Introduction

Five recent cases in four federal district courts have addressed the long disputed question of whether the Foreign Corrupt Practices Act (FCPA or Act) applies to bribes paid to officers or employees of state-owned enterprises (SOEs).  No court has previously ruled on the applicability of the statute to such payments, and the recent decisions are, therefore, potentially significant for future enforcement of the Act.

The FCPA prohibits payments to "foreign officials."  It defines that term to include officers and employees of government departments or agencies.  The FCPA also defines "foreign officials" to include officers and employees of government "instrumentalities" but leaves that term undefined.  The Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) have long construed "instrumentalities" broadly to encompass SOEs, thereby making officers and employees of SOEs "foreign officials" for purposes of the FCPA.  Private counsel have questioned this broad interpretation.  Rather than litigate the issue, however, corporate defendants have settled criminal FCPA charges based on such payments.  Individual defendants have also chosen not to dispute the government on this issue.

Recently, however, the government's interpretation of "instrumentality" has been challenged in five separate cases.  In two, individual defendants' motions to reject charges based on payments to officers or employees of SOEs were summarily rejected.1  Of more interest, in two unrelated cases in the Central District of California discussed below, the judges, after thorough briefing, held that an SOE may qualify as an "instrumentality" under the FCPA, and that payments to its officers or employees are covered by the Act.  One case remains pending in the Southern District of Texas.

The Lindsey Case

In U.S. v. Noriega, et al., No. 10-1031 (C.D. Ca. 2010) (the "Lindsey" case), the court found that an SOE could qualify as an "instrumentality" under the FCPA, denying the defendants' motion to dismiss.2  The government had indicted Lindsey Manufacturing Company and two of its executives on charges of conspiracy to bribe officials at the Mexican Comisión Federal de Electricidad (CFE). 

In their motion to dismiss, the defendants argued that the plain meaning of "instrumentality" does not include SOEs.3  The defendants further contended that the structure, object, and purpose of the FCPA require the exclusion of SOEs from that term and supported this contention with a lengthy analysis of the legislative history of the Act.4  The defendants also argued that, at best, the term "instrumentality" was too vague to provide adequate notice of its meaning, and that the rule of lenity and the void-for-vagueness doctrine required that the term not be construed to include SOEs.5

The government presented its own textual exegesis and legislative history of the statute to argue that, under general canons of statutory construction, the FCPA should be read to prohibit payments to officers of SOEs.6  The government noted, in particular, that the facilitating payments terms of the FCPA expressly permit payments for "providing phone service [and] power and water supply."7  These services are commonly provided by SOEs, not government departments or agencies.  Therefore, if SOEs are not "instrumentalities," there is no reason for including payments to their employees in this exception.8  Further, the government noted that the United States is party to the OECD Anti-Bribery Convention, which treats employees of SOEs as government employees for bribery purposes.9  Citing the rule of "Charming Betsy,"10 the government argued that the court should interpret the FCPA so as to be consistent with the United States' obligations under this treaty.11 [NE1]    

Judge Matz examined the term "instrumentality" in light of the FCPA's structure, object, and purpose.  He found the legislative history of the FCPA inconclusive but took note of the provisions of the OECD Convention.  Judge Matz then provided a "non-exclusive list" of characteristics of government agencies and departments that may be "instrumentalities" within the terms 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.12

Based on these criteria, Judge Matz found that "a state-owned corporation having the attributes of the CFE may be an 'instrumentality' of a foreign government within the meaning of the FCPA, and officers of such a state-owned corporation ... may therefore be 'foreign officials' within the meaning of the FCPA."13  Judge Matz observed that the CFE is owned by the Mexican government, supplies electricity to all of Mexico besides Mexico City, has a governing board comprised of high-ranking government officials, defines itself on its website as a governmental "agency" and "a company created and owned by the Mexican government," and is defined by the organic law that created it as "a decentralized public entity with a legal personality and its own patrimony."14  Furthermore, the Mexican Constitution provides that the supply of electricity is solely a government function.15 

The jury found the defendants guilty on all counts on May 10, 2011.  This was the first conviction after trial of a corporate defendant in the 34-year history of the FCPA.

