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From Securities Regulation Daily, May 19, 2014

Panel ruling defines “instrumentality” of foreign government for FCPA purposes

By Anne Sherry, J.D.

A panel of the Eleventh Circuit Court of Appeals, taking up an appeal by individuals convicted of violating the Foreign Corrupt Practices Act, determined that the telecommunications company whose officials received the bribes was an “instrumentality” of the Haitian government within the meaning of the FCPA. In so ruling, the panel defined “instrumentality” and provided a list of factors relevant to construing the definition (U.S. v. Esquenazi, May 16, 2014, Martin, B.).

Background. The FCPA bars bribery to a “foreign official,” defined as “any officer or employee of a foreign government or any department, agency, or instrumentality thereof.” The defendants co-owned Terra Telecommunications Corp., a Florida company that purchased phone time from foreign vendors and resold the minutes to U.S. customers. One of Terra’s main vendors, and the company whose employees received the payments at issue, was Telecommunications d’Haiti, S.A.M. (Teleco). The central question before the appellate panel, and the principal disagreement between the parties, was whether Teleco was an “instrumentality” of the Haitian government.

History of Teleco. When Teleco was formed in 1968, the Haitian government gave the company a monopoly on telecommunication services and appointed two members of its board. The company also enjoyed significant tax advantages. In the early 1970s, the National Bank of Haiti gained 97 percent ownership of Teleco, and thereafter, the Haitian president appointed all of Teleco’s board members. The business entity suffix, S.A.M., according to an expert witness, indicated that the government put money in the corporation and was attached to the company de facto because the government considered Teleco as its entity. Haiti privatized Teleco at some time between 2009 and 2010, after the payments in question were made.

Context and history of FCPA. Looking at the term “instrumentality” in context with the FCPA’s mentions of “agency” and “department,” the panel gleaned that an instrumentality must be under the control or dominion of the government and doing the government’s business. To determine what counts as the government’s business, the panel looked to the broader statutory context of the FCPA, first concluding that a company’s providing a commercial service does not mean that it is not an instrumentality. The appeals court panel also put great weight on the 1998 amendments to the FCPA, which brought the statute into compliance with the United States’ obligations to foreign nations under the OECD Convention. The court would construe the statute in such a way as to ensure compliance with the U.S.’s treaty obligations, requiring a broader interpretation of the term “instrumentality.”

Definition of “instrumentality.” The definition that the panel settled on is that “‘instrumentality’ under Sec. 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.” Acknowledging that what constitutes control and a function the government treats as its own are fact-bound questions, the panel provided a non-exhaustive list of factors that may be relevant in construing the definition it created.

Factors. 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. These factors were informed by the commentary to the OECD Convention and consistent with the approach the Supreme Court has taken to decide if an entity is an agent or instrumentality of the government in analogous contexts.

To decide if an entity performs a function the government treats as its own, 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. These factors were also drawn in part from the OECD Convention.

Affirmance of conviction. Having determined the definition and interpretive factors, the panel affirmed the defendants’ convictions and sentences. The list of factors prospectively identified by the panel was not significantly different from those laid out in the district court’s jury instructions. The evidence was also sufficient to support the verdict, and the FCPA was not unconstitutionally vague given that “instrumentality” was not defined to include state-owned enterprises that do not perform a governmental function. Finally, the court found no basis for overturning the conviction based on the defendant’s knowledge or for revising the sentencing enhancements.

The case is No. 11-15331.

Attorneys: Kirby A. Heller, U.S. Department of Justice for the United States. Michael J. Rosen (Michael J. Rosen, PA) and Michael Alex Sink (Perkins Coie, LLP) for Joel Esquenazi.

Companies: Terra Telecommunications Corp.; Telecommunications d’Haiti, S.A.M.

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