clear up some of the confusion over who is a foreign official.

Sources:

Image is the Crown of Rus-Ukrania by Alexandr Synytsa

Who Is a Foreign Official After the Government Bailout of Financial Instiutions?

We have all read about the bailout of US financial institutions by the US government. This is not happening in other countries.  This complicates the analysis under the Foreign Corrupt Practices Act.

As Joel M. Cohen, Michael P. Holland, and Adam P. Wolf of Clifford Chance examined in Under the FCPA, Who Is a Foreign Official Anyway?, the FCPA does not define a foreign official. An employee of a state-owned enterprise is a foreign official. But the FCPA does not define a state-owned enterprise. The Anti-Bribery Convention of OECD does a better job of defining. See International Standards for the Bribery of Public Officials.

In some of these government bailouts, the governments are purchasing equity and equity-like interests in the financial institutions. Is AIG a state-owned enterprise? The US government has the right to purchase majority ownership!

Morgan Lewis put out LawFlash on this issue: Financial Turmoil and the Expanding Reach of the FCPA.

Morgan Lewis points out that the DOJ will likely treat sovereign wealth funds as state-owned enterprises and therefore their employees are foreign officials under the FCPA.

If a government has a small passive interest in a company, then the company is probably not a state-owned enterprise. As the ownership interest increases and the management control increases the company starts looking more like a state-owned enterprise.

Merely buying assets (like crappy CMBS and CDO interests) or guaranteeing loans should not affect the treatment of the company.

International Standards for the Bribery of Public Officials

The Foreign Corrupt Practices Act is the U.S. standard for bribery of public officials by U.S. concerns or international concerns with a presence in the U.S. The international standard is the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions promulgated by the Organization for Economic Co-Operation and Development.

The convention sets a criminal offense for:

any person intentionally to offer, promise or give any undue pecuniary or other advantage, whether directly or through intermediaries, to a foreign public official, for that official or for a third party, in order that the official act or refrain from acting in relation to the performance of official duties, in order to obtain or retain business or other improper advantage in the conduct of international business.

A foreign public official means:

any person holding a legislative, administrative or judicial
office of a foreign country, whether appointed or elected; any person exercising a public
function for a foreign country, including for a public agency or public enterprise; and any
official or agent of a public international organisation.

A public enterprise means:

any enterprise, regardless of its legal form, over which a government, or governments, may, directly or indirectly, exercise a dominant influence. This is deemed to be the case, inter alia, when the government or governments hold the majority of the enterprise’s subscribed capital, control the majority of votes attaching to shares issued by the enterprise or can appoint a majority of the members of the enterprise’s administrative or managerial body or supervisory board.

Who is a Foreign Official under the FCPA?

The FCPA defines “foreign official” as:

[A]ny officer or employee of a foreign government or any department, agency, or instrumentality thereof, or a public international organization, or any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality, or for or on behalf of any such public international organization.

It is obvious that person holding political office is a foreign official. In this age of increasing privitization of government services and the sudden investment of government investment in private businesses, it is not clear when an entity is an “instrumentality” of a foreign government.

The OECD Anti-Bribery Convention uses the term “public enterprise” which it defines to include “any enterprise in which the government holds a majority stake, as well as those over which a government may exercise a dominant influence directly or indirectly.

Under the FCPA, Who Is a Foreign Official Anyway? by Joel M. Cohen, Michael P. Holland, and Adam P. Wolf of Clifford Chance examine some of thses issues in great detail. You can find the article in the August 2008 edition of The Business Lawyer.