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One of the goals of the Foreign Corrupt Practices Act
("FCPA") is to prevent U.S. companies and individuals
from paying bribes to foreign officials in exchange for business.
To this end, the FCPA prohibits any domestic individual or business
entity from making payments to a "foreign official" for
the purpose of obtaining or retaining business. 15 U.S.C. §
78dd-2(a)(1). However, who, precisely, qualifies as a "foreign
official" is the subject of much uncertainty. In particular,
whether employees of a state-owned company qualify as foreign
officials for purposes of FCPA is an area of great
concern—and potential liability—particularly
for U.S. companies doing business in Latin America where
governments often have at least some level of involvement in
various business sectors from education to utilities to health
care.
The FCPA defines a "foreign official" as "any
officer or employee of a foreign government or any department,
agency or instrumentality thereof." 15 U.S.C. §
78dd-2(h)(2)(A). Thus, whether an employee of a state-owned company
is a foreign official depends, in part, upon whether state-owned
companies are "instrumentalities" of a foreign
government. Two courts have recently weighed in on this issue,
finding that the determination is a fact-specific inquiry. In
United States v. Carson, 2011 U.S. Dist. LEXIS 88853 (C.D.
Cal. May 18, 2011), the court identified several factors including:
(1) the foreign state's characterization of the entity and its
employees; (2) the foreign state's degree of control over the
entity; (3) the purpose of the entity's activities; (4) the
entity's obligations and privileges under the foreign
state's law, such as whether the entity has exclusive or
controlling power to administer its functions; (4) the
circumstances surrounding the entity's creation; and (5) the
extent of the foreign state's ownership of the entity and level
of financial support, such as subsidies, special tax treatment, and
loans. 2011 U.S. Dist. LEXIS 88853, at *11-12. The court emphasized
that state ownership by itself is insufficient to determine that
the company is an "instrumentality" under the FCPA.
Id. at 12. In United States v. Aguilar, 783 F.
Supp. 2d 1108 (C.D. Cal. 2011), the court considered various
characteristics of government agencies and departments to assist it
in understanding whether a state-owned company is an
"instrumentality." 783 F. Supp. 2d at 1115. In addition
to several of the factors identified by the Carson court,
the Aguilar court also looked at whether the entity
provides a service to the citizens of the jurisdiction; whether key
officers and directors are, or are appointed by, government
officials; and whether the entity is perceived and understood to be
performing official government functions. Id.
In practice, however, companies who come under investigation for
alleged FCPA violations cannot necessarily rely on the standard
that has been articulated by the Court. Looking at recent
settlements announced by the Department of Justice
("DOJ") and the Securities and Exchange Commission
("SEC"), the entities tasked with investigating FCPA
violations, these agencies take a more bright-line stance that
government ownership is the determinative factor for FCPA purposes.
For example, in March 2012, the SEC and DOJ announced a settlement
with Biomet, which had been charged with bribing doctors in
Argentina, Brazil, and China in order to secure business with
state-owned and operated hospitals. Similarly, in April 2011, the
SEC and DOJ reached a settlement with Comverse Limited over
payments to employees of Hellenic Telecommunications Organisation
S.A., a telecommunications company in Greece. The Greek government
owned one-third of the company's issued share capital, making
it the company's largest single shareholder.
Given that many companies under investigation by the DOJ and SEC
for FCPA violations reach settlements rather than litigating
charges in court, companies doing business abroad are left with
considerable uncertainty about whether the DOJ and SEC's broad
definition of an instrumentality (and thus a "foreign
official") or the court's fact-specific inquiry set the
standard for FCPA liability. Until the courts definitively settle
the issue, companies seeking to limit potential FCPA liability
should err on the side of caution and consider all employees of any
company owned in whole or in part by a foreign state to be
"foreign officials" for purposes of the FCPA.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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