Anti-Corruption Certification

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International experts - Published: 24 May 2012
Rebekah Poston and Gabriel Colwell
Squire Sanders - USA

Is there concern among U.S. lawyers as to how broadly the U.S. Department of Justice (DOJ) interprets the term “Foreign Official” as that term is used in the U.S. Foreign Corrupt Practices Act (FCPA)?

Yes. The FCPA prohibits offers, promises or payments of anything of value, directly or indirectly, to “foreign officials.” A “foreign official” is a term defined within the FCPA to include officers and employees of government departments or agencies. Where this statute becomes less precise is when it further defines “foreign officials” to include officers and employees of government “instrumentalities.”

How do the two U.S. enforcement agencies of the FCPA, the DOJ and Securities and Exchange Commission (“SEC”), define a government “instrumentality”?

If you look at the enforcement actions over the years, the DOJ and SEC have construed “instrumentalities” to encompass State-Owned Enterprises (“SOE”). In the eyes of the DOJ and SEC, officers and employees of SOEs are all “foreign officials” under the FCPA. This can become problematic when you are doing business in countries such as China and Russia, where their governments have an ownership or managerial interest of some degree in most companies.

Have U.S. federal courts required a certain percentage of government ownership, for example, a 51% or greater ownership in the company by a foreign government, before that company would be considered an SOE?

Unfortunately, as a result of very few corporate defendants charged with FCPA violations going to trial to challenge the government in this broad interpretation of “foreign officials,” this definition has persisted, even expanded over the years. There was a time when lawyers felt comfortable advising their corporate clients that a SOE for FCPA purposes was an entity in which a foreign government owned or controlled at least 51% or more of the company. Then the DOJ decided to prosecute a company for bribing employees of a SOE in which the foreign government held only a 43% ownership interest.[1] The companies charged were Alcatel-Lucent France, S.A., Alcatel-Lucent Trade International, A.G., and Alcatel Centroamerica S.A.

Are there any federal cases where the defendants went to trial and challenged this broad interpretation of what is a government instrumentality?

Eventually, some corporate and individual defendants threw down the gauntlet and challenged the DOJ’s broad interpretation. At trial, they contested the government’s construction of whether a SOE can qualify as an “instrumentality” under the FCPA, thus making payments to the SOE’s employees and officers illegal under the FCPA. To date, there are five separate cases that addressed this issue, not all with the same level of success. In two cases, the motions of individual defendants to dismiss charges against them, based on their payments to officers or employees of SOEs, were summarily rejected by the courts.[2]

Can you give us more details on some of those cases where this argument was not summarily rejected by your federal courts?

There are three cases where the courts held that a SOE may qualify as an “instrumentality” under the FCPA. In these cases, the courts laid out specific criteria to guide companies and their counselin answering the difficult question — what constitutes an “instrumentality” for FCPA purposes? The Lindsey Case In U.S. v. Noriega, et al., No. 10-1031 (C.D. Ca. 2010) (the “Lindsey” case), the court denied defendants motion to dismiss and found that, as a matter of law, a SOE could qualify as an “instrumentality” for purposes of FCPA liability.[3] The court then set about determining whether the particular SOE at issue, Mexican Comisión Federal de Electricidad (CFE), qualified as “instrumentality” under the FCPA. We will save you the suspense; it did, but more importantly, the criteria the court utilized to determine that CFE was an “instrumentality” is instructive for determining whether your existing and potential business partners may be considered a government “instrumentality” for FCPA purposes. The Lindsey court provided a “non-exclusive list” of characteristics of government agencies and departments that may be “instrumentalities” within the meaning of the FCPA:

  • The entity provides a service to the citizens of the jurisdiction
  • The key officers and directors of the entity are, or are appointed by, government officials.
  • The entity is financed, at least in large measure, through governmental appropriations or through revenues obtained as a result of government-mandated taxes, licenses, fees, or royalties.
  • The entity is vested with and exercises exclusive or controlling power to administer its designated functions.
  • The entity is widely perceived and understood to be performing official (i.e., governmental) functions. [4]

Is this an exclusive list of factors that qualifies as binding legal precedent?

No. This is a non-exclusive list and does not constitute binding precedent. It is persuasive authority that U.S. federal courts will, no doubt, look to the facts in analyzing whether a SOE qualifies as an “instrumentality” under the FCPA.

Are there more cases that can provide guidance on this issue?

Yes. The Carson Case In U.S. v. Carson et al., No. 09-77 (C.D. Ca. 2009), the court rejected a similar challenge by the defendants, finding that the determination of what qualifies as an “instrumentality” is a question of fact, and, therefore, could not be resolved by a motion to dismiss. [5] The court set forth a list of non-exclusive factors indicating whether a business entity constitutes a government instrumentality and added that “no single factor is dispositive.”[6] The factors include: • The foreign state’s characterization of the entity and its employees. • The foreign state’s degree of control over the entity. • The purpose of the entity’s activities. • The entity’s obligations and privileges under the foreign state’s law, including whether the entity exercises exclusive or controlling power to administer its designated functions. • The circumstances surrounding the entity’s creation. • The foreign state’s extent of ownership of the entity, including the level of financial support by the state (e.g., subsidies, special tax treatment, and loans). [7] The Carson list is remarkably similar to that in Lindsey. As with Lindsey, courts in the future will look to the list of factors set forth in the Carson to determine whether a SOE qualifies as an “instrumentality” under the FCPA. General counsel and compliance officers would be well advised to do the same.

