United States: Eleventh Circuit Adopts Broad Definition Of Government "Instrumentality" Under FCPA

On May 16, 2014, in the first appellate decision of its kind, United States v. Esquenazi,1 the Eleventh Circuit affirmed a broad definition of "instrumentality" of a foreign government, as the term is used in the Foreign Corrupt Practices Act (FCPA) to define who qualifies as a "foreign official" under the statute,2 and upheld the longest prison sentence ever imposed in an FCPA case. The decision generally supported the position that the US government has advanced on this issue. The court provided a two-part definition of "instrumentality" as (1) "an entity controlled by the government of a foreign country" that (2) "performs a function the controlling government treats as its own." The court also laid out a non-exhaustive list of factors to consider in applying each part of the test. In addition to the main issues decided by the court, the court also touched on a number of other ancillary issues involving the FCPA.

Background

In August 2011, a Miami jury found Joel Esquenazi and Carlos Rodriguez guilty of bribing officials at the state-owned Telecommunications D'Haiti between November 2001 and March 2005. They were convicted of one count of conspiracy to violate the FCPA and wire fraud, seven substantive FCPA counts, one count of money laundering conspiracy, and 12 counts of money laundering. Esquenazi was sentenced to 15 years in prison, and Rodriguez, seven years.

The FCPA prohibits companies that trade on US exchanges and companies incorporated in the US, as well as officers, directors, employees, stockholders and agents of such companies, and US citizens and residents, from making or offering corrupt payments to foreign government officials. The FCPA defines "foreign official" to include "any officer or employee of a foreign government or any department, agency, or instrumentality thereof."3 On appeal, Esquenazi and Rodriguez challenged the district court's jury instructions, arguing that the definitions of "instrumentality" and "foreign official" in the instructions were overbroad.

Esquenazi and Rodriguez co-owned Terra Telecommunications Corp., a Florida company that purchased telephone time from foreign vendors and resold that time to customers in the United States. Telecommunications D'Haiti, S.A.M. (Teleco) was one of Terra's primary vendors. The district court heard testimony indicating that Teleco was owned by the Haitian Government at the time that Terra was doing business with Teleco. When Teleco was formed in 1968, it was given a monopoly on telecommunication services. Beginning in the early 1970s, the National Bank of Haiti took on a 97 percent ownership of Teleco. At the relevant time, the Haitian President appointed all of Teleco's board members. The government also produced evidence that the defendants considered Teleco to be a state-controlled entity: they sought political risk insurance on their contracts with Teleco, which "applies only when a foreign government is party to an agreement," and a Terra executive assured the insurer that Teleco was "an instrumentality of the Haitian Government."4 Finally, a 2008 Haitian anti-corruption law listed Teleco as a public administration of the government. Teleco was later privatized. Five days after the jury convicted Esquenazi and Rodriguez, Haitian Prime Minister Jean Max Bellerive sent a declaration to the defense team noting that "Teleco has never been and until now is not a State enterprise."5 He followed that up with a second declaration that clarified "[t]he only legal point that should stand out in this statement is that there exists no law specifically designating Teleco as a public institution."6

The Opinion

In the opinion, the Eleventh Circuit defined "instrumentality" as "an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own."7 The court went on to hold that determining what constitutes control over the entity and whether the function of the entity is treated as its own by the government are "fact-bound questions" that must be answered on a case-by-case basis, because "[i]t would be unwise and likely impossible to exhaustively answer them in the abstract."8

Definition of "Instrumentality"

At the time of the appeal, only two other district courts had outlined factors describing what constitutes an "instrumentality" under the FCPA. In United States v. Noriega, the district court applied a five-factor test: 1) the entity provides a service to its citizens; 2) the primary officers are appointed by government officials; 3) the entity is largely financed through government appropriations; 4) the entity is vested with controlling power; and 5) the entity is understood to be performing official functions.9 One month later, the district court in United States v. Carson offered a six-factor test: 1) the government's characterization of the entity; 2) the government's degree of control; 3) the purpose of the entity's activities; 4) the entity's obligations under the law, including whether it holds a monopoly; 5) the circumstances of the entity's creation; and 6) the government's ownership interest, including ongoing financial support.10

The Eleventh Circuit clarified the test and, taking the facts of Esquenazi as its foundation, offered a non-exhaustive list of factors to consider in assessing whether an entity is an "instrumentality" under the FCPA. 

