The U.S. government has made it clear over the last decade that if you try to bribe a foreign official for a business purpose, you’re going to face criminal and civil penalties. But how do you know if you’re dealing with a foreign official?
Under recently issued and groundbreaking federal appellate court guidance on the Foreign Corrupt Practices Act (FCPA) issued in connection with a Miami-based company, anyone doing business abroad must formally analyze several specific factors to stay a step ahead of potential significant penalties.
If transacting abroad, you need to incorporate the guidance provided by the United States Court of Appeals for the Eleventh Circuit in its Esquenazi opinion discussed below into your compliance and due diligence efforts, along with making sure that other longstanding guidance, some of which we also draw upon here, including the 2012 U.S. Resource Guide to the FCPA, is adhered to. An overview follows of the FCPA’s scope and best practices to follow. We hope this serves as the springboard to plan properly with counsel.
While our focus here is sharpened on instrumentalities under the FCPA’s anti-bribery provisions, the law also requires reporting and accounting by issuers of securities. Even if a payment does not violate anti- bribery provisions, it can be prosecuted under the reporting and accounting provisions if inaccurately recorded or resulting from an internal controls deficiency. Also, as other nations increasingly bolster their own commercial and political bribery regulations, special consideration is accordingly required.
Put simply, the FCPA prohibits publicly traded U.S. companies, companies incorporated in the U.S. and their respective officers, directors, employees, stockholders and agents from paying, offering, or promising something of value to officials of foreign governments to obtain or retain business. FCPA prohibitions also affect non-U.S. companies and persons, as any contact with the U.S. in furtherance of a corrupt scheme creates U.S. jurisdiction.
The FCPA defines a “foreign official” to include “any officer or employee of a foreign government or any department, agency, or instrumentality thereof.” What constitutes an “instrumentality” of a foreign government remains undefined by the statute.
The U.S. Department of Justice (DOJ), which prosecutes alleged violations along with the U.S. Securities and Exchange Commission (SEC), has long argued for a broad interpretation of “instrumentality” including partially or fully state-owned or state-operated entities. In addition to seeking FCPA remedies, including conspiracy, prosecutors have also tacked on additional charges such as tax evasion, Interstate
Travel in Racketeering, money laundering and mail and wire fraud. The government generally negotiates criminal and civil penalties under deferred and no-prosecution agreements that tend to include increased self-reporting requirements. FCPA-inspired civil actions then typically ensue, including derivative, securities fraud and employment law suits, tort and contract law claims and claims under the Racketeer Influenced and Corrupt Organizations (RICO) Act.
Recent Decision
The Eleventh Circuit Court of Appeals, in United States v. Esquenazi, recently upheld lower court convictions based on the DOJ’s broad understanding of government instrumentalities as foreign officials. The case centers on alleged bribes paid by Joel Esquenazi and Carlos Rodriguez, officers of Terra Telecommunications, to employees of a Haitian telecom company. They were convicted of one count each of conspiracy to violate the FCPA, wire fraud and conspiracy to commit money laundering, seven FCPA counts and twelve counts of money laundering. Esquenazi was sentenced to fifteen years in prison, the longest FCPA-related sentence ever, and Rodriguez received seven years. Barring any potential future review by the full appellate court (only a three-judge panel ruled) or the U.S. Supreme Court (it was formally petitioned), the guidance outlined below governs.
The court refused to categorically narrow the definition of a government instrumentality. It found that, in enacting the FCPA, Congress intended to cast a wide net over foreign bribery. In amending the FCPA in 2008, it intended to align it with the Organization for Economic Cooperation and Development Anti- Bribery Convention, which contains a broad understanding of government instrumentalities.
The court refused to limit government instrumentalities to those entities that perform traditional or core governmental functions. As such, it found that even providing a commercial service can render an entity an instrumentality. On the other hand, the court refused to adopt a definition of instrumentality that would have categorically covered every state-controlled entity that merely provides any service.
