United States: When Is A Corporate Officer A "Foreign Official"?

Under the FCPA, a Foreign Corporation Can Still Be a Government Instrumentality

Does the Distinction Matter?

On May 16, 2014, in Esquenazi v. United States, a United States federal appellate court upheld the criminal convictions of two American business owners under the Foreign Corrupt Practices Act ("FCPA"), which prohibits payments to foreign government officials for the purpose of "obtaining or retaining business."1

This Stroock Special Bulletin looks at the Esquenazi decision, in which the court also provided some guidance – though not full clarity – on when employees of state-owned or controlled enterprises qualify as foreign officials under the FCPA.2

Background

Joel Esquenazi and Carlos Rodriguez co-owned Terra Telecommunications Corporation ("Terra"), a Florida telecommunications company that purchased phone time from foreign vendors and resold the minutes to U.S. customers. Esquenazi was the president and CEO, and Rodriguez was the executive vice president of operations. Telecommunications D'Haiti, S.A.M. ("Teleco") was a foreign vendor from which Terra purchased minutes.

When Terra became indebted to Teleco, Teleco's Director General proposed that Terra funnel side payments to him in exchange for his agreeing to alleviate Terra's debt. Terra accepted his offer, and made payments from about November 2001 until March 2005 to the Director General and other Teleco officials. To conceal the illicit nature of the payments, Terra created and routed the bribes through intermediate sham companies under "consulting" and "commission" agreements.

Esquenazi and Rodriguez were convicted by a jury in 2011 on 21 counts of conspiracy, money laundering, and violating the FCPA. Because of the FCPA allegations and the need to prove that "foreign officials" received payments, Teleco's relationship to the Haitian Government was at issue. Thus, the prosecution presented expert testimony that: (1) Teleco was owned and controlled by the Haitian government at the time the bribes were made (i.e., until it was privatized between 2009 and 2010); (2) before it was privatized, Teleco was 97 percent owned by one of Haiti's state-owned national banks, and the Haitian president appointed all of its board members; and (3) in 2008, Haiti enacted an anti-corruption law that expressly cited Teleco as a public administration and required all of its agents to declare their assets to avoid secret bribes. Although the prime minister of Haiti submitted a declaration post-trial stating that "there exists no law specifically designating Teleco as a public institution," the district court denied motions by the defendants for a judgment of acquittal and a new trial on the basis of the prime minister's declaration.

Mr. Esquenazi received a sentence of 15 years in prison, the longest FCPA-related incarceration imposed to date; Mr. Rodriguez received a sentence of 7 years. Both appealed their convictions to the Eleventh Circuit Court of Appeals.

The Eleventh Circuit's Opinion

In an opinion unanimously adopted by a three-judge panel, the Eleventh Circuit affirmed the convictions of both Esquenazi and Rodriguez.

On appeal, the main argument that Esquenazi and Rodriguez advanced – unsuccessfully – was that the payments to Teleco officials were not unlawful under the FCPA, because the statute defines a foreign official as "any officer or employee of a foreign government or any department, agency, or instrumentality thereof" (emphasis added).3 Esquenazi and Rodriguez argued that Teleco was not an instrumentality of the Haitian government, and its officials therefore were not "foreign officials" under the FCPA.

Because no other federal appellate court has addressed the issue, the Eleventh Circuit looked to international as well as domestic law to assess what might qualify an entity as an "instrumentality" under the FCPA. Although the court cited U.S. Supreme Court and other Eleventh Circuit decisions on whether various entities qualified as government instrumentalities under U.S. law,4 it relied more heavily on the Organisation of Economic Co-operation and Development ("OECD")'s 1997 Anti-Bribery Convention ("the Convention"). The Convention was one of the main catalysts for anti-corruption legislation worldwide, and prompted amendments to the FCPA in 1998 to conform to the Convention's provisions.