First, courts and juries should determine whether the government "controls" the entity,11 by considering the following factors:

  • the foreign government's formal designation of that entity;
  • whether the foreign government has a majority interest in the entity;
  • the foreign government's ability to hire and fire the entity's principals;
  • the extent to which the government profits from or subsidizes the entity; and
  • the length of time that these indicia have existed.

Second, courts and juries should assess whether "the entity performs a function the government treats as its own" by examining the following factors:12

  • 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; and
  • whether the public and government generally perceive the entity to be performing a governmental function.

The court went on to say that "it will be relatively easy to decide what functions a government treats as its own" by looking at objective factors, including "control, exclusivity, governmental authority to hire and fire, subsidization, and whether an entity's finances are treated as part of the public fisc."13 The court said that courts and businesses "have readily at hand the tools to conduct that inquiry."14 In practice, this analysis may be more difficult than the court allows because information on these factors is not always publicly available or easy to discern.

Applying these principles, the court held that Teleco was an "instrumentality" of Haiti. The court noted that throughout the years that the defendants were involved with Teleco, it was 97 percent owned by the government; the company's Director General was chosen by the Haitian president with the consent of the Prime Minister and two other government ministers; and the Haitian President appointed all of its board members.

Government-Owned "Instrumentalities" May be Commercial in Nature

The government and the defense agreed that an "instrumentality must perform a government function at the government's behest" but disagreed as to "what functions count as the government's business."15 The defendants argued that a foreign government entity can only be considered an instrumentality under the FCPA if the entity performs "traditional, core government functions."16 In rejecting this argument, the Eleventh Circuit considered the broader context of the FCPA. According to the court, "[Th]at a government-controlled entity provides a commercial service does not automatically mean that it is not an instrumentality. In fact, the statute expressly contemplates that in some instances it would."17 Specifically, the court noted that the FCPA allows "grease payments" to expedite performance of routine governmental actions, and that the FCPA in fact includes, as an example of such a routine action, "providing phone service."18 Accordingly, the court concluded that if a company providing telecommunication service could never be an instrumentality of a foreign government, this statement in the FCPA's statutory exclusion would be meaningless. The court's conclusion on this point did not seem to take into account that the defendants' argument would not necessarily categorically exclude an entity that provides phone service. Rather, a phone service provider might be a government instrumentality in one country in which the service is provided by a public utility, but not in another country in which the service is provided by a private or partially privatized telecommunications company.

The court also noted that Congress amended the FCPA in 1998 to implement the requirements of the Organization for Economic Cooperation and Development's (OECD) anti-bribery convention. The OECD convention states that a "foreign public official" includes agents of entities that are not operating on a "normal commercial basis in the relevant market" while performing public functions.19 Importantly, the commentary to the convention explains that in order to be excluded from the definition of "foreign public official," the entity for which the official works must not receive preferential subsidies or other privileges from the foreign government. Because the 1998 FCPA amendments did not address this definition, the Eleventh Circuit concluded that Congress believed that the FCPA already covered officials and entities encompassed therein.

Convictions and Sentences Affirmed

In addition to its historic ruling on the definition of instrumentality, the Eleventh Circuit addressed other arguments raised in the appeal. It rejected the argument that the FCPA is unconstitutionally vague, and it affirmed the jury instructions on whether the defendants had knowledge that payments would ultimately go to foreign officials. The appeals court noted that the district court should not have instructed the jury on "deliberate ignorance" when the evidence either pointed to actual knowledge or no knowledge at all. The court stated that an instruction on deliberate indifference is only appropriate if there is evidence showing that a defendant "purposely contrived to avoid learning the truth."20 In light of the overwhelming evidence demonstrating the defendants' actual knowledge, the Eleventh Circuit concluded, however, that this error was harmless. In the context of this discussion, the court reiterated a key aspect of the FCPA-that "knowledge" under the statute includes not only actual knowledge, but a "firm belief" that a circumstance exists or that a result is "substantially certain" to occur.21   

