In a guest post on this the FCPA Compliance and Ethics Blog yesterday, my colleague
Michael Volkov, criticized the two district courts which have passed on the
question of whether a state owned enterprise (SOE) can be an "instrumentality
thereof" under the Foreign Corrupt Practices Act (FCPA). The two cases were the
Lindsey Manufacturing case and the Carson case. Volkov stated, "By deciding
these cases using fact specific standards, the courts have failed to clarify
this issue by adopting a more focused and simple inquiry. Unfortunately,
the courts have now obscured even more the application of the FCPA." No
doubt inspired by my "This Week in the FCPA" partner, Howard Sklar, I will take
a contrarian view from Mike.
The Defendants' Claims
The issue was presented as starkly as possible to both
courts. The defendants in both cases argued that employees of state-owned
enterprises could never be 'foreign officials' under the FCPA. The defendants
made five general arguments, which were
First, in the absence of an
express definition, the Court must give the term its ordinary meaning as used
in the statute. As used in the FCPA, the term "instrumentality" refers to a
governmental unit or subdivision that is akin to a "department" or an "agency,"
the two terms that precede it in the statute.
Second, the Government's
proposed interpretation would lead to absurd results. Among other things, if it
were adopted, the Government's definition would transform persons no one would
consider to be foreign government employees - specifically citing the example
of employees of the US company CITGO, because it is owned by the Venezuelan
national oil company PDVSA.
Third, the extensive
legislative history of the FCPA makes clear that Congress did not intend the
statute to cover payments made to employees of state-owned business
enterprises. Rather, the FCPA was aimed at preventing the special harm posed by
the bribery of foreign government officials.
Fourth, as other statutes
and proposed legislation make clear, Congress knows how to define the term
"instrumentality" in terms of government ownership of a commercial enterprise
where it desires to do so. But it did not do so in the FCPA.
Fifth, in construing
statutes, courts should avoid interpretations resulting in unconstitutional
vagueness. Adopting the Government's amorphous and expansive interpretation of
"instrumentality" here would result in exactly the type of unconstitutional
vagueness that must be avoided.
But courts made quick and direct refutations of the
defendants' points 2-5. The major guidance provided by courts was in creating
an inquiry to define the term instrumentality in response to defendants' Point
1. We therefore turn to the respective courts holdings on what factors should
go into an analysis to determine if a state-owned enterprise is a foreign
government instrumentality under the FCPA.
Court Ruling in Lindsey Manufacturing
The court in Lindsey Manufacturing responded to the
defendants' claims by pointing to various characteristics of foreign government
'instrumentalities' that would provide coverage under the FCPA. The court listed
five non-exclusive factors:
entity provides a service to its citizens, in many cases to all the
inhabitants of the country.
key officers and directors of the entity are government officials or are
appointed by government officials.
entity is financed, at least in large measure, through governmental
appropriations or through revenues obtained as a result of
government-mandated taxes, licenses, fees or royalties, such as entrance
fees to a national park.
entity is vested with and exercises exclusive or controlling power to
administer its designated functions.
entity is widely perceived and understood to be performing official
In Lindsey Manufacturing the foreign governmental entity
at issue was the Mexican national electric company CFE. The trial court found
that the entity had all of the characteristics listed in the five non-exclusive
factors. It was created as a public entity; its governing Board consisted of
high ranking government officials; CFE described itself as a government agency
and it performed a function that the Mexican government itself said was a
government function, the delivery of electricity. (I would also note that the
US entity CITGO does not meet this test, so much for the absurd result prong.)
The Carson Case
In the Carson case, the court denied the "foreign
official" challenge ruling that "the question of whether state-owned companies
qualify as instrumentalities under the FCPA is a question of fact." The
court cited the following factual inquiries to determine whether a business
entity constitutes a government instrumentality" including (1) The foreign
state's characterization of the entity and its employees; (2) The foreign
state's degree of control over the entity; (3) The purpose of the entity's
activities; (4) The entity's obligations and privileges under the foreign
state's law, including whether the entity exercises exclusive or controlling
power to administer its designated functions; (5) The circumstances surrounding
the entity's creation; and (6) The foreign state's extent of ownership of the
entity, including the level of financial support by the state (e.g., subsidies,
special tax treatment, and loans). The Court specifically noted that the
factors were non-exclusive and no single factor is dispositive. Later in its
opinion the court added additional guidance with the following, "Admittedly,
a mere monetary investment in a business by the government may not be
sufficient to transform the entity into a government instrumentality. But when
a monetary investment is combined with additional factors that objectively
indicate that the entity is being used as an instrumentality to carry out
governmental objectives, that business entity would qualify as a governmental
instrumentality." Lastly, as it is a factual inquiry, the question will go
to the jury.
I do not find these factors set out by either court
obscure or vague. I believe that both courts provided guidance to the
compliance practitioner in the form of a guideline or checklist that can be
used to determine if a counter-party has these characteristics of a foreign
government instrumentality. In fact, these are factors (or ones similar as they
are non-exclusive) that a compliance officer should have been using to make a
determination of a counter-party's status even before these cases came down the
pike. With CFE, the decision seems very straight forward. In the Carson case,
there were several entities which had employees to which bribes were paid.
These entities included CNOOC, PetroChina, China Petroleum Material and
Equipment Corp., National Petroleum Construction Corp., Dongfang Electric
Corp., Gouohua Electric Power and Petronas. Some of these companies clearly
meet the Carson test, some may take additional research. The moniker "Know Your
Customer (KYC)" is one that is well known in marketing circles and should
becoming equally as well known in the compliance arena.
Mike and I hope to post several point-counter-point blogs
over the next couple of weeks setting out our respective positions on other
issues. I hope that you will find them both enjoyable and informative.
Visit the FCPA Compliance and Ethics Blog,
hosted by Thomas Fox, for more commentary on FCPA compliance, indemnities and
other forms of risk management for a worldwide energy practice, tax issues
faced by multi-national US companies, insurance coverage issues and protection
of trade secrets.
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