There is no question that it is illegal to bribe a foreign official. But until recently, there was little clarity on how broadly the term “foreign official” in the Foreign Corrupt Practices Act (FCPA) would be interpreted or how successful prosecutors would actually be in making their cases. Now we know.
On May 10, 2011, a California federal jury convicted Lindsey Manufacturing Company, two of its executives, and a Mexican sales agent on all counts charged in the superseding indictment arising out of their participation in a scheme to bribe Mexican government officials at a state-owned utility company in U.S. v. Noriega. The charges against the company and the executives included one count of conspiracy to violate the FCPA and five substantive bribery counts under the FCPA, while the charges against the sales agent included one count of money laundering conspiracy. What is particularly notable about this case, and about several others recently commenced by the Department of Justice (DOJ), is that the alleged bribes were not directed at a government official, but instead towards the employees of a state-owned utility company.
Although companies facing similar charges frequently avoid the risks posed by seeking deferred and non-prosecution agreements with the DOJ, the defendants here chose to fight. In their motion to dismiss the First Superseding Indictment, several of the defendants challenged the DOJ’s position that the employee of a nationalized company qualifies as a “foreign official,” which the FCPA defines as “any officer and employee of a foreign government or any department, agency, or instrumentality thereof[.]” Relying heavily on the legislative history of the FCPA, the moving defendants argued that, as a matter of law, no state-owned corporation can be an “instrumentality” of a foreign government and, thus, officers and employees of such entities could not qualify as foreign officials. The court disagreed, finding that the FCPA’s legislative history was “inconclusive” as to whether an “instrumentality” includes state-owned corporations and finding that officers and employees of a state-owned corporation can be “foreign officials” for purposes of the FCPA when the state-owned corporation shares defining characteristics of departments and agencies that fall within the ambit of “instrumentality.”
In reaching this conclusion, the court provided a non-exhaustive list of these defining characteristics that can help an entity determine when it is dealing with an “instrumentality”:
- The entity provides a service to the citizens of the jurisdiction;
- Government officials act as or appoint the key officers and directors of the entity;
- The entity is being financed, at least in large measure, through governmental appropriations, or through revenues obtained as a result of government-mandated taxes, licenses, fees or royalties;
- The entity is vested with and exercises exclusive or controlling power to administer its designated functions; and
- The entity is widely perceived to be performing official functions.
After pressing forward, the defendants were convicted at trial on all counts. This was the first time in the 34-year history of the FCPA that a company and executives have been tried and convicted under the statute, and it is clear that the government views this as only the beginning. In announcing the verdict, Assistant Attorney General Lanny A. Breuer confirmed that the verdict would only embolden the department in its prosecution of foreign bribery:
Lindsey Manufacturing is the first company to be tried and convicted on FCPA violations, but it will not be the last. Foreign corruption undermines the rule of law, stifling competition and the health of international markets and American businesses. As this prosecution shows, we are fiercely committed to bringing to justice all the players in these bribery schemes—the executives who conceive of the criminal plans, the people they use to pay the bribes, and the companies that knowingly allow these schemes to flourish. Bribery has real consequences.
So does this case. When expanding into economies that are nationalized, companies—and in-house counsel— need to be aware that the reach of the FCPA goes beyond dealings with government officials. Knowing what is at stake, and how broadly the “foreign official” term has been construed, might actually make the panoply of expensive and intrusive conditions that often are part of deferred and non-prosecution agreements—including paying fines and penalties, cooperating with further DOJ investigations, establishing internal compliance programs, and appointing (and paying for) independent, corporate monitors—seem much more attractive than the alternative.