Investigations and White Collar Defense

Is Anyone Not a Foreign Official Under the FCPA?

Authors: Jacqueline C. Wolff | Nirav S. Shah 

Recent years have seen a rise in the number of enforcement actions taken by the Department of Justice (DOJ) and the Securities Exchange Commission (SEC) under the Foreign Corrupt Practices Act (FCPA), as well as a notable expansion of the types of conduct covered by these prosecutions. Increasingly, the government has focused on prosecuting individuals and companies for allegedly corrupt payments to officials of state-owned enterprises (SOEs), rather than more traditional government entities.

The FCPA prohibits corrupt payments to “foreign officials,”defining a foreign official as “any officer or employee of a foreign government or any department, agency, or instrumentality thereof ... or any person acting in an official capacity for or on behalf of any such government or department ... ” 15 U.S.C. § 78dd-2(h)(2)(A).

The DOJ has brought cases against companies and individuals in relation to their dealings with SOEs based on a broad reading of the term “instrumentality,” a term not otherwise defined in the statute. According to one survey of FCPA prosecutions in 2009, two-thirds of the prosecutions against companies that year related to SOEs, with DOJ and the SEC pursuing a disproportionate number of cases in a handful of industries like energy, telecommunications and health care. Mike Koehler, The Foreign Corrupt Practices Act in the Ultimate Year of Its Decade of Resurgence, 43 Ind.L. Rev. 389, 411-13 (2010). Some recent examples include:

  • A deferred prosecution agreement and $2 million fine for payments made to physicians employed at Chinese stateowned hospitals in exchange for physicians directing theirhospitals to purchase the defendant U.S. corporation’s medical devices. U.S. v. AGA Medical Corp., 0:08-cr-00172-1(D. Minn. 2008).
  • Charges leading to a $402 million criminal settlement for, inter alia, bribes allegedly made by KBR to officials of Nigeria LNG, a joint venture between private multinational energy companies owning 51% of the joint venture, and Nigeria’s state-owned oil company owning 49%, for the purpose of securing engineering and procurement contracts. U.S. v. Kellogg, Brown and Root LLC, 09-cr-071 (S.D.Tex. 2009).
  • Indictments of officers of a Florida company for payments made to officials of Honduras’ national telecommunications company — including the senior in-house attorney of that company — in exchange for interconnection agreements and preferential rates. U.S. v. Granados, 1:10-cr-20881 (S.D.Fla. 2010).

The government’s approach appears to subsume nearly every entity that has some government ownership, even if the amount of government ownership is less than 50% of an otherwise privately owned entity or the entity is engaged in purely commercial pursuits. From a domestic perspective, this approach has potentially absurd results: if the U.S. were a foreign country, American International Group officers would have to be deemed foreign officials by virtue of the government’s takeover of that company as part of TARP.

Legislative History Suggests Otherwise
In two recent cases, defendants have sought to highlight this potential absurdity. In both U.S. v. Nguyen, 2:08-cr-00522 (E.D.Pa. 2009) and U.S. v. Esquenazi, 1:09-cr-21010 (S.D. Fla. 2009), the defendants filed motions to dismiss on the grounds that the recipients of their alleged payments were not “foreign officials” under the FCPA. In Nguyen, the president of Nexus Technologies Inc. was charged with violating the FCPA by making payments to secure contracts with various Vietnamese state-owned enterprises. Esquenazi involved payments to the directors of international relations at Haiti’s government-owned telecommunications utility, allegedly in exchange for lower usage rates.

Nguyen and Esquenazi argued that Congress’s intent in enacting the FCPA was to criminalize payments to individuals performing public functions, not the commercial functions typical of SOEs. They argued that the ordinary meaning of “instrumentality” — “a thing used to achieve an end or a purpose” — compels this interpretation. As an instrumentality of the government, such entities must necessarily advance the “end or purpose” normally associated with governance, not simple financial gain.

Nguyen and Esquenazi also analyzed the use of the term “instrumentality” in other statutes on the books in 1977, such as the Foreign Sovereign Immunities Act (FSIA) and Employee Retirement Income Security Act (ERISA), arguing that these definitions should be persuasive in interpreting FCPA.

Drawing on FSIA case law indicating that instrumentalities must be directly owned by the government, for example, Nguyen argued that one company named in the indictment, PVGC, was a subdivision of an entity that was owned by the Vietnamese government. Nguyen claimed that the “corporate layer separating PVGC from the Vietnamese government” was sufficient to preclude PVGC’s status as an instrumentality. Additionally, courts interpreting “instrumentality” under ERISA have held that “a government  instrumentality is one that performs an important government function,” a point used by the defendants to attempt to highlight the distinction between public and commercial functions. See Fed. Reserve Bank v. Metrocentre Improvement Dist. #1, 657 F.2d 183, 185.

