Eleventh Circuit Broadly Defines FCPA “Instrumentality” To Include Commercial BusinessesJuly 9, 2014 – Articles White Collar Defense & Compliance Blog
At long last, a federal circuit court has stepped forward to provide guidance as to when an entity is an “instrumentality,” such that its employees are “foreign officials” under the FCPA. In a recent ruling, the Eleventh Circuit held that it is a violation to bribe an employee of a commercial business if that commercial business is controlled by foreign state and performs a function that the foreign government treats as its own. United States v. Esquenazi, 2014 WL 1978613 (11th Cir., May 16, 2014)
In Esquenazi, the Eleventh Circuit reviewed the conviction of the two co-owners of Terra Telecommunications Corp., a Florida company which purchased phone time from foreign vendors and resold the minutes to customers in the United States, for violations of the FCPA. The defendants were found to have bribed the Director of International Relations of Telecommunications D’Haiti, S.A.M. (Teleco), a Haitian company with connections to the Haitian government. The relationship between Teleco and the Haitian government was a disputed issue in the case.
The FCPA prohibits bribery of a “foreign official”, which is defined as “any officer or employee of a foreign government or any department, agency, or instrumentality thereof.” 15 U.S.C. §§ 78dd-2(h)(2)(A) (emphasis added). At issue in Esquenazi was whether Teleco was an “instrumentality” under the FCPA. The FCPA does not define “instrumentality,” and according to the Esquenazi court, no previous circuit court had defined it, either.
Thus, the Eleventh Circuit in Esquenazi undertook to define an “instrumentality” under section 78dd-2(h)(2)(A) of the FCPA as “an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own.” Thus, a commercial business becomes an “instrumentality” subject to the FCPA when it is controlled by a foreign state and serves a public purpose.
The DOJ failed to convince the court to automatically convert any business with government ownership into an instrumentality. Instead, the Eleventh Circuit proffered a multi-factor test to determine whether a commercial enterprise should be considered an “instrumentality” under the FCPA. First, according to the court in Esquenazi, the entity must be “under the control or dominion of the government to qualify as an ‘instrumentality’ within the FCPA’s meaning . . . and must be doing business with the government.” The Eleventh Circuit provided the following factors to consider when deciding if the foreign government “controls” an entity:
To decide if the government “controls” an entity, courts and juries should look to 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.
The second element of the “instrumentality” test in Esquenazi is whether “the entity performs a function the government treats as its own.” For this prong, the Eleventh Circuit provided the following factors to consider:
Courts and juries should examine 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.
The Esquenazi court found that Teleco met the test for an “instrumentality” under the FCPA, and affirmed the convictions of the co-owners of Terra.
The takeaway here is that companies that deal with commercial businesses with close ties to foreign governments should ensure that proper FCPA compliance measures are in place. Those compliance measures should take into account that employees of entities which meet the Eleventh Circuit’s “instrumentality” test could rise to the level of “foreign officials” under the FCPA, and thus dealings with those employees should be FCPA compliant.