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Thursday, May 29, 2014

FCPA Guidance from the Eleventh Circuit? Not Entirely

Court of Appeals for the Eleventh Circuit – In United States v. Esquenazi, No. 11-15331 (11th Cir. May 16, 2014), the U.S. Court of Appeals for the Eleventh Circuit affirmed the convictions of two men charged with violating the Foreign Corrupt Practices Act (FCPA), in violation of 15 U.S.C. § 78dd-2, concealment money laundering, conspiracy, and conspiracy to commit money laundering. In doing so the Eleventh Circuit defined the statutory term “instrumentality” as used in the FCPA, however the definition may not ultimately provide the clarity the court intended.

 

Joel Esquenazi and Carlos Rodriguez co-owned Terra Telecommunications Corp. (Terra), a Florida company that purchased phone time from foreign vendors and resold the minutes to customers in the United States. One main vendor was Telecommunications D’Haiti (Teleco), which was an entity with ties to the Haitian government. Specifically, when Teleco was formed, it was granted a monopoly on telecommunications services; it had significant tax advantages; its Board of Directors had certain members appointed by the Haitian government; and the National Bank of Haiti owned 97 percent of Teleco. According to testimony adduced during trial, essentially everyone in Haiti considered Teleco a public administration.

 

In 2001, Terra owed Teleco approximately $400,000. Esquenazi arranged for a deal in which an officer of Teleco would shave minutes from Terra’s bill in exchange for payment of 50 percent of what the company saved. The payments would be made through sham companies so as to disguise their purpose. Ultimately, through another sham company established with the assistance of Esquenazi, Terra made six transfers totaling $75,000 to the sham company. Esquenazi (who admitted he had bribed Teleco officials) and Rodriguez were convicted after trial. After the trial concluded, the Haitian Prime Minister submitted a declaration stating that Teleco is not a state enterprise. He later clarified his initial declaration by stating that “there exists no law specifically designating Teleco as a public institution.”

 

The Eleventh Circuit explained that the FCPA prohibits any “domestic concern” from making use of the mail or any means of interstate commerce “corruptly in furtherance” of a bribe to any foreign official, or to any person, “while knowing that all or a portion of such money or thing of value will be offered, given, or promised, directly or indirectly, to any foreign official,” for the purpose of “influencing any act or decision of such foreign official . . . in order to assist such domestic concern in obtaining or retaining business for or with, or directing business to, any person.” 15 U.S.C. § 78dd-2(a)(1), (3). Foreign official is defined as any officer or employee of a foreign government, or any “department, agency, or instrumentality thereof.” 15 U.S.C. § 78dd-2(h)(2)(A). Finding that no other court of appeal has defined “instrumentality,” the Eleventh Circuit endeavored to do so.

 

The court began with the dictionary definitions of “instrumentality” and determined that the parties agree that “an instrumentality must perform a government function at the government’s behest.” Esquenazi at p. 11. But, according to the court, this does not provide a complete definition and so the court felt the need to dig deeper. Looking at the statutory company kept by the word “instrumentality,” the court found that words like “agency” and “department” are in the same statutory clause as “instrumentality.” As a result, an entity must be “under the control or dominion of the government to qualify as an ‘instrumentality’ within the FCPA’s meaning.” Esquenazi, at 13. Likewise, based on the statute’s context, “an instrumentality must be doing the business of the government.” Id. The question, then, is what will be considered the government’s business.

 

After a long explication of the United States’ ratification of the Organization for Economic Cooperation and Development’s Convention on Combatting Bribery of Foreign Public Officials in International Business Transactions (OECD Convention), the Eleventh Circuit determined that the definition of “instrumentality” within the FCPA was intended to reach “the types of officials the United States agreed to stop domestic interests from bribing when it ratified the OECD Convention.” Esquenazi, at 18. Thus, the court declined to limit the definition – as advocated by defendants Esquenazi and Rodriguez – to entities that perform only traditional, core government functions. Instead, it determined that “the most objective way” to determine whether an instrumentality is one of a foreign government, “is to examine the foreign sovereign’s actions, namely, whether it treats the function the foreign entity performs as its own.” Esquenazi, at 19 (emphasis in original). The Eleventh Circuit thus defined an “instrumentality” as “an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own.” Esquenazi, at 20.

 

Recognizing itself that this definition seems incomplete, the Eleventh Circuit then listed factors to consider when determining whether an entity is an instrumentality of a foreign government. The measure of control will be determined by looking at how the government designated the entity; whether the government has a majority interest in the entity; whether the government may hire and/or fire executives of the entity; whether any of the entity’s profits go to the government’s coffers; and how long these factors have existed. Consideration of the entity’s function will focus on whether the entity has a monopoly over the function it is tasked with carrying out; whether it receives government subsidies for providing its services; whether the entity provides services to the general public; and whether the government of the foreign country generally perceives the entity to be performing a government function. These are fact-based questions, and will depend on the entity at issue.

 

Applying this definition, the Eleventh Circuit affirmed the defendants’ FCPA convictions. The jury instructions provided a sufficient basis for concluding that Teleco was an instrumentality of the Haitian government. Likewise, the evidence established that the government had satisfied the FCPA’s knowledge requirement because the defendants knew or had reason to know that the bribes paid would reach the hands of a foreign official. Lastly, the court dismissed the Haitian Prime Minister’s declaration – which defendants claimed constituted exculpatory material pursuant to Brady v. Maryland, 373 U.S. 83, 83 S. Ct. 1194 (1963) – because the information was never in the hands of the prosecutor, so it was not required to be disclosed.

 

The takeaway from the Esquenazi case is that in attempting to clarify what constitutes an “instrumentality” for the purposes of the FCPA, the Eleventh Circuit provided a definition that still requires significant factual analysis and still prohibits payments to an entity acting as an arm of the government. Yet whether an entity will be considered an instrumentality of the government will still depend on local perceptions and a factual analysis that could put defendants in the crosshairs of enforcement with only slightly clearer guidance than they had before the Esquenazi decision. Businesses should continue to proceed with caution when doing business with entities that are not clearly private and that may be connected to, controlled by, or performing the functions of the government.




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