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Prosecuting the Foreign Official for Demand Side Bribery

by with No Comment Blog

PROSECUTING THE FOREIGN OFFICIAL TAKING THE BRIBE

Congress has proposed the passage of a law, the Foreign Extortion Prevention Act (FEPA), that would enable prosecutors to prosecute a foreign official, a foreign political candidate, instrumentalities of foreign governments, etc. who take bribes or “anything of value.”

The proposed law would become part of 18 U.S.C. Section 201 which criminalizes the “bribery of public officials and witnesses.” It would not, however, become part of the Foreign Corrupt Practices Act (FCPA). It is no mystery that the law is intended to fill a gap left open by the text of the FCPA and closed by federal courts of appeal which have consistently held that federal prosecutors cannot prosecute a foreign official for violations of the FCPA. See United States v. Castle, 925 F.2d 831 (5th Cir. 1991) (“In this case, we are called upon to consider the Foreign Corrupt Practices Act of 1977 (hereinafter referred to”FCPA”), 15 U.S.C. §§ 78dd- 1, 78dd-2, and determine whether “foreign officials,” who are excluded from prosecution under the FCPA itself, may nevertheless be prosecuted under the general conspiracy statute, 18 U.S.C. § 371, for conspiring to violate the FCPA. We hold that foreign officials may not be prosecuted under 18 U.S.C. § 371 for conspiring to violate the FCPA.”); United States v. Hoskins, 902 F.3d 69 (2d Cir. 2018) (reaching similar conclusions and barring prosecution of FCPA offenses under conspiracy and aiding and abetting theories where defendant is not in one of the three cognizable categories under 15 U.S.C. Section 78dd-1, 78dd-2, or 78dd-3).

The truth is, however, that this law – whether passed or not – is just another hammer for federal prosecutors for the same conduct they already prosecute using money laundering statutes. The government may prosecute a foreign official under the promotional prong of the money laundering statute. Indeed, the government has prosecuted multiple foreign officials under that prong by asserting that money which is sent from the U.S. to a foreign country (or vice-versa) was used to promote the carrying on of violations of the FCPA or, better yet, violations of foreign bribery laws pursuant to 18 U.S.C. Section 1956(c)(7)(b)(iv).

The critical portions of the revised law would create a new Section 201 (a)(4)-(5) that would greatly expand the definition of what constitutes a public official under 201 by including a “foreign official.” It would also include “a public international organization” within the definition of a “foreign official.”

‘‘(4) the term ‘foreign official’ means—

(A)

(i) any official or employee of a foreign government or any department, agency, or instrumentality thereof; or

(ii) any senior foreign political figure, as defined in section 1010.605 of title 31, Code of Federal Regulations, or any successor regulation;

(B) any official or employee of a public international organization;

(C) any person acting in an official capacity for or on behalf of—

‘(i) a government, department, agency, or instrumentality described in sub20

paragraph (A)(i); or

(ii) a public international organization; or

(D) any person acting in an unofficial capacity for or on behalf of—

(i) a government, department, agency, or instrumentality described in sub3

paragraph (A)(i); or

(ii) a public international organization; and

‘‘(5) the term ‘public international organization’ means—‘‘(A) an organization that is designated by Executive order pursuant to section 1 of the International Organizations Immunities Act (11 U.S.C. 288); or (B) any other international organization that is designated by the President by Executive order for the purposes of this section, effective as of the date of publication of such order  in the Federal Register.

The offense portion of the FEPA would be found at Section (f) which is set forth below. The language in the new prohibition would apply to foreign officials regardless of whether the conduct occurred “while in the territory of the U.S.” which is a departure from the plain text of the FCPA and language in 15 U.S.C. Section 78dd-3.

(f) PROHIBITION OF DEMAND FOR A BRIBE.—

(1) OFFENSE.—It shall be unlawful for any foreign official or person selected to be a foreign official to corruptly demand, seek, receive, accept, or agree to receive or accept, directly or indirectly, anything of value personally or for any other person or nongovernmental entity, by making use of the mails or any means or instrumentality of interstate commerce, from any person (as defined in section 104A of the Foreign Corrupt Practices Act of 1977 (15 U.S.C. 78dd–3), except that that definition shall be applied without regard to whether the person is an offender) while in the territory of the United States, from an issuer (as defined in section 3(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a))), or from a domestic concern (as defined in section 104 of the Foreign Corrupt Practices Act of 1977 (15 U.S.C. 78dd–2)), in return for—

(A) being influenced in the performance of any official act;

(B) being induced to do or omit to do any act in violation of the official duty of such foreign official or person; or

(C) conferring any improper advantage, in connection with obtaining or retaining business for or with, or directing business to, any person.