What about the O’Shea case in Texas?

The O’Shea Case In U.S. v. O’Shea, No. 09-00629 (S.D. Tex. 2009), the defendant was accused of paying kickbacks to the Mexican Comisión Federal de Electricidad (CFE) in exchange for contracts.[8] CFE is the same entity that was at issue in Lindsey, where the court found that CFE qualified as an “instrumentality,” and that CFE employees could be considered “foreign officials.” On January 3, 2012, the court denied defendant O’Shea’s motion to dismiss in a single sentence and without explanation. In the same order, however, the court took judicial notice of several facts relating to CFE, which almost certainly influenced its decision to deny the defendant’s motion to dismiss: • CFE is a monopoly. • The Mexican Ministry of Energy, Mines, and State-Owned Industries sets requirements for the CFE. • The President of Mexico appoints the CFE’s Director and its governing board.[9] The facts the O’Shea court took judicial notice of are very similar to the factors utilized by the Lindsey and Carson courts in determining whether a SOE qualifies as an “instrumentality” under the FCPA. When combining these three lists together, we can see that there is now a burgeoning set of precedent in this area of the law that courts will look to in the future to determine whether a SOE qualifies as an “instrumentality” under the FCPA.

What lessons can be learned from these three cases you have just described?

General counsel and compliance officers should take note of these instructive cases and incorporate these lists of factors into their due diligence review process when entering into transactions with foreign-based companies. If, in the process of doing due diligence on an SOE, a number of the factors match up to the lists of factors mentioned in these cases, one should know that any improper or corrupt “payments” made to an employee or agent of the SOE may constitute a violation of the FCPA.

Is this a legal or factual determination companies need to make; and who within a company should be making this determination?

It appears from the rulings and dicta in these cases that Hamlet’s famous line in Act 3, Scene 1, “To be or not to be, that is the question.” remains unanswered when it comes to what is, or is not, an “instrumentality” under the FCPA, and whether this term encompasses, or does not, a SOE. We do know that at present, whether a foreign-based company has sufficient governmental ownership or managerial control to constitute an “instrumentality” will rest upon a factual determination. The governmental and commercial characters of SOEs will vary from country to country. Until such time as the criteria for distinguishing these entities become more defined and precise, the analysis of this issue of “instrumentalities” should be performed with the aid of legal counsel, and not left to the local marketing and sales or managerial personnel in the foreign jurisdiction. The risk of making the wrong decision is simply too great.

What is the safest pathway for companies to travel when it comes to determining if they are doing business with a non-U.S. government instrumentality?

For now, the safest pathway for companies to travel is to treat foreign-based companies with government ownership or managerial control as a government instrumentality, thus falling under the provisions of the FCPA.


[1] U.S. v. Alcatel-Lucent France, S.A., Alcatel-Lucent Trade International, A.G., and Alcatel Centroamerica S.A., No. 10-cr-20906 (S.D. Fla. 2010) [2] Order Denying Motion to Dismiss, US v. Esquenazi, et al., No. 1:09-cr-21010 (S.D. Fla. November 19, 2010); U.S. v. Nguyen, No. 2:08-CR-522 (E.D. Pa. September 16, 2009) (Docket No. 108).

[3] Order Denying Motion to Dismiss, U.S. v. Noriega, et al., No. 10-1031 at 2 (C.D. Ca. April 20, 2011); 783 F.Supp.2d 1108 (2011).
[4] Id. at 19-20.
[5] Order Denying Motion to Dismiss, U.S. v. Carson et al., No. 09-77 at 7 (C.D. Ca. May 18, 2011)
[6] Id. at 5.
[7] Id.
[8] Motion to Dismiss, U.S. v. O’Shea, No. 09-00629 (S.D. Tex. March 7, 2011); Opposition to Defendants Motion to Dismiss, U.S. v. O’Shea, No. 09-00629 at 2-3 (S.D. Tex. March 28, 2011).
[9] Management Order, U.S. v. O’Shea, No. 09-00629 (S.D. Tex. Jan. 3, 2012).

May 2012

Rebekah Poston, partner in the Miami office, is a former Assistant US Attorney who has more than 30 years of white collar criminal experience in, inter alia, the defense of the FCPA, USA Patriot Act, money laundering, environmental, Internet fraud and identity theft. She is consistently ranked among Florida’s top white collar criminal defense lawyers. She has written corporate compliance programs and conducted FCPA trainings, audits and investigations for multinationals. Gabriel Colwell is an accomplished lawyer with first chair trial experience who focuses his practice on white collar criminal defense, commercial business litigation, international dispute resolution and the FCPA corporate compliance. While at the US DOJ in Hawaii he directed investigations by the FBI, DEA, ATF, ICE and the Major Procurement Fraud Unit of the Army Criminal Investigation Division. Los Angeles, California, USA

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