The Carson Case

In United States v. Carson et al., No. 09-77 (C.D. Ca. 2009), the Central District of California recently rejected a similar challenge to the government's categorization of SOE employees as government officials.  Carson involves former officers of Control Components Inc. (CCI), a company which pled guilty in July 2009 to violating the anti-bribery provisions of the FCPA and the Travel Act.  Most of the charges against CCI involved payments to officers or employees of SOEs in various countries.  The DOJ also indicted eight former CCI executives on conspiracy, FCPA, and Travel Act charges.  Three have pled guilty; five indictments remain pending. 

The individual Carson defendants filed a motion to dismiss the FCPA charges based on payments to officers or employees of SOEs.  Defendants' counsel filed a lengthy brief supporting this motion, appending a 152-page declaration by business law professor Mike Kohler (of the "FCPA Professor" blog) analyzing the legislative history of the FCPA.  Defendants' arguments were similar to those in Lindsey and relied heavily on legislative intent and their interpretation of the statute's legislative history.  Like the Lindsey defendants, they also cited the constitutional doctrines of void-for-vagueness and lenity in the construction of criminal statutes.

The government argued that the determination of what qualifies as an "instrumentality" is a factual question, and thus the defendants' motion to dismiss was premature.16  If the motion were to be considered, however, the government argued that SOEs come within the intended scope of "instrumentality" based on the FCPA's legislative history and principles of statutory construction.17  In addition, the government argued that the meaning of "instrumentality" is sufficiently clear that the rule of lenity and void-for-vagueness are inapplicable.18 

Judge Selna agreed with the government that an SOE may constitute an "instrumentality" and whether a specific SOE qualifies is a question of fact19  The judge observed that, in the United States itself, corporations such as banks and railroads have "long been used" to "carry out governmental objectives," consistent with the idea that such entities could be considered government instrumentalities.20  In addition, Judge Selna pointed to other US statutes' inclusive definition of "instrumentality" as support of FCPA coverage of SOEs.21  In light of these findings, the judge decided that a review of the legislative history of the FCPA was unnecessary.22  Judge Selna rejected the defendants' void-for-vagueness and rule of lenity arguments, holding that the term's meaning is "sufficiently definite."23 

To facilitate the case-by-case determination, the judge provided a number of non-exclusive factors which would indicate whether a business entity constitutes a government instrumentality, adding that "no single factor is dispositive."24  The list is similar to that in Lindsey: 

  • 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; and
  • 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).25

Carson is currently scheduled for trial in June 2012.

The O'Shea Case

The O'Shea case also remains pending in the Southern District of Texas, U.S. v. John Joseph O'Shea, No. 09-00629 (S.D. Tex. 2009), with no ruling on the defendant's motion to dismiss.  The general manager of the Texas unit of ABB, John Joseph O'Shea, is accused of paying kickbacks to the Mexican Comisión Federal de Electricidad (CFE) in exchange for contracts with ABB.  The CFE is the same entity that was at issue in Lindsey, where Judge Matz found that the CFE could be considered an "instrumentality," and that CFE employees could be considered "foreign officials."  The arguments presented by O'Shea and the government are similar to those in the Lindsey and Carson cases.26    

Conclusion

The courts in Lindsey and Carson have specifically rejected defendants' arguments that "instrumentality" may never be construed to encompass SOEs, leaving the determination of whether a given institution has sufficient indicia of governmental control to constitute an "instrumentality" to a factual determination.  The Esquenazi and Nguyen courts' summary dismissal of similar motions has effectively the same result.  Appeals in Lindsey and Carson are possible, but in the meantime these decisions may have an effect on other cases and corporate compliance practices.

It remains to be seen how difficult it will be for the government to establish as a factual matter that a given institution is an "instrumentality" by the standards of Lindsey and Carson.  The facts in Lindsey made it relatively easy for Judge Matz to find that the CFE was an "instrumentality" within the meaning of the FCPA.   The government's evidentiary burden in Carson may be somewhat greater.  The SOEs at issue are from a number of different countries, and the relative governmental or commercial character of the entities may vary.27   

Lindsey and Carson have offered an initial analytical framework, but the facts in each were relatively straightforward.  Other cases may prove more difficult.  A state may, for example, hold a minority equity interest in a joint venture but nevertheless exercise a substantial degree of control, for example through holding a "golden share."  Or a state may hold a controlling equity interest in a publicly listed corporation, but the securities laws of the listing state may limit the state's exercise of that interest.  Or the entity may be a majority-owned subsidiary of an SOE whose governance is separate.  These "governmental character" issues can be finely parsed, and other permutations have been left for future cases. 

