This post is by Simon Malinowski, one of my firm’s summer associates. Simon summer clerked with us last summer and has returned for another few months of punishment. Simon is currently a 2L at Indiana University.

The Foreign Corrupt Practices Act (FCPA) should be a constant concern for any U.S. company operating abroad, particularly in China. Intentional or inadvertent violations of the Act, which prohibits payments to foreign officials, can result in severe punishment. Steptoe & Johnson just put out an interesting article that explores recent U.S. District Court rulings on State Owned Enterprises (SOEs) and the FCPA.

SOEs present a particularly difficult challenge for application of the FCPA because the Act fails to concretely define a government “instrumentality.” Both the Department of Justice and the Securities Exchange Commission have consistently held that “instrumentalities” include SOEs. However, this interpretation has been questioned by private counsel numerous times, leading to a number of cases that clarify if and when payments to SOE officers or employees will be considered violations of the FCPA.

In the three cases discussed in the article, U.S. v. Noriega (C.D. Ca. 2010), U.S. v. Carson (C.D. Ca. 2009), and U.S. v. John Joseph O’Shea (S.D. Texas 2009), the courts all held that there are circumstances in which an SOE will be considered an instrumentality for FCPA purposes. Though none of the cases specifically involve Chinese SOEs, the holdings provide good indications as to how U.S. courts will rule in Chinese SOE–based FCPA cases.

All three of the cases look to a similar “non-exclusive list” of characteristics of government agencies and departments to determine if they may be “instrumentalities” within the terms of the FCPA:

  • The entity provides a service to the citizens of the jurisdictions.
  • The foreign state’s degree of control over the entity.
  • The purpose of the entity’s activities
  • 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.
  • The key officers and directors of the entity are either government officials ore were government appointed.
  • The 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.
  • The entity is vested with and exercises exclusive or controlling power to administer its designated functions.
  • The entity is widely perceived and understood to be performing official (i.e., governmental) functions.

In Noriega, the court concluded that an SOE owned by the Mexican government (the Mexican Comision Federal de Electricidad or “CFE”), which supplies electricity to all of Mexico besides Mexico City, is an instrumentality to which the FCPA applies. The CFE has a governing board comprised of high-ranking government officials, and defines itself on its website as a “governmental agency” and “a company created and owned by the Mexican government.” The SOE at issue in the Carson case is structured similarly to CFE and the SOE at issue in O’Shea was also CFE.

The specific facts of these three cases are not overly useful for a U.S. company dealing with a Chinese SOE because they so clearly suggest that the FCPA should apply. However, the list of factors used in the courts’ determinations is relevant for any U.S. company doing business with a Chinese SOE.

If, in the process of doing due diligence on an SOE, a number of the factors match up to the factors set forth above, you need to be very concerned that any “payments” you make to an officer or employee of the SOE will cause you to violate the FCPA. At minimum, these newly issued decisions should serve to give you even greater pause in your dealings with Chinese SOEs.

The factors set forth by these courts are so complex that, if anything, they really only increase the uncertainty inherent in dealing with SOEs. If in doubt, just don’t.

  • Twofish

    In any case it doesn’t much matter, because even if you convince a judge that the person you handed the bribe was not a state instrumentality, the USDOJ can get you under the Travel Act.

  • Seraphina

    Do you know any case where Chinese SOEs were involved? I’m an in-house legal counsel in China and have been doing this FCPA training several times, but I’m curious if any company who is/was dealing with Chinese SOEs were sued.

  • Simon Malinowski

    Seraphina, as far as I can tell, the three cases referenced in the post are the the only three recent FCPA cases involving SOEs. There is an FCPA case involving Lucent Technologies from 2007, but nothing more recent than that.

  • Justaguy

    I’m currently a visiting scholar at a state run research institute in Beijing. I’m about to buy one of the directors of the institute dinner in an attempt to influence him to extend my stay there for another year. Is that a violation of the FCPA? I don’t expect the Justice Department to come knocking on my door over it, but I am curious…

  • Chris

    IBM’s recent heavy fine for FCPA violations were a result of China issues and involved SOEs. What was different was the bribery was undertaken by 3rd party distributors not by IBM employees. IBM settled acknowledging poor management of compliance, records etc, not admitting to bribery.

