United States: DOJ’s FCPA Enforcement Power Gets A Big Boost

In 2011, the Department of Justice ("DOJ") stated that "[i]t's not necessarily the wisest move for a company" to challenge the definition of "foreign official" under the Foreign Corrupt Practices Act ("FCPA"), and that "[q]uibbling over the percentage ownership or control of a company is not going to be particularly helpful as a defense."1 The DOJ's prophecy rang true in the Eleventh Circuit's recent decision in U.S. v. Esquenazi, 2014 U.S. App. LEXIS 9096 (11th Cir. 2014).

In Esquenazi, the Eleventh Circuit broadly defined "foreign official" under the FCPA to encompass employees of the Haitian telecommunications company Telecommunications D'Haiti, S.A.M. ("Teleco") despite the fact that the Haitian Prime Minister had authored a declaration asserting that "Teleco has never been and until now is not a state enterprise."2 The decision is the first time an appellate court has interpreted the term "foreign official." The decision affirms the DOJ's sweeping interpretation of the FCPA to date and provides impetus for continued aggressive enforcement.

The FCPA prohibits the making of corrupt payments to "foreign official[s]" for the purpose of securing business.3 The FCPA defines a "foreign official" as "any officer or employee of a foreign government, or any department, agency, or instrumentality thereof." In Esquenazi, the Eleventh Circuit interpreted "instrumentality" as an expansive catch-all category. It held that "instrumentality" may include government-controlled companies even if the companies do not perform "traditional core government functions." In reaching its decision, the Eleventh Circuit relied principally on the fact that the 1998 amendments to the FCPA endorsed the definition of "foreign official" set forth in the Organization for Economic Cooperation and Development's anti-bribery convention, which includes agents of enterprises not operating on a normal commercial basis due to government concessions.

The Eleventh Circuit's decision affirmed the convictions of Joel Esquenazi and Carlos Rodriguez, Florida businessmen accused of bribing officials at Teleco who were sentenced to 15 years and 7 years imprisonment, respectively. The court rejected the defense's argument that Teleco was not a government instrumentality because it did not perform what is traditionally viewed as a core government function – the provision of telecommunication services. The court took special care to make clear that just because a company with government ties is performing a "commercial service" does not insulate the company from being deemed an "instrumentality" under the FCPA.

While the court acknowledged that creating a bright-line definition of "instrumentality" under the FCPA would be both impracticable and unwise, it provided the following definition as guidance for U.S. corporations and enforcement agencies going forward: "An 'instrumentality' under. . . the FCPA is an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own." The court then supplied a two-pronged, multi-factor test for making the determination. First, courts must decide if the government "controls" the given entity. Factors include the foreign government's formal designation of the 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 government coffers; the extent to which the government funds the entity if it fails to break even; and how long the aforementioned factors have existed. The second part of the test assesses whether the entity performs a function the government "treats as its own." Factors include whether the entity has a monopoly over the function it exists to carry out; whether the foreign 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 governmental function.

Applying these criteria to Teleco, the Eleventh Circuit found the company to be an instrumentality of the Haitian government. In making its assessment, the court relied heavily on the fact that when Teleco was founded: (1) the company was granted a monopoly over telecommunications services in Haiti as well as tax advantages; and (2) the Haitian government appointed two of the company's board members and its top officials. The court also found persuasive the fact that the Haitian national bank held shares in Teleco for a number of years before the company was ultimately privatized and Teleco held itself out as being an instrumentality of the Haitian government when doing so was advantageous to its business dealings.

The Eleventh Circuit's decision squares with the only two U.S. district courts that have addressed the definition of "foreign official." In U.S. v. Carson, 2011 U.S. Dist. LEXIS 88853 (C.D. Cal. 2011), and U.S. v. Aguilar, 783 F.Supp.2d 1108 (C.D. Cal. 2011), the Central District of California rejected a proposed narrow definition of "foreign official" that would have categorically excluded officials of foreign state-owned corporations, holding instead that state-owned corporations could qualify as "instrumentalities" of foreign governments and that the determination must be made on a case-by-case basis.

The decision in Esquenazi lays the groundwork for case-by-case judicial determinations of what it means to be a "foreign official" under the FCPA, based on long lists of mutable factors. Unfortunately, this prospect offers little solace for companies struggling to plan ahead and mitigate risk. The DOJ therefore has little incentive to curtail its FCPA enforcement efforts and will likely use Esquenazi to take its enforcement efforts to new heights. As such, U.S. companies should exercise caution when dealing with foreign companies that have any ties to foreign governments.

Ms. Hengsbach would like to thank associates Joseph Barton and Mark Jensen for their contributions to this article.

Footnotes

[1] Christopher M. Matthews, DOJ Official Warns Against Challenging Foreign Official Definition in FCPA Cases, mainjustice.com (May 4, 2011), http://www.mainjustice.com/justanticorruption.

[2] A copy of the Haitian Prime Minister's declaration can be found here.

[3] The FCPA applies to: (1) issuers, (2) domestic concerns and their officers, directors, employees, agents, and shareholders, and (3) foreign persons and foreign non-issuer entities that, either directly or through an agent, engage in any act in furtherance of a corrupt payment while in the territory of the U.S.

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