Last month, the 11th Circuit Court of Appeals issued a ground-breaking decision on a Foreign Corrupt Practices Act case that will have lasting effects and provides some clarity on the definition of an important aspect of the law—what constitutes a “foreign official.”

In an opinion released on May 16, the court upheld the convictions of Joel Esquenazi and Carlos Rodriguez for violations of the Foreign Corrupt Practices Act (FCPA) and certain U.S. anti-money laundering (AML) laws.

The two had engaged in a long-running bribery scheme with the Haitian telephone company, Telecommunications d'Haiti. The pair were convicted and sentenced to lengthy jail terms—15 years for Esquenazi and 7 years for Rodriguez.

This opinion was the first time that a court of appeals had reviewed the FCPA question of what is an “instrumentality” under the Act. Both defendants had argued that (1) “only an actual part of the government would qualify as an instrumentality” and (2) the FCPA should be construed to encompass only foreign entities performing “core” governmental functions such as departments or agencies. The court rejected both arguments. As to the first argument, the court said “that contention is too cramped and would impede the “wide net over foreign bribery” Congress sought to cast in enacting the FCPA.” The court rejected several points that the defense raised in the second argument as well.

The ruling was ... a watershed moment for the Justice Department in upholding a position, which the government has long avowed in FCPA enforcement, that state owned entities were covered under the Instrumentality prong of the Act.

The Instrumentality Tests

Here the court started with the premise that: “Specifically, to decide in a given case whether a foreign entity to which a domestic concern makes a payment is an instrumentality of that foreign government, we ought to look to whether that foreign government considers the entity to be performing a governmental function.” From this starting point, the court said that “An ‘instrumentality' under section 78dd-2(h)(2)(A) of the FCPA is an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own.”

From this the court developed two significant analyses. First, does a foreign government “control” an entity? This is what I call the “Control Test.” The second question is: Does “the entity perform a function the [foreign] government treats as its own?” This is what I call the “Function Test”?

A.      Control Test

With the caution that, “it would be unwise and likely impossible to exhaustively answer them in the abstract,” the court provided a list of some factors that might further be relevant to deciding the instrumentality issues of the control test. These factors are:

The foreign government's formal designation of the entity;

Whether the government has an 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;

The extent to which the government funds the entity if it fails to break even; and

The length of time these indicia have existed. 

B.      The Function Test

As to this second analysis, the court set out the following factors to determine if the entity performs a function the government treats as its own:

Does the entity have a monopoly over the function it exists to carry out?;

Does the foreign government subsidize the costs associated with the entity providing the services?;

Does the entity provide services to the public at large in the foreign country?; and

Does the foreign government generally perceive the entity to be performing a governmental function?

The court then went on to analyze the trial court's jury instructions in light of their two-part formulation, which was the following:

One, whether it provides services to the citizens and inhabitants of Haiti.

Two, whether its key officers and directors are government officials or are appointed by government officials.

Three, the extent of Haiti's ownership of Teleco, including whether the Haitian government owns a majority of Teleco's shares or provides financial support such as subsidies, special tax treatment, loans, or revenue from government-mandated fees.

Four, Teleco's obligations and privileges under Haitian law, including whether Teleco exercises exclusive or controlling power to administer its designated functions.

And five, whether Teleco is widely perceived and understood to be performing official or governmental functions.

As you might expect from such an important ruling, there was a plethora of commentary on the case. The observations generally fell into two camps: The first acknowledged the expansive nature of the factors listed by the court of appeals, while the second criticized the court's decision as insufficient in providing guidance for practitioners.

This quote from a client alert by Chuck Duross, former head of the Department of Justice's FCPA unit and now partner at Morrison Foerster, exemplifies the views of that first camp that the decision expands the scope of instrumentality: “In the face of this uncertainty, and with an appellate court adopting an expansive definition of instrumentality, companies should ensure that their compliance programs are structured to sufficiently evaluate whether the entities with which they are conducting business are under the control of a foreign government and performing a government function—even if that function is considered commercial in nature.”

This client alert from the law firm of Paul Hastings, whose authors were listed as Tara Giunta, Nat Edmonds, Mor Wetzler, and Ian Hebert, is representative of the second group: “In this decision, the Eleventh Circuit provided additional factors beyond those proposed by the enforcement agencies and those that this trial court and other trial courts had used in examining the issues at the trial level. The Eleventh Circuit, however, found no need to elaborate on the application of those factors to the matter at issue, and therefore, this opinion provides little guidance to companies seeking certainty. Moreover, the court did not even discuss the relative weight of the factors, for example, whether majority ownership may be of greater importance than the formal designation of the entity.”

Whatever your thoughts about the court's ruling, the 11th Circuit joins but a mere handful of U.S. courts of appeal, which have provided any judicial guidance on FCPA issue. For that reason alone it is extremely significant. But the ruling was also a watershed moment for the Justice Department in upholding a position, which the government has long avowed in FCPA enforcement, that state owned entities were covered under the Instrumentality prong of the Act. Together with the district court holdings in the Lindsey and Carson rulings there is now significant court guidance on what factors a company should consider if they are dealing with an entity covered under the FCPA.

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