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Deep Within Its Section 1504 Final Rules, The SEC Adopts An FCPA Reform Proposal Advanced By The Chamber And Contradicts An Enforcement Theory At Issue In Several Of Its Prior FCPA Actions

In late August, the SEC adopted final rules implementing Section 1504 of Dodd-Frank, the so-called Resource Extraction Disclosure Provisions.  A future post will discuss the final rules as to this provision which was tacked to the end of the massive financial regulation bill at the last minute as a “miscellaneous provision” (see here for a prior post).

This post highlights that deep within the 232 pages of Section 1504 SEC final rules, the SEC adopted an FCPA reform proposal advanced by the Chamber of Commerce as well as contradicts an enforcement theory at issue in several of its prior FCPA actions.

First a bit of background.

In “Restoring Balance:  Proposed Amendments to the Foreign Corrupt Practices Act” (here), the Chamber proposed to clarify the definition of “foreign official.”  In Congressional testimony, former Attorney General Michael Mukasey, testifying on behalf of the Chamber, stated as follows.  “The FCPA therefore should be amended to clarify the meaning of ‘foreign official,’ indicate the percentage of ownership by a foreign government that would qualify the entity as an instrumentality. We think majority ownership is the most plausible threshold.”  (See here for the hearing transcript).

In the aftermath of the House hearing, and in response to questions from Capital Hill, SEC Chairman Mary Schaprio stated that the FCPA “sufficiently defines the term foreign official” and further stated as follows.  “Given the various forms of government found around the world, it would be impractical to articulate each of the myriad of ways that one could use to identify a foreign official in particular countries or cultures.”  (See here for the prior post).

Back to Section 1504.  It  defines “foreign government” to mean a “department, agency or instrumentality of a foreign government, or a company owned by a foreign government, as determined by the Commission.”  On page 101 of its recently issued final rules (here), the SEC states as follows.  “[T]he final rules clarify that a company owned by a foreign government is a company that is at least majority-owned by a foreign government.”

By so concluding, not only did the SEC quietly adopt an FCPA reform proposal advanced by the Chamber, but it also contradicted an enforcement theory at issue in several of its prior FCPA actions.

For instance, in the several Bonny Island, Nigeria enforcement actions (see here for a summary) the SEC alleged that employees of Nigeria LNG Limited (“NLNG”) were “foreign officials” despite the fact that NLNG was owned 51% by a consortium of private multinational oil companies.

In the Alcatel-Lucent enforcement action, the SEC alleged that employees of Telekom Malaysia Berhad were “foreign officials” in that the entity was a state-owned and controlled company even though the Malaysian Ministry of Finance owned only 43% of the company’s shares.  (See here for the prior post).

The Comverse enforcement action focused on Hellenic Telecommunications Organization (“OTE”) and allegations that the Greek Government was OTE’s largest shareholder and controlled the company.  The SEC suggested that employees of OTE were “foreign officials” even though, during the relevant time period, the Greek Government held only 33% – 38% of the company’s shares.  (See here for the prior post).

With the SEC’s conclusion in its Section 1504 final rules that a company owned by a foreign government is a company that is at least majority-owned by a foreign government, the SEC will be hard pressed to allege in future FCPA enforcement actions that an entity with less than 50% foreign government ownership or control is an instrumentality of a foreign government and that its employees are “foreign officials” under the FCPA.  This is assuming of course that the SEC cares about intellectual honesty and consistency.

As noted in previous posts, Section 1504 of course also demonstrates that when Congress wants to, it knows how to pass a bill that captures state-owned or state-controlled enterprises (SOEs).  Congress is presumed not to use redundant or superfluous language in enacting statutes.  If instrumentality include SOEs (as the enforcement agencies maintain), then Congress violated this legislative maxim by using redundant or superfluous language in Section 1504.  Congress did not violate this maxim in Section 1504 because instrumentality does not include SOEs and there is no support in the voluminous FCPA legislative history to support such a claim.  (See here for my foreign official declaration).

In its 11th Circuit “foreign official” response brief (here) the DOJ merely states, in a footnote, the following as to Section 1504.  “[Section 1504’s] definition of “foreign government,” enacted more than 30 years after the FCPA and in a very specific and unrelated context, has no bearing on the meaning of instrumentality in the FCPA.”

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