One of the goals of the Foreign Corrupt Practices Act (“FCPA”) is to prevent US companies and individuals from paying bribes to foreign officials in exchange for business. To this end, the FCPA prohibits any domestic individual or business entity from making payments to a “foreign official” for the purpose of obtaining or retaining business. 15 U.S.C. § 78dd-2(a)(1). However, who, precisely, qualifies as a “foreign official” is the subject of much uncertainty. In particular, whether employees of a state-owned company qualify as foreign officials for purposes of FCPA is an area of great concern—and potential liability—particularly for US companies doing business in Latin America where governments often have at least some level of involvement in various business sectors from education to utilities to health care.
The FCPA defines a “foreign official” as “any officer or employee of a foreign government or any department, agency or instrumentality thereof.” 15 U.S.C. § 78dd-2(h)(2)(A). Thus, whether an employee of a state-owned company is a foreign official depends, in part, upon whether state-owned companies are “instrumentalities” of a foreign government. Two courts have recently weighed in on this issue, finding that the determination is a fact-specific inquiry. In United States v. Carson, 2011 U.S. Dist. LEXIS 88853 (C.D. Cal. May 18, 2011), the court identified several factors including: (1) the foreign state’s characterization of the entity and its employees; (2) the foreign state’s degree of control over the entity; (3) the purpose of the entity’s activities; (4) the entity’s obligations and privileges under the foreign state’s law, such as whether the entity has exclusive or controlling power to administer its functions; (4) the circumstances surrounding the entity’s creation; and (5) the extent of the foreign state’s ownership of the entity and level of financial support, such as subsidies, special tax treatment, and loans. 2011 U.S. Dist. LEXIS 88853, at *11-12. The court emphasized that state ownership by itself is insufficient to determine that the company is an “instrumentality” under the FCPA. Id. at 12. In United States v. Aguilar, 783 F. Supp. 2d 1108 (C.D. Cal. 2011), the court considered various characteristics of government agencies and departments to assist it in understanding whether a state-owned company is an “instrumentality.” 783 F. Supp. 2d at 1115. In addition to several of the factors identified by the Carson court, the Aguilar court also looked at whether the entity provides a service to the citizens of the jurisdiction; whether key officers and directors are, or are appointed by, government officials; and whether the entity is perceived and understood to be performing official government functions. Id.
In practice, however, companies who come under investigation for alleged FCPA violations cannot necessarily rely on the standard that has been articulated by the Court. Looking at recent settlements announced by the Department of Justice and the Securities and Exchange Commission, the entities tasked with investigating FCPA violations, take a more bright-line stance that government ownership is the determinative factor for FCPA purposes. For example, in March 2012, the SEC and DOJ announced a settlement with Biomet, which had been charged with bribing doctors in Argentina, Brazil, and China in order to secure business with state-owned and operated hospitals. Similarly, in April 2011, the SEC and DOJ reached a settlement with Comverse Limited over payments to employees of Hellenic Telecommunications Organisation S.A., a telecommunications company in Greece. The Greek government owned one-third of the company’s issued share capital, making it the company’s largest single shareholder.
Given that many companies under investigation by the DOJ and SEC for FCPA violations reach settlements rather than litigating charges in court, companies doing business abroad are left with considerable uncertainty about whether the DOJ and SEC’s broad definition of an instrumentality (and thus a “foreign official”) or the court’s fact-specific inquiry set the standard for FCPA liability. Until the courts definitively settle the issue, companies seeking to limit potential FCPA liability should err on the side of caution and consider all employees of any company owned in whole or in part by a foreign state to be “foreign officials” for purposes of the FCPA.