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The Noticeably Missing Hypothetical And The Government’s Two “Instrumentality” Positions

The FCPA guidance issued last week by the DOJ and SEC contains 18 hypotheticals (including sub-parts) ranging from jurisdictional issues; to gifts, travel and entertainment; to facilitation payments; to successor liability; to third party due-diligence.  In addition to these hypotheticals, the guidance also contains 12 (what I will call) vignettes – information set apart from the text that discuss issues ranging from “how can I tell if my company is a issuer;” to obtain and retain business, to numerous other issues such as charitable donations and routine government action.

One hypothetical noticeably missing from the FCPA guidance concerns the most important element of an FCPA anti-bribery violation – the “foreign official” element.  The DOJ’s position on this important FCPA element has become so discombobulated (for example, see here for a recent post) that it was probably easiest to take a pass.

Not only does the guidance pass on providing a “foreign official” hypothetical, but the guidance also creates a situation where the government now has two “instrumentality” positions.  I am not talking about a position based on informal statements delivered on the FCPA conference circuit, but a position set forth in official government documents.

In pertinent part, the FCPA guidance states that “as a practical matter, an entity is unlikely to qualify as an instrumentality if a government does not own or control a majority of its shares.  However, there are circumstances in which an entity would qualify as an instrumentality absent 50% or greater foreign government ownership, which is reflected in the limited number of DOJ or SEC enforcement actions brought in such situations.”  The guidance then lists as an example the Alcatel-Lucent enforcement action (see here for a prior post) in which the enforcement agencies asserted that Telekom Malaysia Berhad was a state-owned and controlled entity, even though the Malaysian Ministry of Finance only owned approximately 43% of the company’s shares, because the Ministry of Finance was a “special shareholder” with apparent veto power over major expenditures and control over important operational decisions.

This position in the guidance conflicts with the recent rule promulgated by the SEC (which co-authored the FCPA guidance) in connection with Section 1504 of Dodd-Frank.  As highlighted in this prior post, Section 1504 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  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.”

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