Defending its far-reaching view of the reach of the Foreign Corrupt Practices Act, the US Department of Justice has struck back at two convicted defendants who are challenging who is a “foreign official” under the 35-year-old global anti-corruption law. The closely-watched legal battle is the first case to take this key question before an appellate court.
In a 120-page brief filed August 21 with the US 11th Circuit Court of Appeals, in Atlanta, the Department vehemently rebuffs arguments by Joel Esquenazi and Carlos Rodriquez, who were convicted of FCPA and other violations in federal court in Miami last year. They argue that government-owned companies and their employees are outside the reach of the FCPA.
Esquenazi and Rodriquez, two former executives of Florida-based telecommunications company Terra, were convicted in October 2011 of paying $1.2 million in bribes to officials of Haiti Teleco, a government-owned telephone company in Haiti.
No violation if government-owned firm performs no ‘governmental function,’ appeal says
In their appeal, they argue that because Haiti Teleco operated as a company selling services and not as an agency performing a “governmental function,” it was not a government entity under the FCPA. Therefore, bribing its employees is not a violation of the US law.
Not so, the Justice Department replies. It says the Haitian government’s 97 percent ownership of Haiti Teleco through its national bank and control of the appointment of the board of directors, make the company’s employees foreign officials under the FCPA.
Haiti is not a rarity among nations that form and run commercial enterprises, which are common in many developing countries. These enterprises often serve as cesspools of corruption for the persons that run them and for the civilian or military government officials who appoint them.
That is one reason why the issue of who is a “foreign official” under the FCPA is important in the federal appellate case court in Atlanta. The case is likely to provide crucial guidance on navigating the compliance minefield that state-owned enterprises (SOEs) present.
“The main takeaway [of this brief] is that the safest course of action for compliance is to assume that state ownership will establish that the entity is an instrumentality in most cases,” says Matteson Ellis, who specializes in FCPA compliance in Latin America and is principal of Matteson Ellis Law, in Austin, Texas. “Assuming the worst can be the safest path.”
Court ruling will also impact financial institution approach to “PEPs”
It is not only commercial corporations that should be watching this case closely. Financial institutions, including, banks, broker-dealers, and insurance companies, should also prepare themselves to recalibrate their “politically exposed persons” (PEPs) definitions and monitoring systems. The case presents a clear example of the overlap and intersection of FCPA, anti-money laundering and Bank Secrecy Act compliance and enforcement.
US says FCPA’s terms, legislative intent are conclusive
Enacted in 1977, the FCPA makes it a crime to bribe “foreign officials” of “any department, agency, or instrumentality.” It does not explicitly define these terms, a fact that has allowed the Justice Department to take an expansive view of who is covered, especially during its accelerated enforcement in recent years.
In disputing “that Teleco was not an ‘instrumentality’ of… Haiti because it did not perform a ‘governmental function,’” the Justice Department made it clear it will continue to target payments to employees of SOEs as fair game for FCPA prosecutions.
“The prohibitions in the FCPA are expressed broadly and reflect Congress’s purpose to combat the problem of pervasive foreign bribery,” the department says in its brief. A “narrow construction of the term ‘instrumentality’” that leaves out SOEs “is inconsistent with the terms of the FCPA and Congressional intent,” it adds.
Five-point ‘instrumentality’ test may offer compliance guide
The Justice Department stops short of explicitly defining an “instrumentality” or “foreign official” in its brief. But, it hints that the jury instructions in the Esquenazi-Rodriquez trial are an acceptable test.
“What’s new is that the DOJ adopted the court’s standard for determining what counts as an instrumentality,” says Thomas Fox, a Houston attorney, who handles FCPA cases. In the August 2011 Miami trial the court instructed jurors to consider five factors to decide if Haiti Teleco was a government instrumentality under the FCPA:
- “Whether it provides services to the citizens and inhabitants of Haiti,”
- “Whether its key officers and directors are government officials or are appointed by government officials,”
- “The extent of Haiti’s ownership of Teleco, including whether the… government owns a majority of Teleco’s shares or provides financial support,” including subsidies and tax breaks,
- “Teleco’s obligations and privileges under Haitian law,” such as a government-granted monopoly, and
- “Whether Teleco is widely perceived… to be performing… governmental functions.”
These factors give companies a relatively clear roadmap for dealing with SOEs, says Fox.
“I think it’s an excellent test,” he says. “You have a court’s thinking on the issue, which is always helpful. These factors are not that esoteric or difficult to understand, and can be applied in a wide range of situations.”
Even with a straightforward test, it may still be simpler and safer for companies to take a blanket approach that treats all SOEs as instrumentalities and any of their employees as foreign officials, says Ellis.
Broad presence of SOEs overseas poses FCPA compliance hazards
“SOEs come in many different forms,” he says. “Some are heavily controlled by the state, others have minimal control. If compliance programs are designed to treat all state ownership as presenting a risk, companies avoid having to do their own analysis, which can be time consuming and ultimately uncertain. “
In many countries, SOEs represent a large share of the national gross domestic product, particularly in Latin America and Asia. A 2011 report by Clifford Chance, a British international law firm, found there are more than 100,000 SOEs in China alone. The report said SOEs accounted for nearly 62 percent of China’s GDP.
The report also found that in many Asian countries, including China, India and South Korea, it was common for SOEs to hold monopolies or near-monopolies in various major industries, including banking, oil and gas, transportation and telecommunications.
The Justice Department admits in its brief that SOEs are not uncommon in the US. Historically, the US government has formed corporations to carry out certain activities or provide commercial goods or services. They are widely understood to be branches of the US government, the brief argue.
“Foreign governments similarly perform certain tasks through SOEs, and placing those functions in SOEs does not mean that they are not performed on behalf of the foreign government,” the Justice Department brief states. “Defendants’ restrictive view of the scope of governmental functions effectively reads the statutory term “instrumentality” out of the FCPA.”
Uncertain outcome of case clouds DOJ’s pending guidance
Much is at stake for Esquenazi and Rodriquez in the appeal. Esquenazi received a record 15-year sentence last year, the longest FCPA sentence ever. Rodriguez received a seven-year term. They were found guilty of eight FCPA counts, 13 money laundering counts and one for wire fraud.
Their victory would create a major precedent for others in FCPA cases, but it appears such an outcome is a long shot. In at least four FCPA cases, judges have dismissed challenges to the definition of foreign official or instrumentality.
Whatever the 11th Circuit rules, it may complicate the Justice Department’s pending guidance on FCPA compliance, says Sonia Delman, a Washington, DC attorney at Miller & Chevalier, who specializes in FCPA issues. “The DOJ’s guidance is expected this September, before the October meeting on the OECD Convention Against Corruption,” says Delman.
“We’ve been waiting on this guidance for some time now,” she continues, “but if this ruling conflicts with that guidance, it would certainly take precedence.”