23 May 1014 – On May 16, 2014 the U.S. Court of Appeals for the Eleventh Circuit handed down its eagerly anticipated decision in the case of U.S. v. Esquenazi. The case is of particular interest because of its consideration of the definition of a state “instrumentality” under the U.S. Foreign Corrupt Practices Act (FCPA). The definition is a core element of any FCPA analysis as determining an entity as an instrumentality of a foreign state renders its staff “foreign officials” susceptible to corruption which is prosecutable under the Act. This is the first time that the instrumentality issue has been considered at appellate level in the U.S.. The court found in favor of the U.S., affirming the lower courts’ and the U.S. Department of Justice’s expansive interpretations of “foreign official” and “instrumentality”. The full text of the decision can be found here. The case involves the defendants Esquenazi and Rodriguez’s appeals against their convictions for conspiracy to violate the FCPA (amongst other offences). They appealed arguing that employees of the Haitian telecoms company (Haiti Teleco) whom they are convicted of bribing were not public officials and the company was not a state instrumentality because:
- Employees of state-owned companies like Haiti Teleco are not “foreign officials” because such companies do not perform traditional government functions similar to a governmental department or agency; and
- The statutory context of the FCPA makes clear that “instrumentality” must be read to exclude state-owned business enterprises that do not perform governmental functions. The FCPA is aimed at foreign governments and foreign public officials, and the term “instrumentality” must be read accordingly.
Although, in rejecting the appeal on the facts, the view of the court was that Haiti Teleco “would qualify as a Haitian instrumentality under almost any definition we could craft …”, the case offers some general guidance on the test itself. Particularly by adopting a two phase test: firstly whether the government controls the entity; and secondly whether the activity carried on by the entity is a function the controlling government treats as its own. The court was at pains to point out that each case will turn on its own facts and they could not give a comprehensive definition. Nonetheless the decision does list some, non exhaustive factors that should be taken into account in making a determination: Factors to be considered in determining governmental control:
- The foreign government’s formal designation of the 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 to the government, and in the case that the entity does not break even, the extent to which the government subsidizes the entity; and
- The length of time these indications of control have existed.
Factors to be considered in determining whether an entity carries on “a function the controlling government treats as its own”:
- 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.
On the facts Haiti Teleco was found to be an instrumentality of the Haitian State because (for amongst other reasons), at the relevant time it:
- Was 97% state-owned;
- Was financially dependent on the state;
- Had various tax advantages;
- Had an entity suffix indicating that it was funded with government money;
- Enjoyed a state-sanctioned monopoly;
- Came into being based upon a contract created by the government;
- Subjected its officials to domestic, public anti-corruption law; and
- Had a board filled exclusively with government-appointed individuals and had been so for nearly 40 years.
The Esquenazi decision affirms the broad instrumentality definition found in previous guidance, case law and the prior approach taken by the U.S. Government. The additional guidance provided by the decision will be useful to companies and FCPA practitioners in making future determinations, subject to any appeal of the case in the U.S. Supreme Court.