The court noted that the Convention defines "foreign public official" as "any person exercising a public function for a foreign country, including for a . . . public enterprise," and that the accompanying OECD commentary defined "public enterprise" as "any enterprise . . . over which a government, or governments, may, directly or indirectly, exert a dominant influence." The court further considered a statement in the commentary that "[a]n official of a public enterprise shall be deemed to perform a public function unless the enterprise operates on a normal commercial basis in the relevant market, i.e., on a basis which is substantially equivalent to that of a private enterprise, without preferential subsidies or other privileges." Based on this language, and on the fact that Congress left the FCPA's definition of "instrumentality" alone when it amended the statute in 1998, the court reasoned that Congress must have viewed the term "instrumentality" in the FCPA as consistent with the Convention's definition of a "public enterprise."5

Relying on the above argument, the court held that Teleco was a government instrumentality under the FCPA. The court did not end there, however. Noting that "Teleco would qualify as a Haitian instrumentality under almost any definition we could craft," the court proceeded to articulate written "guidance" for "both corporations and the government for ex ante direction about what an instrumentality is."6 The court's guidance stated that an entity is a government instrumentality under the FCPA if it:

  1. is "controlled by the government of a foreign country"; and
  2. "performs a function the controlling government treats as its own."7

The court then provided a non-comprehensive list of factors to which courts, businesses, and the U.S. government should look to determine whether an entity meets these criteria.

  1. Control by a government:To determine whether an entity is foreign government-controlled, the court held that the following factors should be considered relevant:

    • "[T]he foreign government's formal designation of that entity";
    • "[W]hether the government has a majority interest in the entity";
    • "[T]he government's ability to hire and fire the entity's principals";
    • "[T]he extent to which the entity's profits, if any, go directly into the governmental fisc";
    • "[T]he extent to which the government funds the entity if it fails to break even"; and
    • "[T]he length of time these indicia have existed."8
  2. Performing a government function:To determine whether the entity performs a function that the government treats as its own, the court held that the following factors should be considered relevant:

    • "[W]hether the entity has a monopoly over the function it exists to carry out";
    • "[W]hether the government subsidizes the costs associated with the entity providing services";
    • "[W]hether the entity provides services to the public at large in the foreign country"; and
    • "[W]hether the public and the government of that foreign country generally perceive the entity to be performing a government function."9

The court emphasized that the above factors were intended as a "helpful, non-exhaustive list," and cautioned against exclusive reliance on the court's guidance.

How Esquenazi Changes – and Does Not Change – the FCPA Legal Landscape

The Eleventh Circuit is currently the only United States appellate court that has addressed the issue of who qualifies as a foreign official under the FCPA. As a result, and because very few FCPA cases make it to trial, Esquenazi will probably be the most authoritative opinion on the issue for some time.

That said, the factor-based test adopted in Esquenazi is not a particularly earth-shattering development. Although the issue was one of first impression for a federal appellate court, two lower U.S. courts had addressed the definition of "foreign official" before the Esquenazi decision. These courts similarly held that a number of factors belong in an analysis of whether an entity is an instrumentality under the FCPA, including the degree of financial control the government has over an entity, the degree of control the government has over the governance of an entity (e.g., the authority to appoint key directors and officers), and whether the entity is perceived as performing government functions.10

The U.S. Department of Justice ("DOJ") took a similar approach in its Opinion Release No. 12-01,11 which considered whether a member of a royal family could be a foreign official under the FCPA, and concluded that the answer may depend on: (i) "how much control or influence the individual has over the levers of governmental power . . ."; (ii) whether the government "characterizes an individual or entity as having governmental power"; and (iii) "whether and under what circumstances an individual (or entity) may act on behalf of, or bind, a government."12

The factors the court listed in Esquenazi are similar, but not necessarily identical. For example, the court in Esquenazi appears to have "flipped" the first of the factors in Opinion Release 12-01 by focusing on the level of government control over the entity, rather than the entity's influence on the government, but Esquenazi presented a different factual scenario. In a situation involving a particular individual or entity (such as the royal family member in Opinion Release 12-01), the focus on the individual or entity's influence on the government – rather than vice versa – may be more appropriate. We note this difference to emphasize that the test of who may be a "foreign official" remains far from bright-line, even after Esquenazi.

