View Page As PDF
Share Button
Tweet Button

On May 16, 2014, the U.S. Court of Appeals for the 11th Circuit issued the highly anticipated opinion in United States v. Esquenazi.1 In affirming the longest sentences ever imposed under the Foreign Corrupt Practices Act (FCPA), the court held that bribe payments to a foreign state-owned business enterprise that did not perform traditional governmental functions could nonetheless be the basis for criminal liability under the FCPA. The 11th Circuit was the first federal Court of Appeals to decide this issue. The decision gives the Justice Department increased power to bring more aggressive FCPA prosecutions and sets the benchmark for all other FCPA cases going forward.

In general terms, the FCPA prohibits the bribing of “foreign officials.” A “foreign official” is defined under the FCPA as “any person acting in an official capacity for or on behalf of any such government or department, agency or instrumentality thereof.” The FCPA does not define the term “instrumentality”.

Esquenazi involved over $890,000 in payments by Terra Telecommunications to officials of Telecommunications D.Haiti, S.A.M. (Teleco) through a series of sham consulting contracts and shell companies. Teleco is a telecommunications provider owned and operated by the Haitian government. The payments were to induce Teleco to reduce a $2 Million debt that Terra owed to Teleco. Two Terra senior executives, including the CEO, were convicted of multiple FCPA violations. They were sentenced to 15 and 7 years respectively. The CEO’s 15-year sentence is the longest FCPA sentence ever imposed.

The issue on appeal was whether the FCPA could be expanded to reach the payments to the Teleco officials, given that Teleco did not perform traditional, core government functions and that Haiti never formally designated Teleco as a government owned entity. The Department of Justice argued that Teleco was an instrumentality of the Haitian government, and therefore, bribes to Teleco officials were covered under the FCPA. The defendants argued that the FCPA only reached government agencies, not state-owned enterprises (like Teleco).

The court defines “instrumentality”

The 11th Circuit held that the Teleco payments violated the FCPA. The court defined an “instrumentality” under the FCPA, as “an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own.” It pointed to several key facts in assessing whether Teleco was an “instrumentality” of the Haitian government: 

  • Terra sought political-risk insurance, a type of coverage that applies only when a foreign government is a party to an agreement.
  • Internal emails from Terra’s General Counsel to the senior executives referred to Teleco as an instrumentality.
  • Teleco had an entity suffix indicating that it was funded with government money because the government considered Teleco as its entity.
  • Haiti passed a law expressly designating Teleco officials as subject to a public anti-corruption law.
  • Haiti granted the company a monopoly over telecommunications service and gave it various tax advantages.
  • Teleco came into being based upon a contract created by the government.
  • The Haitian government owned almost all of the equity in the company and has appointed all board members and the chief executive officer for nearly 40 years. 

Acknowledging the potential ambiguity in its definition of “instrumentality”, the 11th Circuit provided guidance to assist corporations doing business overseas in conducting anti-corruption compliance programs and avoiding FCPA violations. The opinion identified the following non-exhaustive list of factors that “might prove relevant to deciding whether an entity is an instrumentality of a foreign government:” 

  1. How the foreign government has designated that entity formally 
  2. Whether the foreign government has a majority interest in the entity
  3. Whether the foreign government has the ability to hire and fire the entity’s principals
  4. The extent to which the entity’s profits, if any, go directly to the governmental fisc, and by the same token, the extent to which the government fund the entity if it fails to break even 
  5. The length of time these indicia have existed 

Turning to the second prong, the Court provided an additional set of factors for deciding
whether an entity performs a function the government treats as its own: 

  1. Whether the entity has a monopoly over the function it exists to carry out 
  2. Whether the government subsidizes the costs associated with the entity providing services 
  3. Whether the entity provides services to the public at large in the foreign country 
  4. Whether the public and the government of that foreign country generally perceive the entity to be performing a governmental function

The 11th Circuit explained that they did not create these non-exhaustive lists from “whole cloth,” rather; they utilized the commentary to the Organization for Economic Cooperation and Development’s Convention on Combating Bribery of Foreign Officials in International Business Transactions (OECD Convention) to formulate the lists.

The 11th Circuit’s expansive view of the FCPA increases the regulatory and enforcement risks for businesses operating outside the United States. McDonald Hopkins will continue to follow the case and provide updates and developments pertaining to the Foreign Corrupt Practices Act.

________________________________

1Slip Opinion, United States v. Esquenazi, --- F.3d. --, Case 11-15331 (11th Cir. May 16, 2014) 
 
For more information, please contact: 
 
Robin E. Kaplan
305.704.3979
rkaplan@mcdonaldhopkins.com
 
Bruce E. Reinhart
561.472.2970
breinhart@mcdonaldhopkins.com
 

White Collar and Government Compliance

Our White Collar and Government Compliance Practice Group understands government investigations and prosecutions firsthand. Our team includes distinguished former federal prosecutors who bring with them decades of white collar experience to counsel clients nationwide in all aspects of government compliance, investigations and litigation. We develop effective compliance and risk management strategies individually tailored for each client's needs. When necessary, we conduct internal investigations and vigorously represent our clients throughout all phases of inquiries, investigations and prosecutions.

COMMENT
+