Foreign banks, investment funds, utilities, universities and hospitals can be considered instrumentalities. Providing employees of these entities with anything of value, such as extravagant gifts or meals, excessive entertainment, or travel with no apparent business purpose, can run afoul of the FCPA.
Control-and-Function Test
Esquenazi establishes a two-part, government control-and-function test, for determining if an “instrumentality” is involved that would potentially trigger FCPA liability. First, an entity must be controlled by the government of a foreign country. Second, the entity must perform a function the controlling government treats as its own.
The court then lists non-exhaustive factors for determining such governmental control and function. The factors are not specifically weighted but rather considered altogether in what is tantamount to a “totality of the circumstances” analysis, with no single dispositive factor.
For the first part of the test, “control” factors include: (i) the foreign government’s formal designation of the entity; (ii) the government’s majority interest in the entity; (iii) the government’s ability to hire and fire entity principals; (iv) the government’s direct receipt of substantial entity profits; (v) the
government’s subsidization if the entity fails to break even; and (vi) how long these control factors have
existed.
Then, for the second part of the test, “function” factors include: (i) the entity’s monopoly power over its function and its servicing the public-at-large; (ii) the foreign government’s subsidization of the entity’s service-related costs; (iii) whether the entity provides services to the public at large in the foreign country; and (iv) the foreign country’s (public and government) general perception that the entity performs a governmental function.
Compliance Programs
Regulators consider the effectiveness of a compliance program when deciding whether to pursue and how to settle an enforcement action. For instance, a more effective program begets more favorable nonmonetary terms, like avoiding an independent compliance monitor or self-reporting requirements.
The ideal program, overseen by senior-level executives, includes the following components:
• a compliance department with direct reporting lines to your Directors;
• periodic compliance training on company policies, applicable laws, practical advice and case studies for foreign-based personnel;
• regular monitoring and auditing of particular transactions, employees and business units;
• extensive due diligence for all new business partners;
• annual employee certifications on adherence to the company’s code of conduct within a framework including incentives, disciplinary actions and confidential reporting and internal investigation systems; and
• a regular review and update of the compliance program based on employee surveys and reporting mechanisms.
At the very least, focus on three basic standards: (i) tailor compliance to the specific business and to its associated risks in a way that evolves as the business and the relevant markets change; (ii) apply the program in good faith; and (iii) encourage ethical conduct and a commitment to legal compliance by helping prevent, detect, remediate and report misconduct.
Consider technological solutions to compliance issues, including web-based approval tools for spending on items such as gifts and hospitality. Also, create “help desks” for personnel to obtain guidance on how to proceed with a compliance question. Pool your compliance resources towards higher-risk transactions.
Due Diligence
Your legal, accounting and compliance departments should conduct due diligence on third parties (e.g., customers and business partners) based on the Esquenazi government control-and-function factors to ensure that any instrumentality covered by the FCPA is identified and treated with the required care. The DOJ and the SEC expect pre- and post-acquisition due diligence to uncover potential corruption and to voluntarily disclose any corrupt payments discovered immediately following a merger or acquisition.
Three principles should guide due diligence and be addressed as quickly as practicable. First, understand the qualifications and associations of a third party, including its reputation and relationships with foreign officials. Second, evaluate the business rationale for retaining it by reviewing your contract’s specification of payment terms corresponding to the market, industry and service provided. This includes evaluating documentation proving it is actually performing the work for which it is being paid. Third, monitor the business post-retention by updating its due diligence, exercising contractual audit rights, providing periodic training and requiring annual compliance certifications.
You should review sales and financial data, customer contracts and third party and distributor agreements. Speak with a third party’s general counsel, sales vice president and internal audit head about corruption risks, compliance efforts and any other related issues going back at least ten years.
An entity’s status as an “instrumentality” may trigger additional rounds of due diligence, enhanced representations and warranties in contracts and more attention from compliance officers. Require heightened levels of due diligence for any foreign entity that appears to have state ownership or ties. Finally, in mergers and acquisitions, buyers should increase the number of seller counterparties that they subject to due diligence while analyzing the Esquenazi factors in the vetting of third-party contractors.