Eleventh Circuit Is First US Appeals Court To Define

Keywords: FCPA risk, anti-bribery, foreign officials, DOJ, SEC, enforcement

The US Court of Appeals for the Eleventh Circuit has provided useful guidance on the meaning of the term "instrumentality" as used in the Foreign Corrupt Practices Act ("FCPA"). In a landmark decision released on May 16, the court established the criteria for when companies with ties to foreign governments and their employees may be considered "foreign officials" for purposes of the anti-bribery law. The decision—the first by a federal appeals court to consider the question—means that companies managing FCPA risk oversees must closely monitor business conducted with companies associated with foreign governments.

The FCPA prohibits the bribery of "foreign officials." That term is defined as "any officer or employee of a foreign government or any department, agency, or instrumentality thereof." The Department of Justice ("DOJ") and Securities and Exchange Commission ("SEC") have long pursued FCPA cases under a broad definition of "instrumentality," and the Eleventh Circuit's decision, United States v. Esquenazi, No. 11-15331 (11th Cir. May 16, 2014), endorses the government's aggressive enforcement strategy.

The case involved Joel Esquenazi and Carlos Rodriguez, two former executives of Terra Telecommunications Corp., who were found guilty for their roles in a scheme to bribe officials at Haiti's state-owned telecom company, Haiti Teleco. Mr. Esquenazi received a 15-year sentence—the longest ever imposed under the FCPA. The defendants argued that the term instrumentality should be limited to entities that perform "traditional, core government functions," and that, therefore, Haiti Teleco did not qualify as an instrumentality of Haiti's government.

The Eleventh Circuit disagreed, instead holding that an instrumentality is any "entity controlled by the government of a foreign country that performs a function the controlling government treats as its own."

According to the decision, what constitutes "control" and what constitutes "a function the government treats as its own" are fact-based questions. And, while the court noted that "[i]t would be unwise and likely impossible to exhaustively answer them in the abstract," the opinion provided a non-exclusive list of "some factors that may be relevant" to deciding those issues. First, to decide if the government controls an entity, courts and juries should look to, among other factors:

The foreign government's formal designation of that 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 go to the government;
The extent to which to government funds the entity if it fails to break even; and
The length of time these factors have existed.

The Eleventh Circuit did not "cut these factors from whole cloth," rather they were lifted from commentary to the OECD Anti-Bribery Convention the United States ratified in 1998. The court reasoned that by ratifying the OECD convention and amending the FCPA to comply with the OECD's strictures, Congress evidenced its belief that the term "instrumentality" was already broad enough to include state-owned entities like Haiti Telco.

The court then addressed factors to consider in deciding if the entity "performs a function the government treats as its own." Again, citing the OECD Anti-Bribery Convention, the Eleventh Circuit stated that courts and juries should examine whether:

The entity has a monopoly over the function it exists to carry out;
The government subsidizes the costs associated with the entity providing services;
The entity provides services to the public at large in the foreign country; and
The public and the government of that foreign country generally perceive the entity to be performing a governmental function.

Applying those factors, the Eleventh Circuit held that the evidence was sufficient for the jury to conclude that Haiti Telco was an instrumentality, and that the jury was properly instructed on the issue. The court's decision fully affirmed the convictions and sentences of Esquenazi and Rodriguez.

As the first appellate court to consider the reach of the term "instrumentality," the Eleventh Circuit recognized that its opinion would provide much-needed guidance to "both corporations and the government." Corporations operating in foreign jurisdictions should reexamine their compliance polices and business practices in light of the Esquenazi decision to ensure that they properly account for the broadened understanding of instrumentality under the FCPA.

Originally published May 19 2014.

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