The Firm defends foreign nationals and foreign officials in public corruption and FCPA investigations. The Firm also has experience representing foreign nationals from South America including Argentina, Brazil, Ecuador, Peru, and Venezuela in FCPA and money laundering investigations. The Firm is also one of the few law firms in the U.S. to have tried an FCPA case before a jury.

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What is a Foreign Official Under the FCPA?

by with No Comment Blog

United States v. Esquenazi: Eleventh Circuit Becomes the First Court of Appeals to Decide What Constitutes an “Instrumentality” of a Foreign Government Under the FCPA

Recently, the Eleventh Circuit became the first Court of Appeals to decide the question of whether an entity constitutes an “instrumentality” of a foreign government for purposes of the FCPA.

I. Facts

Two co-owners of a telecommunications company in Florida, Terra Telecommunications (“Terra”), purchased phone time from foreign vendors and resold minutes to customers in the United States. One of Terra’s main vendors was Telecommunications D’Haiti SAM (“Teleco”). Over time, Terra’s outstanding debt to Teleco increased based on previous agreements between the two companies.  To relieve some of the debts they owed to Teleco, Terra sent monies to officers of Teleco. Later on, the two co-owners of Terra also made payments to a shell company owned by other Teleco officials.

II. FCPA Provisions Addressing “Instrumentality” of a Foreign Government

The anti-bribery provision of the FCPA specifically prohibits a “domestic concern” from:

“Making use of the mails or any means …of interstate commerce corruptly in furtherance of a bribe to “any foreign official,” or to any person, while knowing that all or a portion of such money or thing of value will be offered, given, promised, directly or indirectly to any foreign official…

For purposes of  —-

influencing any act of decision of such foreign official …in order to assist such domestic concern in obtaining or retaining business for or with, or directing business to, any person.”

See 15 U.S.C. Section 78dd-2(a)(1),(3)

A “domestic concern” includes:

  • Any individual who is a citizen, national, or resident of the U.S.; and
  • Various business entities, e.g., partnerships, corporations, organizations, business trusts, so long as the business entity has its principal place of the business in the U.S. or is organized under the laws of the U.S. or a territory, possession, or commonwealth of the U.S., e.g., Puerto Rico.

See 15 U.S.C. Section 78dd-2(h)(1)(A)-(B)

A “foreign official” includes, among other things:

  • Any officer or employee of a foreign government;
  • Any department or agency of a foreign government; and
  • Any instrumentality of a foreign government.

See 15 U.S.C. Section 78dd-2(h)(2)(A)

III. The Esquenazi Decision

A. Two Prong Test for “Instrumentality” in Esquenazi

The court upheld the Teleco owners’ convictions under the FCPA, reasoning that, the district court’s jury instructions with respect to what constituted an “instrumentality” of a foreign government were proper. The jury instructions in dispute were as follows:

To decide whether Teleco is an instrumentality of the government of Haiti, you may consider factors, including:

One, whether it provides services to the citizens and habitants of Haiti

Two, whether its key officers and directors are government officials or are appointed by government officials

Three, the extent of Haiti’s ownership of Teleco, including whether the Haitian government owns a majority of Teleco’s shares or provides financial support such as subsidies, special tax treatment, loans or revenue from government mandated fees.

Four, Teleco’s obligations and privileges under Haitian law, including whether Teleco exercises exclusive or controlling power to administer its designated functions

And, five, whether Teleco is widely perceived and understood to be performing official or governmental functions.

