One of the big frustrations companies have with the Justice Department’s ongoing Foreign Corrupt Practices Act (FCPA) crackdown is that there’s so little case law on the subject. Because the vast majority of cases are resolved through deferred-prosecution agreements, there has been very little judicial review of the DOJ’s broad application of the law. Last fall the U.S. Chamber of Commerce went so far as to issue a report complaining that without more test cases, the DOJ essentially serves as judge as well as prosecutor in FCPA matters.
Well, a trickle of FCPA cases is finally making its way before the judiciary, and so far the decisions are only serving to support the DOJ’s global attack on corruption.
In an April ruling in U.S. v. Noriega, U.S. District Judge Howard Matz of the Central District of California squarely backed prosecutors’ definition of what constitutes a “foreign official.” The facts of the case, FCPA experts say, do not present a strong challenge to the DOJ’s legal interpretation.
“This isn’t a good case, frankly, to test it. The defense counsel certainly made the right motion here. Unfortunately they didn’t have great facts,” says Jonathan Feld, a partner at Katten Muchin Rosenman. “However, this case is significant in that lawyers are finally beginning to test some of the DOJ definitions and scope of the act for the first time. And this issue has certainly been hanging out there for a long time: What’s a foreign official?”
The ruling in question was the denial of a motion to dismiss Noriega, a case in which Lindsey Manufacturing Co., its CEO and its CFO are accused of bribing officials of CFE, a Mexican state-owned electric utility. The defendants argued that employees of a state-owned enterprise did not meet the definition of “foreign official.”
Judge Matz ruled, however, that a state-owned business may constitute an “instrumentality” of a foreign government, therefore its employees qualify as foreign officials. He did not go so far as to say this is always the case, and he applied a five-point test to determine instrumentality (see “Five Points”). The ruling supports the DOJ’s expansive view of public officials and discourages defenses tied to parsing the language of the law or speculating on legislative intent.
“The reality is so far there’s been a plain reading of the statute,” says Markus Funk, a white-collar partner at Perkins Coie. “Basically, the judge said, ‘Look, we don’t need to go into the legislative history, we don’t need to analyze the intent of the authors of the statute, because in a plain reading of the statute the meaning is straightforward.’ He cited the Webster Dictionary, and that’s seriously bad news for the defense.”
The biggest problem the defense faced in the motion to dismiss was the simple fact that CFE was completely government-owned.
“If the facts ever come up where they’re bringing a criminal case where the government has less than a controlling interest, the government’s going to lose,” says Michael Volkov, a Mayer Brown partner and a former federal prosecutor.
Judge Matz’s five-point test centers on the degree of control a government can exert over a company. That at least suggests that when a government does not have financial or practical control, an argument can be advanced that employees are not government officials. That will be little help, of course, in some of the world’s more notorious FCPA hot spots.
“In China, 70 percent of all the assets are owned by the government,” Volkov says. “I tell my clients to just treat everybody there as a foreign official.”
More Cases Pending
Noriega is not the only current case where companies are pushing back against FCPA enforcement in court. U.S. v. Carson in the Central District of California and U.S. v. O’Shea in the Southern District of Texas are both being tracked closely by FCPA practitioners.
“They have almost identical issues: Does the government interpretation of foreign official overreach, and is the statute void for vagueness because it doesn’t give you any notice of when you violate it?” says Funk.
Like Noriega, these cases face an uphill battle, but any clarification on the foreign official question will be useful to companies doing business abroad.
“I personally have been in investigations where the definition of foreign official comes up,” Feld says. “It’s come up recently in some of these pharmaceutical FCPA cases where the medical system is owned or operated almost entirely by the government. Does that make every doctor a foreign employee?”
Definitive answers to these questions will go a long way to providing clarity for the in-house counsel tasked with creating and monitoring effective compliance programs. And it’s hard to overstate the anxiety compliance officers feel when trying to definitively answer even the simplest business questions.
“The fact that you basically have to consult lawyers to try to determine when you can take someone out to dinner or give them a little gift—a little hospitality—is a problem,” Funk says. “It’s a problem because these businesses are going out of their way to do the right thing. They’re analyzing all the systems, they’re trying to become compliant and generate a culture of compliance. Yet it’s impossible for me, for example, to tell them with certainty whether they are or aren’t violating the law when someone takes a foreign official out to a dinner that costs X number of dollars.”
Clearly, many companies are frustrated with the FCPA push, which shows absolutely no signs of abating. That charges cases like Noriega with special significance.
“There was a lot of hope that legal challenges, such as the ones made in Noriega, would help fight back the Department of Justice and prevent them from continuing what is perceived by a lot of people in the business community as an overly expansive interpretation of the law,” Funk says. “Well, now judges are ruling on it, and we’re not getting the rulings that we’re hoping for. So I think there’s going to have be a recalibration of approach.”
Still, the real significance of the case is the fact that companies are pushing FCPA matters to court at all. The ubiquity of prosecutions these days may be removing a bit of the associated stigma and giving defendants the confidence to fight back.
“The DOJ broad definition of public official is the one still standing, if not stronger than ever,” Feld says. “But it really hasn’t been tested in situations where there’s more of a gray area. When those gray areas come up, these motions—which have kind of set the foundation—will be more interesting.”