The DOJ Doubles Down on its Definition of Government “Instrumentality”

Written by Jeff Johnston Erika Tristán

The U.S. Foreign Corrupt Practices Act (FCPA) prohibits U.S. companies and their employees from paying bribes to foreign officials in order to retain or obtain business and provides both civil and criminal penalties for doing so.  The statute defines “foreign official” as any “officer or employee of a foreign government or any department, agency, or instrumentality thereof” or “any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality….”  The term “instrumentality,” however, is not defined by the statute; a fact that has caused tremendous uncertainty and discomfort for those required to understand and comply with the FCPA in their international business ventures.  The issue of how the term “instrumentality” should be defined under the FCPA has also never before been considered or decided by a United States Court of Appeals.

In addition, aside from interpreting the terms “foreign official” and “instrumentality” broadly in their enforcement activities, the two agencies primarily responsible for enforcement of the FCPA—the United States Department of Justice (DOJ) and Securities and Exchange Commission (SEC)—have thus far not provided authoritative, uniform guidance on this issue.  In February, two U.S. Senators wrote a letter to the DOJ urging it to provide, among other things, clear and concrete guidance regarding the definition of “instrumentality.”  The following week, the U.S. Chamber Institute for Legal Reform (ILR) and a coalition of numerous trade groups sent a letter to the DOJ and SEC requesting guidance on “several issues and questions of significant concern to businesses seeking in good faith to comply with the FCPA,” including the definitions of “foreign official” and “instrumentality” under the statute.  The lack of “clear understanding of the parameters of ‘instrumentality’ and ‘foreign official,’” they complain, has had “a chilling effect on legitimate business activity (as companies perceive a real risk of prosecution even in scenarios involving only the most remote and attenuated connection to foreign governments) and

[has resulted in] a costly misallocation of compliance resources.”

In a legal brief filed last week, however, the DOJ provided some much-anticipated clarification regarding its view on how the term “instrumentality” should be interpreted under the FCPA.  The DOJ’s brief relates to the federal jury conviction of the former president of Miami-based Terra Telecommunications Corp. and a former executive vice president of Terra, Joel Esquenazi and Carlos Rodriguez.  Esquenazi, Rodriguez, and their co-conspirators were alleged to have paid over $890,000 in bribes to officials of Telecommunications d’Haiti (Teleco) in return for business advantages and recording such bribes in company books and records as “commissions” or “consulting fees” to shell companies, in violation of the FCPA’s books and records provisions.  In August 2011, Esquenazi and Rodriguez were convicted of conspiracy to violate the FCPA, substantive FCPA violations and money laundering.[  In addition to prison sentences (Esquenazi was sentenced to a record 15 years and Rodriguez was sentenced to 7 years), the defendants were ordered to forfeit $3.09 million.

One of the issues at the heart of this case was whether Teleco constitutes an instrumentality of the Haitian government for purposes of construing the FCPA-related charges against the defendants.  At trial, the defendants requested a jury instruction that categorically precluded instrumentality status to foreign state-owned enterprises.  The District Court, however, instructed the jury that an instrumentality of the Haitian government “is a means or agency through which a function of the foreign government is accomplished,” and provided the jury with a nonexhaustive list of factors that it could consider in determining whether or not Teleco is an instrumentality of the Haitian government.  The District Court’s rejection of bright-line approaches for determining whether the state-owned or state-controlled entity qualifies as a state instrumentality under the FCPA in favor of a case-by-case, more fact-intensive analysis in light of the totality of the circumstances was consistent with several recent rulings by other federal district courts.

Following their convictions, both Esquenazi and Rodriguez filed appeals to the Eleventh Circuit.  On appeal, the defendants argue that Teleco—a state-owned enterprise, which does not perform a governmental function similar to those more commonly performed by a government department or agency—cannot properly be considered an instrumentality under the FCPA.  Their appeals also raised the issue of whether the failure to define the term “instrumentality” renders the FCPA unconstitutionally vague.

The DOJ filed its legal brief in response to the appeals on August 21.  In it, the DOJ takes the position that (1) the defendants’ narrow construction of the term “instrumentality” is inconsistent with the terms of the FCPA and Congress’s purpose in enacting broad prohibitions against corporate bribery; and (2) “[t]he district court’s instructions on the meaning of ‘instrumentality of a foreign government’ were correct.”  According to the DOJ, while state ownership of foreign state-owned or state-controlled enterprises, by itself, is not dispositive, such enterprises that perform a governmental function can qualify as state instrumentalities and, accordingly, employees of such enterprises can qualify as foreign officials under the statute.  The DOJ further states that the District Court’s instruction appropriately provided the following list of several relevant, but nonexhaustive, factors for the jury to consider in deciding whether Teleco was a government instrumentality:

  • Whether the foreign state-owned enterprise provides any services to the citizens and inhabitants of that country;
  • Whether or not the foreign state-owned enterprise’s key officers and directors are government officials or are appointed by government officials;
  • The extent to which the government owns the foreign state-owned enterprise, including whether or not the government owns a majority of its shares or provides financial support such as subsidies, special tax treatment, loans or revenue from government mandated fees;
  • The foreign state-owned enterprise’s obligations and privileges under the government’s law, including whether it exercises exclusive or controlling power to administer its designated functions; and
  • Whether or not the foreign state-owned enterprise is widely perceived and understood to be performing official or government functions.

Applying this definition and nonexhaustive list of factors, the DOJ concludes that the evidence sufficiently established that Teleco was an instrumentality of Haiti during the relevant time period.  The DOJ specifically cited the following as evidence supporting Teleco’s classification as an instrumentality under the FCPA:

  • The Haitian government, through its national banks, owned 97% of Teleco’s shares, and, if Teleco has been profitable, those profits would have accrued to the government and its national bank.  Because it was not profitable, the national bank subsidized Teleco.
  • Haiti’s president and high-level ministers controlled Teleco through their appointment of Teleco’s board of directors and general director.
  • Haitian law subjects Teleco officials to its prohibitions against official corruption.

Instrumentality status, according to DOJ’s brief, should not be granted only to those entities that perform a traditional governmental function similar to a political subdivision, as the defendants advocate.  Rather, the definition of instrumentality must be broad enough to recognize that “governments perform many functions, including selling commercial services to the public, and they do so through entities other than ‘departments’ and ‘agencies.’”  The DOJ also states that the term “instrumentality” as used in the FCPA is not unconstitutionally vague in that it provided fair notice that defendants’ bribery scheme, which involved intentional conduct and had no innocent explanation, was illegal.

In summary, the DOJ’s brief highlights the fact that U.S. enforcement agencies will continue to interpret the FCPA’s applicability broadly and take the position that any foreign state-owned or state-controlled enterprise can qualify as a state instrumentality (and its employees and officials can qualify as foreign officials) under the FCPA, even in cases in which such enterprises do not perform a more traditional governmental function commonly performed by government departments or agencies.  Furthermore, the case-by-case, fact-based analysis adopted by the trial court in United States v. Esquenaziand endorsed by the DOJ on appeal is a far more discretionary and less predictable approach than bright-line rules.  As such, companies interacting with business entities affiliated with a foreign government, particularly in high-risk areas, are wise to err on the side of caution by operating under the assumption that all employees of state-owned or state-controlled entities qualify as “foreign officials” under the FCPA.