From a compliance standpoint, it seems unlikely that Lindsey and Carson will have an immediate impact.  The criteria for distinguishing entities that constitute "instrumentalities" for FCPA purposes from those that do not are simply too indefinite.  Few companies will wish to make fine judgments based on these criteria or to entrust those judgments to local management or sales staff in other countries.  The risk of a mistaken judgment in this regard is simply too great.  Most companies can, therefore, be expected to continue to treat corporate business partners with a large government ownership or management role as within the scope of their FCPA policies. 

We will update you as these issues develop. 

Footnotes

1. Order Denying Motion to Dismiss, U.S. 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).

2. Order Denying Motion to Dismiss, U.S. v. Noriega, et al., No. 10-1031 at 2 (C.D. Ca. April 20, 2011).  Noriega is one of the individual defendants in the case.  The case is more often referred to by the corporate defendant's name, "Lindsey."

3. Motion to Dismiss, U.S. v. Noriega, et al., No. 10-1031 at 6-9. (C.D. Ca. March 21, 2011).

4. Id. at 9-12, 13-21.

5. Id. at 21-24.

6. Opposition to Defendants Motion to Dismiss, U.S. v. Noriega, et al., No. 10-1031 at 12-26 (March 10, 2011 C.D. Ca. 2010).

7. Id. at 13, (citing 15 USC sec 78DD-2(h)(4)(A)(iv)).

8.  Id. at 13-14.

9. See OECD Antibribery Convention, Article 1, para. 4 ("foreign public official" is "any person exercising a public function for a foreign country, including for a public agency or public enterprise").  The Commentaries to the Convention define a public enterprise as "any enterprise, regardless of its legal form, over which a government or governments, directly or indirectly, exercise a dominant influence," whether through share ownership, management control, or other  means.  Article 1, para. 14.  An official of a public enterprise is deemed to perform a public function unless the enterprise operates "on a normal commercial basis in the relevant market."  Id., para. 15.

10. Murray v. The Schooner Charming Betsy, 6 U.S. (2 Cranch) 64 (1804)).

11. Opposition to Defendants Motion to Dismiss, U.S. v. Noriega, et al., No. 10-1031 at 14-19.  In support of this argument, the government filed a State Department Declaration.  The declaration, by the Assistant Legal Advisor for Law Enforcement and Intelligence, Clifton M. Johnson, said the judge should deny the defendants' motion to dismiss because the United States was obligated under the OECD anti-bribery convention to interpret employees of SOEs as foreign officials.  However, on March 22, without elaboration, the presiding judge granted the defendants' motion to strike the declaration on procedural grounds.

12. Order Denying Motion to Dismiss, U.S. v. Noriega, et al., No. 10-1031 at 9 (C.D. Ca. April 20, 2011).

13. Id. at 2-3.  The court acknowledged that the government reserved the right to prove at trial that CFE is not only an "instrumentality" but also an "agent" of Mexico.

14. Id. at 3, 5.

15. Id. at 5.

16. Opposition to Defendants Motion to Dismiss, U.S. v. Carson et al., No. 09-77 at 8-14 (C.D. Ca. April 18, 2011).

17. Id. at 14-42.

18. Id. at 42-50

19. Order Denying Motion to Dismiss, U.S. v. Carson et al., No. 09-77 at 7 (C.D. Ca. May 18, 2011).

20. Id. at 8-10.

21. Id. at 10-11.

22. Id. at 11-12.

23. Id. at 14-16.

24. Id. at 5.

25. Id.

26. Motion to Dismiss, U.S. v. John Joseph O'Shea, No. 09-00629 (S.D. Tex. March 7, 2011); Opposition to Defendants Motion to Dismiss, U.S. v. John Joseph O'Shea, No. 09-00629 at 2-3 (S.D. Tex. March 28, 2011).

27. Note, however, that many of the charges in Carson relate to payments to Chinese SOEs, and Chinese criminal law expressly treats officers and employees of SOEs as "state functionaries" for criminal bribery purposes.  See Criminal Code of the People's Republic of China, Articles 93 and 389.

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