U.S. Court Issues Decision on Foreign Official Definition Under FCPA (with Banoun and Clark Comment)
On May 16, 2014, the United States Court of Appeals for the Eleventh Circuit issued a historic decision defining for the first time what constitutes an "instrumentality" of a foreign government, and thus who may be considered a "foreign official" under the Foreign Corrupt Practices Act ("FCPA").
In U.S. v. Esquenazi, Joel Esquenazi and Carlos Rodriguez, executives of Terra Telecommunications Corp., a Florida-based company that purchased phone time from foreign vendors, were convicted of conspiracy, violations of the FCPA and money-laundering for taking part in a multi-year scheme to bribe employees of Haiti's state-owned telecom company, Telecommunications D'Haiti, S.A.M. ("Haiti Teleco"). Rodriguez was sentenced to 7 years in prison and Esquenazi was sentenced to 15 years in prison – the longest prison term in FCPA history.
On appeal, the main issue before the Eleventh Circuit was whether Haiti Teleco should be considered an "instrumentality" of the Haitian government, which would make Haiti Teleco employees "foreign officials" for the purposes of the FCPA. The FCPA defines "foreign official" as "any officer or employee of a foreign government or any department, agency, or instrumentality thereof." At trial, the district court instructed the jury that an "instrumentality" included any entity "through which a function of the foreign government is accomplished, and that state-owned or controlled companies that provide services to the public may meet that definition." Esquenazi contended that Congress had intended to limit the FCPA to traditional government officials, not employees of state-owned entities such as Haiti Teleco.
The court relied in part on the Commentaries to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions in arriving at its decision.
While finding that Haiti Teleco would qualify as a government instrumentality under any definition, the Eleventh Circuit panel stated that it was "mindful of the needs of both corporations and the government for ex ante direction about what an instrumentality is." The appellate panel then defined an "instrumentality" as any entity "controlled by the government of a foreign country that performs a function the controlling government treats as its own."
The Eleventh Circuit panel provided a "list of some factors that may be relevant" to "courts and juries" in determining whether a government controls a particular entity. These factors included "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 to the governmental fisc; and, by the same token, the extent to which the government funds the entity if it fails to break even; and the length of time these indicia existed."
In addition, in deciding whether an entity then meets the second prong of the test – that is "performs a function the government treats as its own" – the factors to be evaluated include "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 in the foreign country; and whether the public and the government of that foreign country generally perceive the entity to be performing a government function."
Banoun and Clark Comment: The broad definition of "instrumentality" and factors to be considered by a court and a jury in making that determination enunciated by the court in Esquenazi has significant implications. Under this opinion, foreign banks, investment funds, utility companies, universities and hospitals could be considered instrumentalities, which means that providing anything of value, including giving gifts, meals or entertainment, to the employees of these entities could be considered violations of the FCPA. Any dealings that U.S. funds or banks have with foreign investors must recognize the breadth of this decision or risk violating the FCPA. More than anything, the Esquenazi opinion highlights the importance of conducting comprehensive due diligence on third parties with whom an entity is conducting business to ensure that "instrumentalities" covered by the FCPA are treated with the required care.
See: OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. See generally: Cabinet FCPA Specialty Page (available to Cabinet subscribers only). For more information, please contact Ray Banoun, Peter Clark, Samantha Dreilinger, and Jodi Avergun.