Reed Smith Client Alerts

The U.S. Supreme Court on Monday, October 6, 2014, chose not to take an appeal regarding a vague and potent provision of the United States’ international bribery statute, the Foreign Corrupt Practices Act (“FCPA”).

The FCPA generally criminalizes the corrupt bribery of a non-U.S. “foreign official” for business purposes by American businesses and individuals or by companies traded on American stock exchanges.

“Instrumentality” of a “Foreign Government” The FCPA’s definition of “foreign official” includes “any officer or employee of a foreign government or any department, agency, or instrumentality thereof.” 15 U.S.C. § 78dd-2(h) (emphasis added).

The “instrumentality” term has aggressively been used by American prosecutors to go after the alleged bribery or attempted bribery of those who operate in a quasi-governmental capacity, rather than directly for the foreign government, such as in now-privatized industries that were formerly under public control.

This grey area places pressure on corporations already rightly concerned about FCPA liability to conduct due diligence on customers and business partners to uncover any level of foreign government involvement in their operations.

Eleventh Circuit’s Definition of “Instrumentality” The Supreme Court’s denial of certiorari leaves untouched the U.S. Court of Appeals for the Eleventh Circuit’s definition of an “instrumentality” as “an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own.” United States v. Esquenazi, 752 F.3d 912, 925 (11th Cir. 2014). We previously discussed the Eleventh Circuit’s Esquenazi opinion in Client Alert 2014-174.

The appellate court provided additional, but certainly not concrete, guidance regarding the “control” and “function” prongs of this definition.

The Eleventh Circuit referenced the OECD Anti-Bribery Convention’s definition of “control” in holding that term to be measured by “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, if any, go directly into the governmental fisc, and, by the same token, the extent to which the government funds the entity if it fails to break even; and the length of time these indicia have existed.” Id.

In determining whether an entity performs a government function, the Eleventh Circuit highlighted the following factors: “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 in the foreign country; and whether the public and the government of that foreign country generally perceive the entity to be performing a governmental function.” Id. at 926.

The Teleco Bribery Prosecution The two individual defendants in the Eleventh Circuit case, Esquenazi and Rodriguez, were co-owners of Terra Telecommunications Corp., a Florida company that bought phone minutes in foreign countries and resold the minutes to customers in the United States. They were convicted of bribing officers at Telecommunications D’Haiti, S.A.M. (“Teleco”), which prosecutors put on evidence to show had a monopoly over Haitian telecommunications services, was owned by Haiti’s central bank, had its top position chosen by the Haitian president, and received significant tax breaks, among other things.

Shortly after the convictions in the trial court, the Haitian Prime Minister sent written declarations that “Teleco has never been and until now is not a State enterprise,” and that “there exists no law specifically designating Teleco as a public institution.” But Esquenazi and Rodriguez’s attempt to obtain a new trial was denied.

The Eleventh Circuit affirmed Esquenazi and Rodriguez’s convictions for conspiracy, violating the FCPA and money-laundering, as well as their sentences: 15 years imprisonment for Esquenazi, the company’s President, CEO and majority owner, and seven years for Rodriguez, the minority owner and Executive Vice President of Operations. Esquenazi’s 15-year sentence is the longest term of imprisonment in the history of FCPA prosecutions. The defendants were also ordered to pay $2.2 million in restitution each, and jointly forfeit $3,093,818.50.

Influential Opinion, Unanswered Questions While the Eleventh Circuit’s definition of an FCPA “instrumentality” is binding only in criminal prosecutions originating in Florida, Georgia or Alabama, the relative rarity of opinions from U.S. Courts of Appeal regarding the FCPA makes this an influential decision nationwide. The lack of case law on the subject is attributable to prosecutors’ ability to obtain plea agreements from businesses and individuals alike that face criminal liability for alleged FCPA violations.

The Esquenazi opinion establishes the list of non-exclusive factors that U.S. courts – and, therefore, federal prosecutors – will analyze in deciding whether an entity is an FCPA “instrumentality.” Left unanswered, however, is the weight given to each factor, and the number of factors that must be present to find that an ostensibly private company is actually one that “performs a function the controlling government treats as its own.” Esquenazi was not a close case: the facts regarding the Teleco bribery hit a majority of the Eleventh Circuit’s factors. This makes it difficult to determine from Esquenazi whether just one or two factors – majority ownership by the government, for example – may be dispositive.

Companies concerned about FCPA exposure should establish or continue a risk-based approach to anti-corruption compliance. This includes setting a code of conduct strictly prohibiting bribery by all employees and agents, providing adequate training to ensure compliance, and performing due diligence of customers and business partners in high-risk locations to determine whether any of the Esquenazi factors are present. If an FCPA violation is suspected, independent outside counsel familiar with the FCPA and other related laws should be engaged to conduct an investigation and advise on the proper course forward.

 

Client Alert 2014-263