  • aaron

    Justaguy,
    FCPA covers you as an individual.
    buying a foreign official is giving advantage to influence him in his official duties.
    and you are attempting to retain business for yourself.
    Only question is whether buying him dinner is considered “use of the mails or any means of instrumentality of interstate commerce” under FCPA.
    I would say probably yes, if you are using any US currencies (or taxable earnings) to pay for his dinner.
    (Perhaps if you cooked dinner for him from scratch by yourself at your residence in China, it would not be “any means of instrumentality of interstate commerce”?!)
    In any case, it seems your case is very minor “influencing”, but I would not test the Fed’s interpretation of FCPA.
    You are probably right that the Justice Department won’t come knocking on your door over it, but I would still stay far away from it. (You never know if one day you might be bidding for a contract from the Feds requiring security investigation, and your dinner might come up.)

  • Seraphina

    Simon, Thank you for the reply, I checked this Lucent case and it ended up with non-prosecution settlement by paying $2.5MM penalties. But from the case materials I found it seems that at that moment the officers of SOEs were regarded as “governmental officials” with no doubt.

  • Twofish

    To Justaguy: What the lawyers tell us is that business dinners are fine as long as you are talking about customary and non-extravagant expense. If you buy them dinner, that’s fine. If you buy them dinner and then give them him gold bars, that’s not. It falls under the “business courtesy” exception.
    Also there is a “facilitation payment” exception to the FCPA. What the lawyers tell us is that it’s not an FCPA violation to pay an official to do his job, as long as you get approval from compliance.
    Finally, anything is allowed if it legal according to the local written law.
    Also here are slides from unrelated companies that are similar to the compliance training that we get.
    http://www.valv.com/app_common/118/110/library/31/FCPA%20RSM%20Training.pdf
    http://www.es.northropgrumman.com/ourvalues/assets/FCPA.pdf

  • Twofish

    FYI, this is what a corporate compliance policy looks like. It’s something I grabbed off the web, and it’s for an unrelated company, but it’s pretty standard.
    http://www.boeing.com/companyoffices/aboutus/ethics/pro6.pdf

  • Twofish

    Here is another great article on FCPA
    http://www.virginialawbusrev.org/VLBR5-1pdfs/FCPA.pdf
    There are gray areas, but paying for someone dinner (as long as the price isn’t crazy) is something that the law explicitly allows.

  • Chris

    In addition to the FCPA, anyone doing business needs to be aware of Chinese law on bribery. While few foreigners have been touched, in 6 months in the construction industry alone 13,000 Chinese nationals were arrested for bribery.
    My recollection is that China also has an exception for business dinners with RMB200 or less per head considered reasonable.

  • Twofish

    Dan: The factors set forth by these courts are so complex that, if anything, they really only increase the uncertainty inherent in dealing with SOEs. If in doubt, just don’t.
    The problem with “if in doubt, just don’t” is that you can take it to such an extreme to make business impossible. If you want to see an example of that look at the Boeing FCPA policy in which it explicitly has a section that says that you can give “coffee and doughnuts” to people within the Federal government without being suspected of bribery.
    If it was clearly yes, or clearly no, then there wouldn’t be jobs for lawyers. You just have a sign that says NO. The reason this is tricky is that saying we can’t give you coffee and doughnut because the USDOJ will investigate us for bribery is just silly, and if you spend all your time worrying about paying for somebody’s lunch, then you miss the “cash in suitcase” situations. So having someone to tell you “NO” won’t work. You need someone that can tell you “YES” some of the time.
    True story: At the FCPA compliance talk, we had the lawyer tell us that if we were ever in a situation in which we thought our life or safety was in danger that we should just pay the money and legal will sort it out later. He was talking about a call that they got for someone in some African country. A corporate person was at custom and customs was about to inject him with god knows what unless he paid a fee and the salesman was wanting guidance as to whether or not he could pay the bribe, and the response from legal was “hell yes, pay the man, get on the plane, and we’ll sort it out once you get back.”