As the Department of Justice and the Securities and Exchange Commission have stepped up enforcement of the Foreign Corrupt Practices Act, these agencies also have increased prosecution of cases involving improper payments to employees of state-owned and state-controlled entities. DOJ and SEC consider such entities to be foreign government "instrumentalities" within the meaning of the FCPA and, therefore, their employees to be "foreign officials" under the statute. The breadth of such an interpretation has led many companies and their employees to question the act's reach. Indeed, the U.S. Chamber of Commerce has spearheaded an effort to reform the FCPA by, among other things, clarifying the term "foreign official" to achieve fairer and more predictable results.
A recent judicial decision has now addressed, in part, the government's interpretation and provided some guidance for how to assess whether a state-owned or state-controlled company can be considered an "instrumentality" of a foreign government and thus whether such a company's employees are "foreign officials." In a rare FCPA case that has gone to trial against a company and individuals, the U.S. District Court for the Central District of California issued on April 20 a written opinion in United States v. Noriega et al., 2:10-cr-01031 (the Noriega Opinion), addressing the issue of whether a state-owned entity is always outside the FCPA's reach. Because of the posture of the defense motion, the court was not asked to address when such an entity actually is within the definition of "instrumentality," but only if there was no conceivable set of factual circumstances in which that could be proved. The court found:
- That a foreign state-owned or state-controlled corporation can be a government "instrumentality" within the meaning of the FCPA, and therefore that an employee of such a corporation can be a foreign official within the meaning of the statute;
- That the following characteristics can be considered in determining whether any particular state-owned or state-controlled corporation is a foreign government "instrumentality" under the FCPA:
- Whether the entity provides a service to the citizens of the jurisdiction;
- Whether key officers and directors are, or are appointed by, government officials;
- Whether and to what extent the entity is financed through government appropriations;
- Whether the entity is vested with and exercises exclusive or controlling power to administer its designated functions; and
- Whether the entity is widely perceived and understood to be performing official (i.e., governmental) functions.
Factual Background and the Parties' Arguments
The American defendants in the Noriega case--Lindsey Manufacturing Company and several of its officers--are accused of violating the FCPA by funneling bribes to an electric utility company allegedly wholly-owned by the Mexican government (the Comisión Federal de Electricidad, or CFE), through payments to a Mexican sales representative.
In a motion to dismiss the indictment, the defendants argued that the alleged bribes could not violate the FCPA as a matter of law because "under no circumstances can a state-owned corporation be a department, agency, or instrumentality of a foreign government." Therefore, the defendants asserted, an employee of a state-owned corporation never can be a foreign official under the FCPA.
The Plain Language of the Statute
Under the FCPA, a "foreign official" is any "officer or employee of a foreign government or any department, agency, or instrumentality thereof, or of a public international organization, or any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality, or for or on behalf of any such public international organization." 15 U.S.C. § 78dd-1(f) (1), 78dd-2(h)(2), and 78dd-3(f)(2). Because CFE clearly is not a "department" or "agency" of a foreign government, both parties and the court focused on whether it was a foreign government "instrumentality," a term that the FCPA does not define. Defendants argued that "instrumentality" should be read to include only those entities that share qualities with both agencies and departments. The government asserted that state-owned or state-controlled corporations share at least some qualities with agencies and departments (e.g., they exist at the pleasure of the government and are oriented to public policy), such that at least some such corporations could be considered "instrumentalities" under the law.
The court agreed with the government and set out the "non-exclusive list" of "defining" agency and department characteristics that would render a state-owned or state-controlled entity a government instrumentality, as noted above. The court concluded that CFE exhibits all of the enumerated characteristics.
The Structure, Object, and Policy of the FCPA
Each party also asserted that its position was most consistent with the FCPA's structure and policy objectives. Thus, the government argued that the term "instrumentalities" should be construed broadly because the 1998 amendments to the FCPA were expressly enacted to ensure that the statute comported with the 1997 Organization for Economic Co-operation and Development Convention on Combating Bribery of Foreign Officials in International Business Transactions (the OECD Convention). The OECD Convention in turn includes "public enterprises" among the list of entities for which foreign officials may work. Defendants countered that Congress' failure to amend the FCPA in 1998 to include employees of "public enterprises," and the fact that the FCPA and its amendments always have been intended to address attempts to influence governmental, not corporate, action, support a narrower definition of the term "instrumentality." The court agreed with the government, but also concluded that even under the defendants' proposed definition of "instrumentality," CFE clearly falls within the scope of the statute as a matter of statutory text.
Although the court rejected the broad assertion that state-owned corporations are never, as a matter of law, "instrumentalities" of foreign governments under the FCPA, it left open the possibility that some state-owned or state-controlled corporations and their employees may be beyond the FCPA's reach. The list of characteristics of government agencies and departments that the court articulated provides a framework for evaluating whether a state-owned or state-controlled corporation is such an entity.
Presumably those entities that look most like private-sector corporations--those in which the government's ownership stake is small, government funding is minimal, and which compete in an open marketplace against privately-held competitors--would have the best case for not being considered an "instrumentality" of a foreign government. That would be consistent with the OECD Convention, which states that an enterprise that "operates on a normal commercial basis in the relevant market . . . without preferential subsidies or other privileges," is not to be deemed a public enterprise within the cognizance of the OECD Convention. That said, it is the rare state-owned or state-controlled entity that will meet this test.