Nguyen and Esquenazi also addressed the legislative history surrounding the 1998 amendment to the FCPA. The amendment added international organizations to the list of entities whose officials could be deemed foreign officials. The amendment was undertaken to conform the Act with the Organisation for Economic Co-operation and Development (OECD) Convention, an agreement among over 30 nations to effectuate stronger and more consistent laws that criminalize corruption of foreign officials. The Commentaries to the OECD Convention state that the Convention’s anti-bribery provisions should apply to SOEs unless “the enterprise operates on a normal commercial basis in the relevant market, i.e., on a basis that is substantially equivalent to that of a private enterprise, without preferential subsidies or other privileges.” Convention Commentary ¶¶ 14-15. This Commentary weighs in favor of the argument that traditionally commercial entities should be deliberately excluded from the FCPA.

The district courts in Nguyen and Esquenazi rejected the defendants’ arguments but only because the issue (and evidence) would be better left as a question of fact for a jury. In addition to the sources cited in the Nguyen and Esquenazi cases, there are numerous other sources of authority that may be helpful to a practitioner seeking to defend her client in an FCPA enforcement action where the “foreign official” appears to be more private than “official.”

The 1976 SEC Report
In U.S. v. Kay, 359 F.3d 738, 749 (5th Cir. 2004), the U.S. Court of Appeals for the Fifth Circuit identified two primary sources of FCPA legislative history — congressional reports and the 1976 SEC Report that provided the impetus for enactment of the FCPA. This second document, titled the “Report on Questionable and Illegal Corporate Payments and Practices,” bolsters the argument that the term “foreign officials” means individuals performing a traditionally public function.

The SEC Report addressed improper foreign expenditures, dividing these by recipient: “government officials, commission agents and consultants, and recipients of commercial bribery.” SEC Report at 25. Thus, payments to officials are set forth as a category separate from ordinary commercial bribery.

The 1977 House Report for the FCPA made repeated reference to this SEC Report, and added only one example to those cited in the Report: Lockheed’s bribery of various high-level politicians, such as the Japanese Prime Minister and Minister of Finance, a Dutch prince, and various Cabinet-level politicians in Italy. H.R. Rep. 95-640 at 5. While not dispositive of the issue, a deeper look at the 1977 legislative history shows that Congress was addressing traditional government officials, not SOE employees, when it passed the FCPA.

The OECD Convention
In the years prior to the ratification of the OECD Convention in 1998, the passage of the FCPA had created a comparative disadvantage for American companies, which were forced to compete with foreign companies that were unrestrained in their ability to pay bribes. The central purpose of the 1998 Amendment and the OECD Convention was to “level the playing field for business worldwide.” House Report No. 105-802 at 12 (1998).

By creating a uniform anti-bribery policy among the 30-plus signatories, the OECD Convention intends to eliminate any comparative disadvantage to honest companies. An FCPA defendant could use this to argue that reciprocity is a key principle to be applied when interpreting the FCPA — that Congress intended American companies to be bound only as much as companies from other signatory nations would be. This principle militates against criminalizing conduct by American companies abroad if analogous conduct in the U.S. would not fall under other signatories’ anti-corruption laws promulgated pursuant to the Convention. For example, under this approach, payments to telecommunications executives for preferential rates would fall outside the FCPA, since the equivalent American companies — Verizon, AT&T, etc. — are private. Instead, commercial bribery laws would cover such conduct.

The OECD Questionnaire
The DOJ’s response to the OECD Phase I Questionnaire is also helpful. This questionnaire sought information regarding the DOJ’s compliance with the OECD Convention. In response to a request to define the scope of the term “foreign official,” the DOJ stated:

State-owned business may, in appropriate circumstances, be considered instrumentalities of a foreign government and their officers and employees to be foreign officials … . Among the factors [the DOJ] considers are the foreign state’s own characterization of the enterprise and its employees, i.e., whether it prohibits and persecutes bribery of the enterprise’s employees as public corruption, the purpose of the enterprise, and the degree of control exercised over the enterprise by the foreign government. See U.S. Response to Phase I Questionnaire, available at www.oecd.org (emphasis added).