We also note that the DOJ and U.S. Securities & Exchange Commission ("SEC") 2012 Resource Guide to the U.S. Foreign Corrupt Practices Act ("Guide") states that "DOJ and SEC have pursued cases involving instrumentalities since the time of the FCPA's enactment."13 The Guide includes a "non-exclusive" list of no less than 11 factors approved by courts in final jury instructions for determining when an entity is properly deemed an instrumentality of the state. The Guide adds that no factor is dispositive, but "as a practical matter, an entity is unlikely to qualify as an instrumentality if a government does not own or control a majority of its shares."14

The Guide also notes, though, that "there are circumstances in which an entity would qualify as an instrumentality absent 50% or greater foreign government ownership, which is reflected in the limited number of DOJ or SEC enforcement actions brought in such situations."15 Indeed, in at least one FCPA enforcement action, DOJ asserted that a subsidiary that was 49 percent owned by a foreign government entity was a "government instrumentality."16 It is instructive, therefore, that the Eleventh Circuit did not belabor the ownership issue in Esquenazi. As noted by U.S. courts and DOJ, no one factor – including ownership – is dispositive.

Why the Decision Matters for U.S. (and Non-U.S.) Companies

Even if Esquenazi does not represent a sea change in the legal interpretation of the FCPA, its focus on how the government treats the function that the entity performs could have particular implications for companies that conduct business in specific parts of the world. For example, in China, the government plays a significant role in regulating the economy. Whether Chinese companies all perform functions that the Chinese government considers government functions is debatable, but it is a question that will merit careful scrutiny by businesses and legal counsel both in the U.S. and abroad.

U.S. companies in specific industry sectors must also continue to be mindful that industries treated as private sector entities in the U.S. may be treated as instrumentalities of the state in some foreign jurisdictions. In Esquenazi,Teleco and Terra were doing business in the telecommunications sector, but other sectors such as health care, banking, energy, transportation, and heavy industry should be paying close attention to the considerations outlined by the Esquenazi court in assessing whether a foreign entity performs a government function.

Moreover, the decision has importance for non-U.S. companies that do business with U.S. companies. Although foreign persons are plainly at risk of prosecution if they or their agents engage in any act in furtherance of a foreign bribe "while in the territory of the United States," the DOJ and SEC also maintain that foreign companies or their representatives are subject to U.S. jurisdiction under the FCPA if, for example, they conspire with U.S. companies or individuals to obtain business overseas by paying bribes – even without setting foot in the United States. Like U.S. persons, foreign parties may also risk liability under other U.S. criminal statutes for conduct in connection with bribery outside the U.S., including but not limited to mail and wire fraud, criminal conspiracy, and aiding and abetting or causing a violation of U.S. law. For example, some of the Teleco officials who received bribes, although Haitian citizens, were convicted of money laundering under U.S. law.

Finally, the effort to combat corruption is a globalizing campaign. Not only are more nations (such as Mexico and Brazil) enacting and enforcing anti-bribery laws against corrupt actors within their borders, other nations (for example, the United Kingdom and Canada) are joining the U.S. in enacting laws through which they can assert jurisdiction against individuals and companies based on their activities abroad.

The Best Compliance Programs Ban Bribery Outright

Whatever value the decision may have in defining the reach of the FCPA, Esquenazi probably has limited practical value for most companies.Factually, the conduct at issue was fairly egregious; Esquenazi and Rodriguez both occupied senior positions and were apparently closely involved with the Teleco officials who were receiving payments.17 In our experience, U.S. individuals and companies that do business abroad are unlikely to run into problems because they are involved in plots to funnel side payments overseas to individuals who promise to alleviate their businesses' debts. Moreover, teasing out the differences between government instrumentalities and commercial corporations may be a low-yield exercise as a practical matter, because prosecutors in an increasing number of jurisdictions pursue commercial and public corruption with equal vigor.

