By Charles S. Leeper and Gregory A. Mason
On May 16, 2014, the U.S. Court of Appeals for the Eleventh Circuit issued a highly anticipated decision construing the scope of the term “instrumentality” under the Foreign Corrupt Practices Act (“FCPA”). See U.S. v. Esquenazi et al., No. 11-15331 (11th Cir. May 16, 2014). Issuers, domestic concerns, and other persons within the jurisdictional reach of the FCPA who are doing business with foreign entities performing a public function of some kind should be aware that their actions may trigger the FCPA’s penalty provisions, even if their business counterpart is not an actual branch of a foreign government.
The FCPA prohibits bribes to “foreign officials,” a category of persons defined as “any officer or employee of a foreign government or any department, agency, or instrumentality thereof.” See 15 U.S.C. §§ 78dd-2(h)(2)(A) (emphasis added). That last phrase, “instrumentality thereof,” is not further defined in the statute and, up until now, had never been construed by a U.S. Court of Appeals. In Esquenazi, the Eleventh Circuit construed the phrase “instrumentality” broadly, holding that the FCPA extends, not merely to bribes paid to employees of foreign governments, but also to corrupt payments made to employees of foreign state-owned or state-controlled entities. U.S. v. Esquenazi et al., No. 11-15331 (11th Cir. May 16, 2014).
The Esquenazi opinion arises out of the indictment of two U.S. telecommunications company executives for giving gifts and making payments to employees of a partially state-owned Haitian company, Telecommunications D’Haiti S.A. (“Haiti Teleco”). United States v. Esquenazi, No. 09-21010 (S.D. Fla.). The indictment alleged that the U.S. executives, Joel Esquenazi and Carlos Rodriguez, paid “kickbacks” to two employees of Haiti Teleco to obtain reduced telecommunications rates and payment credits.
Esquenazi and Rodriguez contended in their unsuccessful motion to dismiss the indictment that state-ownership (or partial state-ownership) alone is not enough to establish that Haiti Teleco is a government instrumentality, and that only an actual part of the government would qualify as such an entity. Following their conviction at trial, Esquenazi and Rodriguez argued on appeal that “employees of a state-owned enterprise should not be deemed part of the relatively small class of foreign officials unless the enterprise is performing a governmental function similar to a political subdivision.” United States v. Esquenazi, No. 11-15331-C (11th Cir. filed May 9, 2012).
The Eleventh Circuit rejected this “core governmental function” argument, defining “instrumentality” as “an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own.” See U.S. v. Esquenazi et al., No. 11-15331, at 20 (11th Cir. May 16, 2014). The Court provided a non-exclusive list of factors to consider in determining these “control” and “governmental function” elements, but stressed that the determination is fact-specific. Id. Under this rubric, the Court held that Haiti Teleco was an instrumentality of the government of Haiti because the government owned a 97% stake in Haiti Teleco, the government of appointed Haiti Teleco’s Director General and board members, and there was testimony that the government considered Haiti Teleco as a “public entity.” Id.
The Esquenazi court also rejected defendants’ argument that the FCPA was unconstitutionally vague as applied to them in reaching state-owned enterprises that do not perform a core governmental function. The Eleventh Circuit reasoned that “[b]ecause the entity to which Mr. Esquenazi funneled bribes was overwhelmingly majority-owned by the state, had no fisc independent of the state, had a state-sanctioned monopoly for its activities, and was controlled by a board filled exclusively with government-appointed individuals, the FCPA is not vague as applied to his conduct.” Id. at 28.
Less convincing was the court’s discussion of defendants’ contention that the rule of lenity required the court to “cabin” the definition of “instrumentality.” Addressing the argument in a footnote, the court observed that the rule of lenity applied only when there is a “grievous ambiguity” in the meaning of the statutory text. Id. at 11, n. 5. It is difficult to describe the ambiguity in this portion of the FCPA as anything but “grievous.” The term is not defined anywhere in the statute and, in order to search out the meaning of “instrumentality,” the Esquenazi court had to consult two dictionaries, see id. at 10-11; consider “the broader statutory context in which the word is used” (including amendments to the statute, and international treaty obligations undertaken by the U.S. to prohibit bribery), see id. at 13-18; and examine “the concept of a ‘usual’ or a ‘proper’ governmental function [that] changes over time and varies from nation to nation,” see id. at 19-20. The image of a dowser, divining rod in hand, comes to mind.
The Eleventh Circuit’s Esquenazi decision, like the Fifth Circuit’s decision in United States v. Kay, 513 F.3d 432 (5th Cir. 2007), is likely to have enduring influence over the construction of a key provision of the FCPA by lower courts throughout the country. And because the Eleventh Circuit adopted a “fact-bound” approach to defining instrumentality, rather than the strict construction argued by the defendants, companies and individuals doing business overseas will continue to grapple with the question of when their business counterparts abroad will be considered foreign officials under the FCPA. Until another Circuit Court, or the Supreme Court, addresses the question, prudent companies should treat any entity owned or controlled by a foreign government, even in part, as a foreign government agency or department for purposes of FCPA compliance.