The DOJ’s response, drafted essentially contemporaneous to the passage of the 1998 Amendment, implies that SOEs should not automatically be understood to be instrumentalities for purposes of the FCPA. Each of the factors listed — legal characterization, purpose of the enterprise, degree of control — offers a ground to oppose the application of FCPA to a specific SOE. In this respect, an investigation of the foreign country’s legal characterization of its SOEs may bring useful defenses to light. Certain French public corruption legislation, for example, appears to explicitly exclude companies that have less than 30% public ownership, potentially removing such companies from the FCPA’s each.  See Modernization of Public Services Act of 2007.

Conclusion
The government’s broad interpretation of the terms “foreign official” and “instrumentality” significantly expands the types of transactions implicated by the FCPA. Yet there are arguments to be made that this interpretation violates the intent of the statute. Despite the failure of two recent defendants to dismiss indictments on some of these grounds, hearguments can continue to be made and certainly remain viable for a defendant in the post-motion to dismiss stages of an FCPA enforcement action.

 


Foreign Bribery: Feds Aggressively Use FCPA And the Money Laundering Statute

Every time you turn around, the Justice Department or SEC announces a new round of charges and settlements against individuals and entities under the Foreign Corrupt Practices Act (FCPA). Historically, the government has focused FCPA enforcement efforts on persons or entities within the U.S., or on foreign persons or entities that commit unlawful acts within our borders.

But, more recently, the government has employed conspiracy or aiding and abetting theories to reach acts of foreign bribery not previously thought to be within U.S. law enforcement’s reach. This article examines recent charges and settlements suggesting a new approach by federal authorities to foreign bribery.

Background
Before turning to the cases, a little history is required. Investigations by the Watergate Special Prosecutor and SEC during the 1970s revealed that numerous U.S. companies had bribed foreign officials while doing business abroad. As a result, Congress in 1977 enacted the FCPA to curb foreign bribery in two ways. First, with some notable exceptions not pertinent here, the FCPA prohibited bribes (or offers of bribes) to foreign officials by U.S. persons or entities doing business overseas. Second, the FCPA required companies whose stock is registered with the SEC (issuers) to establish accounting and financial controls aimed at preventing corrupt payments to foreign officials.

As originally enacted, the FCPA’s anti-bribery provisions had limited reach. As noted, the statute applied only to “issuers,” i.e., to companies whose stock was registered with the SEC or that were required to file reports with the SEC, and also to “domestic concerns.” 15 U.S.C. §§ 78dd-1, 78dd-2. An individual was a “domestic concern” only if he or she was a U.S. citizen, national or resident. 15 U.S.C. § 78dd-2(h). An entity was a “domestic concern” only if its principal place of business was in the U.S. or if it was organized under the laws of a state of the U.S. Id. Thus, liability generally was limited to U.S. companies or individuals that made corrupt payments to foreign officials.

That changed with enactment of the International Bribery and Fair Competition Act of 1998. Among other things, that Act expanded the FCPA’s reach to foreign companies and persons that directly or indirectly caused to occur within the U.S. an act in furtherance of a corrupt payment abroad. However, even after the 1998 amendment, if a party did not directly or indirectly cause such an act to occur within the U.S., the party was immune from FCPA liability. As a result, foreign nationals or companies (except those registered as issuers) whose unlawful acts occur entirely outside our borders have been thought to be outside the FCPA’s reach.

Moreover, government efforts to broaden the FCPA’s scope by charging exempt persons or entities with conspiring to violate the statute have been rejected by courts. In United States v. Castle, 925 F.2d 831, 836 (5th Cir. 1991), for example, the government charged two Canadian officials with conspiring to violate the FCPA after they agreed to accept bribes from a U.S. company. The U.S. Court of Appeals for the Fifth Circuit held that because foreign officials who receive bribes cannot be charged with primary violations of the FCPA, they also cannot be charged with conspiring to violate the statute. In short, because Congress had specifically excluded a class of alleged wrongdoers from the FCPA’s reach, the Fifth Circuit concluded that the government could not use a conspiracy theory to reach them.

Notwithstanding this seemingly well-settled principle, several recent cases suggest that the government is becoming more aggressive in using conspiracy and aiding and abetting theories to bring enforcement actions against non-U.S. companies and persons whose core violations involve foreign bribery schemes.

U.S. v. Snamprogetti Netherlands B.V.
A notable recent example is U.S. v. Snamprogetti Netherlands B.V., No. 10 Crim. 460 (S.D. Tex.). Snamprogetti, a Dutch corporation, was part of a joint venture that allegedly authorized bribes to Nigerian officials to obtain contracts to build liquefied natural gas facilities in that country. In July 2010, Snamprogetti and its current and former Italian parent companies entered into a deferred prosecution agreement with the Justice Department calling for a $240 million dollar fine. Snamprogetti separately agreed to pay $125 million in disgorgement to settle SEC charges.

