This is not the first time I’ve written about this general topic nor is it likely to be the last.
In the minds of some, Foreign Corrupt Practices Act compliance is easy – you just don’t bribe.
However, as recent enforcement activity has demonstrated, FCPA enforcement actions often include allegations about internships (BNY Mellon and Qualcomm), sports tickets (BHP Billiton), travel and entertainment (GlaxoSmithKline and several other enforcement actions), charitable donations (Nu Skin) and other inconsequential things of value such as flowers, cigarettes, and golf in the morning and beer drinking in the evening (Eli Lilly, SciClone Pharmaceuticals and several other enforcement actions).
In other words, the underlying activity is legal and socially acceptable in most situations. In fact, it is often called effective sales and marketing, wining and dining the customer, or maintaining good will. Yet when such activity is focused, directly or indirectly, on a “foreign official” the U.S. government is inclined to call it bribery.
In short, the meaning of “foreign official” determines whether a criminal law applies to an interaction in the global marketplace.
The proper scope and meaning of “foreign official” is thus an issue of extraordinary practical significance to businesses and individuals subject to the FCPA. Not because business organizations want to bribe, but because business organizations competing in good faith in the global marketplace want to engage in conduct that is legal and socially acceptable in most other situations.
The 2014 Esquenazi decision (see here at pgs. 170-190 for a discussion of the numerous flaws in the decision) expanded regulation of business interactions with a “well-defined group of persons” (as correctly noted by the 5th Circuit in U.S. v. Castle) to an ill-defined, practically boundless category of persons.
Consider this recent article in the Wall Street Journal titled “China Establishes New State-Owned Aircraft-Engine Maker.”
“China set up a new state-owned aircraft engine maker to help fulfill ambitions to develop homegrown aerospace giants and become a major player in global aviation. In remarks published … by state media, President Xi Jinping described the creation of Aero Engine Corp. of China, or AECC, as a “strategic move” that would accelerate the development of indigenously made jet engines and thereby boost national prestige and military power. The new company, which has 50 billion yuan ($7.5 billion) in registered capital and 96,000 employees, will focus on the design, manufacture and testing of aircraft engines, the official Xinhua News Agency said.”
In the blink of an eye, China has 96,000 more “foreign officials” according to the DOJ and SEC and assuming the ill-defined Esquenazi “control” and “function” test are met.
Further relevant to China is this recent Dow Jones release that caught my eye. It states:
“Dow Jones Risk and Compliance has announced that its third party risk data now includes all identifiable Chinese state-owned companies (SOCs) in operation, enhancing its coverage of the global risk landscape. Developed over eight years by a Shanghai-based research team, content relating to China was drawn from a variety of publicly available sources and currently covers more than 100,000 Chinese government-owned companies.”
Notice the phrase “all identifiable” in the above release. As many FCPA compliance practitioners no doubt realize, it is not easy in some cases understanding the ownership structure of certain Chinese entities.
The release further notes:
“China accounts for around 40% of the 242,000 SOCs that Dow Jones Risk and Compliance has identified globally to date, of which:
45,000 Chinese SOCs are wholly-owned by the Chinese government;
4,000 owned by the Chinese government are located outside of China.”
As to this last point, in the eyes of the DOJ and SEC and assuming the ill-defined Esquenazi “control” and “function” test is met, there are Chinese “foreign officials” all over the world including the coal fields of Wyoming and the tar sands of Alberta.
Nevertheless, certain people are likely to be confused or perplexed why the meaning of “foreign official” matters. For instance, this civil society organizations asked – why is greater clarity needed as “foreign official” – “greater certainty of what? Greater certainty of who [companies] are permitted to bribe and who [companies] are not permitted to bribe.”
Likewise, in the immediate aftermath of the 2014 Esquenazi decision a commentator stated:
“If your are trying to figure out whether a company is a private company or an “instrumentality” of a foreign government under the Foreign Corrupt Practices Act you are already in trouble. To reach that point in the FCPA analysis you’ve already paid a bribe, or are thinking of paying a bribe. (If you’re just thinking about it; Don’t do it.) Otherwise you’ll end up in the position of Joel Esquenazi and Carlos Rodriguez.”
For the reasons stated above, this is not the main reason why the meaning of “foreign official” matters.
To repeat, the meaning of “foreign official” determines whether a criminal law applies to an interaction in the global marketplace. The proper scope and meaning of “foreign official” is thus an issue of extraordinary practical significance to businesses and individuals subject to the FCPA.
Not because business organizations want to bribe, but because business organizations competing in good faith in the global marketplace want to engage in conduct that is legal and socially acceptable in most other situations.
As previously stated, the 5th Circuit correctly noted in U.S. v. Castle that “foreign officials” under the FCPA were a “well-defined group of persons.” (It is interesting to note that the DOJ’s opening brief in the Hoskins appeal cites this exact phrase from Castle.)
However, given the DOJ’s and SEC’s interpretations of “foreign official” and the ill-defined Esquenazi “control” and “function” test, we have moved far, far away from “foreign officials” being a “well-defined group of persons.”
Indeed, as FCPA practitioner Timothy Dickinson has stated:
“Ten years ago, I would have been happy to bet anyone a doughnut that I could accurately define what a foreign official is. Now, with various court definitions and a lack of clarity from the DoJ, I fear I might actually lose my doughnut.”