Last week’s 11th Circuit “foreign official” decision (see here and here for prior posts) was the first decision of precedent (at least in federal courts in Florida, Georgia and Alabama) to address the enforcement theory that employees of alleged state-owned or state-controlled entities (“SOEs”) are “foreign officials” under the FCPA.
As readers likely know, last week’s 11th Circuit decision was preceded by two separate trial court decisions (both in the Central District of California in 2011) that also directly addressed the above enforcement theory.
In all of the cases, the issue of whether an alleged SOE was an “instrumentality” of a foreign government – and thus its employees “foreign officials” under the FCPA – was found to be a factual issue dependent on a number of non-exclusive factors.
The below chart highlights the current landscape as to the FCPA’s “foreign official” element relevant to “instrumentality.”
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(11th Circuit – 2014) |
(C.D. Cal – 2011) |
(C.D. Cal – 2011) |
| “An ‘instrumentality’ [under the FCPA] is 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. It would be unwise and likely impossible to exhaustively answer them in the abstract. […] [W]e do not purport to list all of the factors that might prove relevant to deciding whether an entity is an instrumentality of a foreign government. For today, we provide a list of some factors that may be relevant to deciding the issue.To decide if the government “controls” an entity, courts and juries should look to the 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 governmental fisc, and, by the same token, the extent to which the government funds the entity if it fails to break even; and the length of time these indicia have existed.[…]We then turn to the second element relevant to deciding if an entity is an instrumentality of a foreign government under the FCPA — deciding if the entity performs a function the government treats as its own. Courts and juries should examine whether the entity has a monopoly over the function it exists to carry out; 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 perceive the entity to be performing a governmental function.”
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“[T]he question of whether state-owned companies qualify as instrumentalities under the FCPA is a question of fact.”“[S]everal factors bear on the question of whether a business entity constitutes a government instrumentality” including the following.• The foreign state’s characterization of the entity and its employees;• The foreign state’s degree of control over the entity;
• The purpose of the entity’s activities; • The entity’s obligations and privileges under the foreign state’s law, including whether the entity exercises exclusive or controlling power to administer its designated functions; • The circumstances surrounding the entity’s creation; and • The foreign state’s extent of ownership of the entity, including the level of financial support by the state (e.g., subsidies, special tax treatment, and […] “[The] factors are not exclusive, and no single factor is dispositive.” […] [T]heir chief utility is simply to point out that several types of evidence are relevant when determining whether a state-owned company constitutes an ‘instrumentality’ under the FCPA – with state ownership being only one of several considerations. […] “[A] mere monetary investment in a business entity by the government may not be sufficient to transform that entity into a governmental instrumentality. But when a monetary investment is combined with additional factors that objectively indicate the entity is being used as an instrument to carry out governmental objectives, that business would qualify as a governmental instrumentality.”
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The court provided a”non-exclusive list” of “various characteristics of government agencies and departments” that fall within the description of instrumentality:• The entity provides a service to the citizens – indeed, in many cases to all the inhabitants – of the jurisdiction.• The key officers and directors of the entity are, or are appointed by, government officials.• The entity is financed, at least in large measure, through governmental appropriations or through revenues obtained as a result of government-mandated taxes, licenses, fees or royalties, such as entrance fees to a national park.
• The entity is vested with and exercises exclusive or controlling power to administer its designated functions. • The entity is widely perceived and understood to be performing official (i.e., governmental) functions]
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