Notably, the Justice Department did not allege that Snamprogetti committed a primary violation of the FCPA. Rather, Snamprogetti was alleged to have entered into a conspiracy with its joint venture partners and others to pay bribes through intermediaries and to have aided and abetted those same acts. The charging document in that case contained no allegations of direct conduct by Snamprogetti within the U.S. in furtherance of the alleged FCPA conspiracy. Instead, the government relied on allegations that Snamprogetti and its co-conspirators caused wire transfers to flow through bank accounts in New York, and that the company’s alleged co-conspirators caused emails and faxes to be sent to other co-conspirators in Houston, all in furtherance of the alleged conspiracy.

Thus, to support its charges, the government appears to have attributed to Snamprogetti the conduct of its purported co-conspirators, notwithstanding the fact that the company’s core bribery scheme appears to have had little or no connection to the U.S. While the government would likely argue that U.S. wire transfers made in support of the conspiracy provided a sufficient jurisdictional predicate to support FCPA liability, the case nevertheless can be seen as an incremental step toward the day when the acts of U.S.-based co-conspirators are attributed to foreign actors for FCPA purposes even when those acts were not “caused” by the foreign actor within the meaning of the FCPA.

SEC v. Panalpina
In November 2010, the SEC announced civil settlements with several companies in oil services industries, including Panalpina Inc., a global freight forwarding and logistics services company, for violating the FCPA. The SEC alleged that Panalpina, the U.S. subsidiary of a Swiss parent, bribed customs officials in more than 10 countries in exchange for various benefits, including preferential customs duties and import treatment for international freight shipments. Panalpina agreed to pay $11,329,369 in disgorgement to settle the charges. Panalpina and its Swiss parent also agreed to pay the Justice Department a criminal fine of $70.56 million.

While Panalpina, as a U.S.-based entity, clearly could have been (and was) charged with violations of the FCPA as a principal, the SEC’s complaint is notable because it conceded that neither Panalpina nor its parent were issuers. Despite this, the complaint charged Panalpina with two counts of aiding and abetting FCPA violations by customers of the company that were issuers. According to a statement by an SEC official, this was the first time that the agency had charged a non-issuer with FCPA violations. Thus, Panalpina potentially represents an effort by the SEC to expand its focus beyond “issuers” through application of aiding and abetting or, potentially, conspiracy, theories of FCPA liability.

U.S. v. Siriwan
Another example of non-traditional anti-bribery enforcement is the Justice Department’s indictment of a Thai public official, Juthamis Siriwan. See U.S. v. Siriwan, No. 09 Crim. 0081 (C.D. Cal.). In that case, the government alleged that the defendant, the former head of the Tourism Authority of Thailand, accepted bribes from two U.S. citizens who owned and operated several businesses in Southern California. In exchange, Siriwan allegedly secured several lucrative Thai contracts for her U.S. benefactors.

Siriwan was not charged with any FCPA violations because, as discussed already, foreign officials who do no more than receive bribes from a covered person or entity are beyond the reach of the statute. Instead, the Justice Department charged Siriwan under the federal money laundering statute, 18 U.S.C. § 1956, on the theory that she had laundered money for the purpose of furthering the primary FCPA violations allegedly ommitted by her U.S. bribe-givers. In essence, rather than charging Siriwan with accepting a bribe, the government charged her with conspiring to transport the money used for the bribe.

To be sure, the government’s theory was not entirely novel. In U.S. v. Bodmer, 342 F. Supp. 2d 176 (S.D.N.Y. 2004), Manhattan federal district Judge Shira Scheindlin rejected a defendant’s motion to dismiss in similar circumstances, noting that “i[f] immunity from the FCPA’s criminal penalties automatically conferred non-resident foreign nationals with immunity from the money laundering statute, these non-resident foreign nationals could openly serve as professional money launderers of proceeds derived from violations of the FCPA, without repercussion.” Id. at 191. Combined, however, with the kind of aggressive use of the FCPA reflected in the Snamprogetti and Panalpina cases, the charging theory in Siriwan reflects the government’s clear intention to reach foreign bribery previously considered outside the reach of U.S. law enforcement.

Conclusion
The cases discussed above make clear that federal authorities have undertaken a concerted effort to curb foreign bribery schemes. The government appears to be signaling that foreign bribery with even a marginal connection to the U.S. is now fair game for pursuit under the FCPA or other arguably applicable statute.