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.