Court Clarifies Foreign Government “Instrumentality” Under FCPA

FCPA/Antibribery Update

Date: May 21, 2014

A recent decision by the Eleventh Circuit Court of Appeals has clarified – for the first time at the appellate level – what constitutes an “instrumentality” of a foreign government for purposes of the Foreign Corrupt Practices Act. In United States v. Esquenazi, et al., the court found that a state-owned telecommunications company was, given the particular facts of the case, an instrumentality of a foreign government and, therefore, bribes paid to the company’s executives fell within the scope of the FCPA. In light of this case, when transacting with foreign entities, U.S. companies should carefully consider the extent to which the Esquenazi factors are present, such that the foreign entities might potentially be considered instrumentalities of a foreign government.

FCPA Prohibition of Corrupt Payments

The FCPA, 15 U.S.C. § 78dd-1, et seq., prohibits payments to any foreign official for the purpose of influencing that official to obtain or retain business. The FCPA defines a foreign official as an officer or employee of any foreign government or any department, agency “or instrumentality” thereof, but it does not define instrumentality. Although the U.S. Department of Justice has long advocated that instrumentality be interpreted broadly, until now no appellate court had defined the term.

Esquenazi Case

In Esquenazi, the defendants owned a Florida company, Terra Telecommunications Corp., that purchased telephone minutes from foreign vendors and resold the time in the United States. Among Terra’s vendors was Teleco, a Haitian company that, at its inception, was given a monopoly on telecommunications services in Haiti. The president of Haiti appointed the members of Teleco’s board of directors, and 97 percent of Teleco’s stock was owned by Haiti’s central bank. Esquenazi admitted that he had paid bribes to Teleco executives, but argued at trial that Teleco was not an instrumentality of the Haitian government and, therefore, the payments were not a crime under the FCPA.

Appellate Court Holding

The Eleventh Circuit held that instrumentality should be defined as an entity controlled by a foreign country’s government that performs a function that the controlling government treats as its own. Thus, the definition of instrumentality is governed not by U.S. understanding of government functions but rather by the foreign government’s understanding.

The court acknowledged that this was a fact-intensive inquiry and indicated that the following factors should be considered:

  • The foreign government’s formal designation of the 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 entity’s profits go to the foreign government’s treasury or whether the foreign government funds the entity’s losses
  • The length of time these indicia have existed
Implications for Companies

A company that conducts business overseas, particularly in high-risk markets such as Asia and the Middle East, needs to ensure that it has a robust compliance program in place, which should include regular training for company personnel and third-party agents. The program should also include periodic audits of company policies, procedures and practices. A key objective of training and audits is to flag high-risk transactions for review and assessment by the company’s compliance and legal teams. In this regard, in light of the Esquenazi case, it is critical that a company’s compliance program be informed by comprehensive knowledge of government structure and operations in the foreign countries in which its business is conducted.

FOR MORE INFORMATION

For more information on this case, effective compliance programs or how overseas business operations might be affected by the FCPA, please contact any member of Thompson Hine’s FCPA/Antibribery practice:

Norman A. Bloch
Partner, White Collar Crime Group
212.908.3942
Norman.Bloch@ThompsonHine.com

Thomas J. Collin
Partner, Business Litigation Group
216.566.5509
Tom.Collin@ThompsonHine.com

Linn S. Harson
Partner, Corporate Transactions & Securities Group
937.443.6842
Linn.Harson@ThompsonHine.com

James A. Losey
Partner, International Trade & Customs Group
202.263.4135
James.Losey@ThompsonHine.com

John R. Mitchell
Partner, White Collar Crime Group
216.566.5847
John.Mitchell@ThompsonHine.com

David A. Wilson
Partner, White Collar Crime Group
202.263.4161
David.Wilson@ThompsonHine.com

Matthew David Ridings
Associate, Antitrust, Competition & Distribution Group
216.566.5561
Matt.Ridings@ThompsonHine.com

Samir D. Varma
Associate, International Trade & Customs Group
202.263.4136
Samir.Varma@ThompsonHine.com

Visit our website for further information on our FCPA/Antibribery practice.

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