Who is a Foreign Official? Recent FCPA Litigation Sheds New Light
By: DULCE J. FOSTER
May 12, 2011
Do you do business with foreign officials? Maybe more than you think. If you engage in any type of business outside the United States, or with foreign nationals in the United States, the Foreign Corrupt Practices Act (FCPA) might apply to you. The FCPA is a 34-year-old law that, in essence, makes it a federal crime in the United States to bribe foreign officials with anything of value, no matter how small or intangible, in order to get ahead in business.
But who is a “foreign official”? Despite the statute’s long history, our courts are only just now beginning to grapple with exactly what this means. One thing is clear: a person who receives a bribe does not need to be a high-ranking officer, a legislator, or even a low-ranking worker in a foreign government agency to be considered a “foreign official” under the FCPA.
The FCPA defines “foreign official” to include any officer or employee of a foreign government, public international organization, or “department, agency or instrumentality” of a foreign government. The term “instrumentality” is the one that has incited the most debate. If a company is only partly owned by foreign government, does that make it an “instrumentality” of that government? What if the government temporarily takes an ownership interest in a company—like General Motors—in connection with a government-sponsored bailout?
The United States Department of Justice (DOJ) argued for years, without significant legal challenge, that all employees of publicly-owned corporations and other state-owned enterprises are foreign officials because they work for the “instrumentalities” of foreign governments. In communist countries like China, where almost every business is publicly-owned, the vast majority of the workforce would be considered “foreign officials” under this definition. And even in capitalist Western Europe, the percentage of people who work for public institutions may be greater than that at home. Physicians are a prime example of this. Because most other countries in the developed world have public healthcare systems, the majority of doctors in these countries work for public hospitals or clinics. According to the DOJ, these doctors are all public officials, and giving them things to incent them to give you their business likely violates the FCPA. Pharmaceutical and medical device companies are becoming increasing targets of FCPA prosecutions under this theory. Indeed, just last month the pharmaceutical giant Johnson & Johnson agreed to pay $70 million in penalties to settle FCPA charges arising in part from allegations that J&J subsidiaries had paid kickbacks to publicly-employed health care providers in Greece, Poland, and Romania.
But is the DOJ’s assumption—that publicly-owned businesses abroad are foreign government “instrumentalities”—a correct one? Defendants are beginning to challenge the DOJ’s definition, and recent court decisions suggest that the answer is fact-specific and complex. While some public enterprises may be government instrumentalities, others may not be.
In a November 2010 decision, a Florida district court in United States v. Esquenazi rejected the defendant’s motion to dismiss the indictment against him on grounds that employees of Haiti Telco, a publicly-owned telecommunications company in Haiti, are not public officials within the meaning of the FCPA. Without significant analysis of what constitutes a government “instrumentality,” the court held that whether employees of Haiti Telco were foreign officials was a fact issue for the jury to decide at trial.
A decision issued April 20, 2011, by a California district court offers more guidance on the subject. In United States v. Noriega, Lindsey et al. (Lindsey) the government charged Lindsey Manufacturing Company and several of its employees with offering bribes to employees of Comisión Federal de Electricidad (CFE), an electric utility company that is wholly-owned by the Mexican government. In rejecting the defendants’ motion to dismiss the indictment on grounds that a state-owned corporation can never be an “instrumentality” of a foreign government, the court offered a nuanced analysis of the issue. Holding that an “instrumentality” need not share all of the characteristics of government agencies and departments, the court pointed out that CFE in fact did have such characteristics, including: it was created by statute as a decentralized public entity; its governing board was comprised of high-ranking Mexican officials; it described itself as a government agency; and it performed a function (the supply of electric power) that the Mexican Constitution recognizes as “exclusively a function of the general nation.”
The Lindsey court also found “persuasive” the government’s argument that the term “instrumentality” includes state-owned enterprises because the United States enacted amendments to the FCPA in 1998 to conform with its treaty obligations under the Organization for Economic Cooperation & Development (OECD) Convention. The OECD Convention requires signatory nations to enact legislation against the bribery of foreign public officials. It defines “foreign public official” to include anyone exercising a public function for a foreign “public enterprise”, meaning “any enterprise, regardless of its legal form, over which a government or governments may, directly or indirectly, exercise a dominant influence.”
The Lindsey defendants pointed out that when Congress amended the FCPA in 1998 it did not explicitly add employees of state-owned enterprises to the definition of “public officials,” and argued that if Congress had intended to include them it would have done so at that time. But the government countered that no such amendment was necessary, because the FCPA already included such employees within its scope. Ultimately, the court held the legislative history was inconclusive, but said it was unnecessary to decide how the OECD conforming amendments affect the interpretation of “instrumentality” since it was clear that the definition of “instrumentality” includes at least some state-owned businesses. The court thus denied the defendants’ motion to dismiss the indictment, but left open the possibility that—depending on their specific characteristics—some government-owned entities may not fall under the purview of the FCPA.
The defendants in Lindsey did not benefit from that opening, however. Earlier this week, on May 10, 2011, they were convicted on all counts. In an environment where almost all companies indicted under the FCPA have settled with deferred prosecution agreements out of court to avoid the potentially disastrous collateral consequences of a guilty verdict, Lindsey Manufacturing is the first corporate defendant in the history of the FCPA to actually be tried and convicted on FCPA charges. Sentencing is scheduled for September 16, 2011.
The Lindsey decision is just the beginning of a discussion among federal courts about who is a “foreign official” within the meaning of the FCPA. Defendants in two other pending FCPA cases, United States v. Carson (C.D. Cal.), and United States v. O’Shea (S.D. Tex.), have sought dismissal on the grounds that employees of state-owned enterprises are not “foreign officials.” Neither of these challenges appears likely to succeed. The oral argument in Carson took place on May 9, 2011, and the court’s comments reflected strong skepticism of the defendants’ position that state-owned enterprises—by definition—are never “instrumentalities” of foreign governments. The defendant in O’Shea has even greater challenges to overcome: He is accused of bribing CFE—the same Mexican utility company that the Lindsey court addressed at length before denying the dismissal motion in that case.
We do not yet know how the courts will decide these challenges, but however they are resolved, hopefully they will shed more light on what it means to be a “foreign official.” In the meantime, companies that conduct transactions with foreign businesses and their employees should treat such transactions with care, and take steps to ensure they are not associated with gifts or payments that might run afoul of the FCPA.