• Who’s a “Foreign Official”? Supreme Court Could Clarify Key FCPA Term
  • September 24, 2014 | Author: Fatema K. Merchant
  • Law Firm: Sheppard, Mullin, Richter & Hampton LLP - Washington Office
  • On August 14, 2014, Joel Esquenazi and Carlos Rodriguez filed a Petition for a writ of certiorari in the U.S. Supreme Court seeking clarification of a key term in the Foreign Corrupt Practices Act. Among other arguments, Esquenazi and Rodriguez (the “Petitioners”) state that the FCPA “leaves open the pivotal question of who qualifies as a ‘foreign official’” because the law does not define what it means to be an “instrumentality” of a foreign government. The Department of Justice has waived its right to respond to the Petition, possibly signaling that the government believes the issue does not warrant the Court’s review. Last week, the Washington Legal Foundation and the Independence Institute, a pro-business policy group and think-tank respectively, filed a friend-of-the-court brief in support of the Petition, arguing that the case is of exceptional importance to the business community.

    If granted, the case would be the first time the Supreme Court has addressed the substance of the FCPA. While the odds of the Supreme Court granting cert are not great - the Court grants less than one percent of petitions filed - Petitioners argue that the current state of affairs, in which business and individuals cannot determine whether certain business activity is criminal, is unacceptable.

    Background

    The FCPA prohibits individuals and companies from offering or making corrupt payments to foreign officials to obtain or retain business. A “foreign official” is “any officer or employee of a foreign government or any department, agency, or instrumentality thereof.” But the term “instrumentality” is not further defined.

    In August 2011, Esquenazi and Rodriguez, co-owners and executives of Terra Telecommunications Company, were convicted under the FCPA for providing kick-backs to two employees of Telecommunications D’Haiti S.A. (Haiti Teleco), a Haitian telecommunications company. Terra Telecommunications purchased minutes from communications companies, including Haiti Teleco, and resold them for a profit to U.S. customers. In exchange for the alleged improper payments, Terra Telecommunications received reduced rates and unearned credits. Esquenazi was sentenced to 15 years, the longest prison-term in FCPA history; Rodriguez was sentenced to a 7-year term. In May 2014, the Eleventh Circuit affirmed the convictions and confirmed a broad interpretation of “instrumentality,” defining the term as “an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own.” The Court then laid out a two-pronged test with a broad set of non-exhaustive, non-exclusive factors to consider when determining whether a foreign government controls an entity. For businesses trying to navigate FCPA compliance concerns, the waters were left decidedly murky.

    Why The Court Should Take This Case

    Petitioners argue that the Eleventh Circuit’s interpretation of the term “instrumentality” is unacceptably broad, and allows the U.S. government to “take a ‘we-know-it-when-we-see-it’ approach” to enforcement of the FCPA that violates constitutional protections. To illustrate the expansive scope of individuals who may qualify as “foreign officials” under the current definitional ambiguity, the Petition quotes former Assistant Attorney General Lanny Breuer discussing the pharmaceutical industry of certain countries, asserting that “nearly every aspect of the approval, manufacture, import, export, pricing, sale and marketing of a drug product in a foreign country will involve a ‘foreign official’ within the meaning of the FCPA.”

    Petitioners further argue that given the heightened level of FCPA enforcement activity and the span of time it has taken one circuit court to address this key term, the Supreme Court should provide definitive guidance on the meaning of “instrumentality” now, and not wait for a circuit split on the issue. The Petition also highlights that another statute, the Foreign Sovereign Immunities Act, specifically includes within the definition of “agency or instrumentality of a foreign state” entities “a majority of whose shares or other ownership interest is owned by a foreign state or political subdivisions.” Petitioners argue that the explicit definition in the FSIA indicates that Congress knew how to include such language in the FCPA, but chose not to do so. According to the Petition, the absence of such explicit language is significant, and warrants construing “instrumentality” as excluding many entities that seem to fall within the ambit of FCPA enforcement actions.

    The WLF/II amicus brief further argues that, to avoid criminal conduct, businesses are in urgent need of guidance on the FCPA’s meaning; yet nearly no company is willing to challenge in court government assertions about which payments violate the FCPA. Despite the numerous FCPA proceedings in recent years, every large corporate entity that has been subject to an FCPA enforcement action has settled because the consequences of losing are so dire. This has resulted in a dearth of case law, but a desperate need for concrete guidance regarding the definition of “foreign official.” According to WLF/II, the question of who qualifies as a “foreign official” is “the single greatest source of confusion” related to the scope of the FCPA.

    Compliance Challenges Due to Definitional Deficiency

    Enforcement actions involving alleged bribes to employees of state-owned entities have increased dramatically in the last few years. As noted in the Petition, last year, 55% of FCPA corporate enforcement actions involved alleged payments to employees of state-owned entities; in 2012, 42% of such actions related to employees of state-owned enterprises. For businesses with international operations, evaluating business relationships with state-owned entities and their employees who may be considered “foreign officials,” is critical to FCPA compliance. Companies spend enormous sums in compliance costs to mitigate risk in an area that is riddled with ambiguity and where law enforcement discretion is expansive. The open-ended guidance provided by the Eleventh Circuit’s opinion, which requires a highly fact-specific determination, is impracticable for straightforward implementation. Companies are then left to be over-inclusive in their approach, treating any entity with ties to the foreign government as an “instrumentality” and their employees as “foreign officials,” which dampens U.S. companies’ competitiveness in many foreign markets.

    Despite the cry for clarity from the business community, the Court may not grant cert because the facts of Esquenazi do not represent a close call. The Eleventh Circuit opinion stated that Haiti Teleco would “qualify as a Haitian instrumentality under almost any definition [the court] could craft.” Certainly a better case would be one where the entity at issue had weaker ties to the foreign government. On the other hand, Haiti’s own Prime Minister made a declaration stating that “Teleco has never been and until now is not a state enterprise.”

    The business community and compliance professionals will eagerly anticipate the Supreme Court’s decision on granting review. We leave you with the first sentence of the Petition, which neatly sums up the conundrum at hand: “Few, if any, laws match the FCPA when it comes to the chasm between its profitability for the Government and the near-universal confusion concerning how far the statute actually reaches.”