The U.S. Foreign Corrupt Practices Act prohibits corruptly paying or giving anything of value to a foreign government official or political candidate for purposes of influencing the foreign official’s behavior so as to unfairly obtain or retain business.  Generally under the FCPA, a “foreign official” is “any officer or employee of a foreign government or any department, agency, or instrumentality thereof . . . or any person acting in an official capacity for or on behalf of any such government or department, agency, or instrumentality. . . .”

In United States v. Esquenazi, the 11th Circuit (one level down from The U.S. Supreme Court) just issued a decision that is critical for understanding company and individual risks under the FCPA and is especially critical for companies doing business with China.  Specifically, in Esquenazi, the 11th Circuit defined foreign government “instrumentalities” for purposes of the FCPA. Companies subject to the FCPA will want to fully understand this court decision and which foreign entities are “instrumentalities” because payments to such entities could result in FCPA violations as well as corresponding civil and criminal penalties. The Esquenazi decision marks the first time a U.S. appellate court has addressed the issue of who is a foreign government official under the FCPA. It also upheld the longest prison sentence (15 years) for an FCPA violation.

The 11th Circuit acknowledged that businesses and the U.S. Government need to understand what entities are foreign government “instrumentalities,” and it 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. Certainly, what constitutes control and what constitutes a function the government treats as its own are fact-bound questions.”

The 11th Circuit’s decision on what constitutes an “instrumentality” centers on two issues: (1) whether an entity is controlled by the foreign government, and (2) whether the entity performs a function that the foreign government considers its own. Concerning the first issue of the foreign government’s control over the “instrumentality,” the 11th Circuit provided the following non-exhaustive list of factors:

  • whether the foreign government formally designates the entity
  • whether the foreign government has a majority interest in the entity
  • whether the foreign government can hire and fire the entity’s principals
  • how much of the entity’s profits go to the government’s financials
  • whether the foreign government funds the entity if the entity does not break even

Esquenazi also set forth the following factors to be used in determining whether the foreign entity performs a function the government “treats as its own”:

  • whether the entity has a monopoly over the function it exists to carry out;how much of the entity’s profits go to the government’s financials
  • 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
  • whether the public and the government of that foreign country generally perceive the entity to be performing a governmental function.

The 11th Circuit addressed alleged bribes paid by Joel Esquenazi and Carlos Rodriguez, owners of Terra Telecommunications Corp. (“Terra”), to Telecommunications D’Haiti, S.A.M. (“Teleco”), a Haitian company.  Mr. Esquenazi and Mr. Rodriguez allegedly made payments to Teleco officials through various sham companies to obtain reductions in Terra’s bills to Teleco. Key to the allegations against Mr. Esquenazi and Mr. Rodriguez was determining whether Teleco was a foreign government “instrumentality” such that Teleco officials were government officials and thus the bribes were illegal under the FCPA.

The Esquenazi decision clarifies the meaning of foreign government “instrumentalities.” This issue is especially significant for companies operating in China as so many companies in China are government owned or have government ties. In light of this decision, companies will want to ensure that they and their agents understand the identity of the China parties with whom they are conducting business. For any Chinese entities that may be “instrumentalities” under the Esquenazi decision, companies will want to ensure that they follow their anti-corruption compliance policies to appropriately address all risks associated with such “instrumentalities.”

  • Ward Chartier

    Instrumentalities in China include many major banks, insurance companies, many landlords, security guard companies, many colleges and universities, some stores and restaurants, hospitals and their doctors, some logistics and freight forwarding companies. What did I overlook?

    • bystander

      entire media business, publishing, transportation of nearly all kinds, a lot of high tech companies, on and on. when I see this stuff I can’t help but think that the U.S. has put American businessmen in an impossibly difficult position in China, as if their position was difficult already from the Chinese side (and getting worse). I have to wonder why lobbyists, PACs, and defense contractors in the U.S. aren’t given similar off-limits status for American businessmen. What’s the difference? Is it only that it’s our own government? I’m certainly not in favor of bribery, but if my understanding is correct this law prohibits the hiring of people with certain gov’t background for the purpose of gaining gov’t business. Geez, that’s practically a job description for military officials in the U.S. who go to work for defense contractors. Maybe I’m missing the point somehow. Feel free to enlighten me. It seems to me that either it’s OK for the U.S. to have its biggest trade relation with a state-controlled economy, or it’s not. If it’s not, then for Pete’s sake our markets shouldn’t be thrown wide open to them. If it is OK, then the law ought to be at least a little reflective of the realities of the choice that the U.S. gov’t has made to make it OK.

      • Ward Chartier

        Many thanks for expanding the list. The point is that for people who must obey the FCPA, many firms in China may well be instrumentalities, and it will not be at all obvious which ones are. That said, the easier path is to simply conduct oneself as if all China business entities are instrumentalities and thus avoid FCPA consequences.

        • bystander

          and do no business.

  • Ward Chartier

    I overlooked utilities (water, gas, power, sewer, telecom and data com, etc.) in the list of instrumentalities in my other post.

  • nathan

    Aside from that one pharma guy are there any other foreigners sitting in jail right now for bribery charges in China? Not skeptical, just curious.

  • nathan

    Will be or has been? The GSK Executive is the only case I’ve heard of where a foreigner has been subject to prosecution for corruption in China.

    That’s not to say that we can’t read the writing on the wall, but presently I have not seen any cases where foreigners have been prosecuted.