Terra contended that these instructions caused them to convict Terra simply based on the fact that Teleco was a government owned entity providing a service. The Eleventh Circuit disagreed finding that the instructions given to the jury did not mislead the jury or incorrectly state the law. The Court then established a two prong test for deciding whether an entity might constitute an “instrumentality” of a foreign government:

  • First Prong – Whether the foreign government “controls” the entity
    • Foreign government’s formal designation of that entity;
    • Whether the government has a majority interest in the entity;
    • The government’s ability to hire and fire the entity’s principals;
    • The extent to which the entity’s profits, if any, go directly into the government fisc;
    • The extent to which the government funds the entity if it fails to break even; and
    • The length of time that these “indicia” have existed, e.g. the length of the government’s control over the entity.
  • Second Prong – Whether the entity performs a function the controlling government treats as its own.
    • Whether the entity has a monopoly over the function it provides;
    • 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; and
    • Whether the public and the government of that foreign country generally view the entity to be performing a government function.

B. Deliberate Ignorance Instruction

At trial, the court instructed the jury that they may find that the co-owner knew that the payments to foreign officials that he was authorizing were illegal if they found that he deliberately avoided knowledge of the fact that payments to those foreign officials were unlawful. The government argued that such an instruction was proper since, as a financial executive, he was in a position to know the illegality of the payments he was making.

The Eleventh Circuit disagreed finding that there was no evidence showing that the co-owner deliberately avoided learning whether the payments were illegal. However, the court found he actually knew that the payments he was authorizing were illegal, and therefore, the faulty instruction amounted to harmless error.

C. Knowledge that a Bribe Would Be Passed Along to a Foreign Official

At trial, the Court specifically instructed the jury that they can only find the defendant’s guilty if they knew – had actual knowledge– that bribe or thing of value would ultimately reach the hands of a foreign official.  The Eleventh Circuit specifically approved of this instruction.

D. Sentencing

The federal sentencing guidelines provide for a 16 level enhancement if the value of the benefit received or to be received in return for a bribe is more than $1 million but less than $2.5 million. See U.S.S.G. Section 2B1.1(b)(1). Defendants argued that this enhancement did not apply to them, individually, when the value of the benefit received by Terra (the corporation) exceeded $1 million. The Eleventh Circuit found that defendants waived this argument since they did not raise it at sentencing and, instead, argued that a lesser enhancement was warranted to maintain parity with their co-defendants who pleaded guilty.

IV. Potential Impact of the Decision

Haiti Teleco was an easy case for the court to decide since history demonstrated that the Haitian government controlled telecommunications and telecommunications was widely viewed as a service provided by the Haitian government . Undoubtedly, there will be closer cases where a more thorough application of the Esquenazi factors will be required and the two prong test outlined in Esquenazi raises several important questions:

  • Will the Department of Justice and the Securities Exchange Commission apply the factors listed in the Esquenazi two part test?
  • How will the factors listed in the Court’s two prong test impact businesses operating in certain industries, and their behavior, e.g., oil, mining, pharmaceuticals, health care, and banking?
  • Will government attorneys, or U.S. and foreign regulators treat formal declarations from a foreign government that an entity is not performing a function of that foreign government as prima facie evidence that the entity is not an instrumentality of a foreign goverment for purposes of the FCPA?
  • Does this two prong test validate the Department of Justice’s current interpretation of sovereign wealth funds (SWF’s) as “instrumentalities” of foreign governments? If so, how will this affect private investment firms’ (private equity and hedge funds) decisions to obtain investments from SWFs?

The decision also underscores the limitations of a deliberate ignorance instruction with respect to corporate executives. While Esquenazi held that the deliberate ignorance instruction was harmless error because the defendant actually knew about the illegal payments he was authorizing, the court also rejected the premise for that instruction. Indeed, the government seemed to argue that, because defendant was a corporate executive of Teleco, he should have known that the payments that he was authorizing were unlawful. Put simply, the government argued that the deliberate ignorance instruction was proper because knowledge may be imputed to the defendant based on his position as a corporate executive. Fortunately, the Eleventh Circuit recognized that, permitting a jury to find FCPA liability under this quasi-responsible corporate officer theory was problematic.

Equally as important, the decision illustrates that, if a corporate executive gives something of value, e.g. a charitable contribution, which ultimately reaches the hands of a foreign official, then the corporate executive must actually know that the contribution will reach that official to be liable under the anti-bribery provisions of the FPCA.

In sum, individuals and companies operating in high risk industries or countries with lax anti-corruption laws, or both, should be aware of the Esquenazi decision and should evaluate whether, and to what extent, the decision might impact future business arrangements and investment decisions.

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