Although the conduct that occurred in Esquenazi could occur elsewhere, FCPA problems are more likely to arise because businesses: (a) fail to make clear to their employees and business associates that bribes will not be tolerated, even if they are commonplace in the local culture and are perceived within that culture as a "cost of doing business"; (b) fail to conduct adequate due diligence on local business partners and agents and incorporate safeguards against bribery in business agreements; or (c) fail to provide adequate legal and compliance resources to employees and third party intermediaries "on the ground" when they encounter demands or pressures to pay bribes, leading to "self-help" remedies that can prove costly. Even if a company escapes criminal prosecution, the SEC can and does prosecute publicly traded companies under the FCPA for failing to maintain accurate books and records and adequate internal accounting controls.18 Bribes are rarely recorded as such, and bribery, in and of itself, will invite scrutiny of an issuer's internal controls.

Put bluntly, determining whether the intended recipient of a bribe is or is not a government official is an increasingly irrelevant exercise. Bribery is illegal in most, if not all, U.S. and foreign jurisdictions, regardless of whether the recipient of the bribe is a government official – and new laws, like the U.K. Bribery Act 2010, expressly prohibit commercial bribery as well as the bribery of public officials. From a business standpoint, the most useful lesson from the Esquenazi decision may be that U.S. companies and individuals, and their foreign business partners, must work to develop and maintain robust policies that prohibit bribery across the board, including adequate due diligence requirements for vetting third party agents abroad. As those who do business globally know, avoiding government investigations and prosecution altogether is infinitely preferable to enduring the personal and financial costs of trying to build a defense on the nuances of the FCPA.

By Christopher R. Brewster and Gregory T. Jaeger, Special Counsel, and Amelia J. Schmidt, associate, in the National Security/CFIUS/Compliance Practice Group of Stroock & Stroock & Lavan LLP.

Footnotes

1. 15 U.S.C. § 78dd-1(a).

2. Esquenazi v. United States, No. 11-15331 (11th Cir. May 16, 2014).

3. 15 U.S.C. § 78dd-1(f)(1)(A).

4. Esquenazi, No. 11-15331, at 11-13, 21-23 (citing Brentwood Academy v. Tennessee Secondary School Athletic Association, 531 U.S. 288 (2001); Lebron v. Nat'l R.R. Passenger Corp., 513 U.S. 374 (1995); Cherry Cotton Mills, Inc. v. United States, 327 U.S. 536 (1946); Reconstruction Finance Corp. v. J.G. Menihan Corp., 312 U.S. 81 (1941); Edison v. Douberly, 604 F.3d 1307 (11th Cir. 2010)).

5. Esquenazi, No. 11-15331, at 14-17 (emphasis added).

6. Id. at 20.

7. Id.

8. Id. at 21. Id. at 22-23.

9. See United States v. Aguilar, 783 F. Supp. 2d 1108, 1115 (C.D. Cal. 2011); United States v. Carson, No. 09-cr-00077 (C.D. Cal. 2011).

10. Opinion Release No. 12-01, available at http://www.justice.gov/criminal/fraud/fcpa/opinion/2012/1201.pdf .

11. Id.

12. U.S. Dep't of Justice, Criminal Division, and U.S. Securities & Exchange Commission, Enforcement Division, A Resource Guide to the U.S. Foreign Corrupt Practices Act (Nov. 14, 2012), at 20, available at http://www.justice.gov/criminal/fraud/fcpa/guide.pdf.

13. Id. at 21.

14. Id. (citing prosecution of a French issuer for bribery of a Malaysian telecommunications company in which the Malaysian government held a minority share, but retained veto authority over "important operational decisions").

15. See United States v. Kellogg Brown & Root LLC, No. H-09-071 (S.D. Tex. Feb. 6, 2009).

16. See Esquenazi, No. 11-15331, at 34 -35 (discussing sufficiency of the evidence that the defendants knew Teleco was a government instrumentality).

17. 15 U.S.C. §§ 78m(b)(2)(A), (B). The FCPA applies to "issuers," which are defined as those entities issuing registered securities on U.S. stock exchanges, or required to file reports under the Exchange Act.

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