The 15-year sentence for Esquenazi, the former president of Terra, was affirmed. Among other things, the Eleventh Circuit affirmed the sentence enhancement based on Esquenazi's leadership role in the bribery scheme. The seven-year sentence for Rodriguez, a former vice president of Terra, also was affirmed. The court also affirmed the application of sentencing enhancements for the "value of the benefit received," calculating the amount to be the value of the total benefit that the company received, not the value received by an individual. Esquenazi and Rodriguez were ordered to forfeit, jointly and severally, $3 million.

Conclusion and Significance of the Esquenazi Case

This decision provides a clear definition of the term "instrumentality," within the context of the FCPA, and provides guidance on what factors to consider when deciding how to treat employees of entities that are partially owned by foreign governments. This case will make it more difficult for defendants to argue that the definition of "instrumentality" is an open question of law, and enforcement authorities are likely to treat the issue as settled, even in cases outside the Eleventh Circuit. From a compliance perspective, companies would therefore be wise to proceed under the assumption that the FCPA prohibits payments to government-owned and -controlled entities, even if those entities operate in a commercial arena. In practice, this has been the standard in compliance programs for some time given that the enforcement agencies have pressed this view for many years, even memorializing it in their 2012 Resource Guide to the US Foreign Corrupt Practices Act.22  

Whether or not the recipient of a payment is a "foreign official," however, may be becoming less significant from a compliance perspective. The Department of Justice and Securities and Exchange Commission have pursued numerous cases involving commercial bribery with no connection to a government, under the Travel Act or the accounting provisions of the FCPA. Relatedly, the anti-bribery laws of many other countries, such as the UK Bribery Act, prohibit commercial bribery. Thus, the analysis in Esquenazi is a key pronouncement regarding an important statute that has historically had few judicial interpretations, but its practical significance may be limited, particularly for global companies seeking to maintain clear compliance standards across jurisdictions.

All that said, given the dominant role of the government in this case, the outcome certainly could be different in other contested cases, for example in cases where the government may own less than a majority stake, or the function of the entity may be more tangential to the government. Thus, the court's fact-specific inquiry will be important in fully analyzing potential liability under the statute in cases to come.

Footnotes

1 United States v. Esquenazi, No. 11-15331, 2014 U.S. App. LEXIS 9096 (2d Cir. May 16, 2014), available at http://www.ca11.uscourts.gov/opinions/ops/201115331.pdf.

2 15 U.S.C. § 78dd-2.

3 Id. §78dd-2(h)(2)(A) (emphasis added).

4 Esquenazi, No. 11-15331 at 3.

5 Id. at 8.

6 Id

7Id. at 20.  

8 Id. at 20.

9 Minutes in Chamber Order at 9, United States v. Noriega, No. 10-01031 (C.D. Cal. Apr. 20, 2011).

10 United States v. Carson, No. 09-77, 2011 WL 5101701 at *3-4 (C.D. Cal. May 18, 2011).

11 Esquenazi, No. 11-15331 at 20.

12 Id. at 22-23.

13 Id. at 19-20 n.8.

14 Id.

15 Id. at 11, 13.

16 Id. at 18.

17 Id. at 14. 

18 15 U.S.C. § 78dd-2(h)(4)(A).

19 Esquenazi, No. 11-15331 at 23.

20 Id. at 32.

21 Id. at 30 n.12.

22 A Resource Guide on the US Foreign Corrupt Practices Act, at 20-21 (2012), available at http://www.justice.gov/criminal/fraud/fcpa/guide.pdf.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Lillian Howard Potter
Similar Articles
Relevancy Powered by MondaqAI
Sheppard Mullin Richter & Hampton
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Sheppard Mullin Richter & Hampton
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions