Over the past few years, the US government has taken an expansive view of who qualifies as a “Foreign Official” under the FCPA. A recent DOJ advisory opinion took the position that a member of a royal family did not qualify as a Foreign Official for FCPA purposes, leading to speculation that the government had relaxed its standards of who qualifies under the term.1 However, as the new FCPA Guidance2 demonstrates, companies should not assume that the DOJ or the SEC have narrowed their view. Companies should still make good use of the FCPA Guidance by incorporating a complete Foreign Official analysis into their risk assessments going forward.
“Foreign Official” focuses not on the Person, but on the Entity
The FCPA defines Foreign Official as “any officer or employee of a foreign government or any department, agency, or instrumentality thereof . . ..”3 Much of the recent discussion regarding the definition of Foreign Official centers on what constitutes an “instrumentality” of the government.
In keeping with the US government’s expansive view of the meaning of Foreign Official, the government takes a broad view of which entities qualify as instrumentalities of a foreign government. Employees of traditional governmental agencies are easy to identify as Foreign Officials, but the US government has also taken the position that employees of foreign oil, gas and power companies,4 telecommunications firms,5 and state-run hospitals and institutions may qualify as Foreign Officials due to their statuses as instrumentalities of a foreign government.6
The DOJ advisory opinion excluding a royal family member from the definition of foreign official did not address the “instrumentality of the government” question. Unlike recent cases involving the definition of foreign official, the royal family member in question had held only “one governmental position in the Foreign Country” in the late 1990s, and had “never had any role in any public organization.”7 There was no need to analyze the status of any organization connected to the individual as a potential instrumentality of the government, because no such organization existed. The “instrumentality of the government” question did not arise.
In contrast, the FCPA Guidance walks through several examples of entities the DOJ and SEC might consider to be instrumentalities of a foreign government. Generally, these entities tend to be dedicated to infrastructure (such as telecom or natural resources), or the wide provision of basic services (such as healthcare). The FCPA Guidance lays out a “non-exclusive list of factors” the US government would likely consider in evaluating whether an entity qualifies as an instrumentality of a foreign government, which appears to draw largely from positions taken by the US government in litigation over the past several years. Some of the more significant factors include:
- The extent of state ownership of the entity;
- The degree of control exerted by the government, such as whether the government can appoint board members or other key officers;
- How the state itself characterizes the entity;
- The circumstances surrounding the entity’s creation;
- The degree and type of financial support enjoyed by the entity, including any preferential tax treatment, government-mandated fees, or government-backed loans;
- The purpose of the entity, and whether a governmental purpose is expressed in the operation of the entity; and,
- The general perception that the entity is performing official or governmental functions.8
Of all these factors, the most significant factor is the degree of state ownership of the entity. The FCPA Guidance states that entities with only a minority of government ownership are unlikely to be considered instrumentalities of the government.9 Although unlikely, it is still possible that entities with only a minority of government ownership could be considered instrumentalities of a foreign government. For those entities, the key element appears to be the extent of control the government can exert over the entity.
Although the “non-exclusive list” identifies a number of other factors for companies to consider, control seems to be the most important. For example, the FCPA Guidance points to a case where the DOJ determined that a company with only 43% government ownership nonetheless qualified as an instrumentality of the government. Although the foreign government only owned a minority of the company, the government had the power to veto major expenditures, “controlled important operational decisions,” and the entity’s senior officers and directors were political appointees.10
Include a “Foreign Official” Component in any Risk Assessment
Companies hoping to minimize FCPA and corruption liability should conduct risk assessments with these factors in mind. In addition to any other considerations, companies must ensure that all risk assessments include a component for analyzing the legal and operational functions of their partners as they relate to potential governmental activity. A robust risk assessment should include a review of the character, role, status, and financial position of foreign partners to determine whether those partners may qualify as potential instrumentalities of a foreign government under the FCPA. The exact nature of the review will vary depending on the facts and circumstances of each situation, but certain specific steps to consider include:
- An analysis of the percentage of the entity’s ownership that can be attributed to a foreign government;
- An analysis of the composition of the entity’s board of directors and its key officers, and an understanding of how such individuals are appointed to their positions;
- A review of the entity’s legal charter, including any enabling legislation;
- A review of any legislation granting special status to the company, including exclusive rights, special tax treatment, or the establishment of any fees or price regulations;
- Consideration of the nature and function of the entity, including the identification of any other entities within the state that perform the a similar function; and,
- An examination of any financial support provided to the entity by a foreign government.
Should a company’s risk assessment identify customers or other partners who exhibit any of the characteristics of an instrumentality of a foreign government, the company should (i) evaluate whether the characteristics are sufficient for the partner’s employees to be considered Foreign Officials; (ii) ensure existing policies and procedures regarding foreign officials are applied to any interactions with the entity, and (iii) conduct appropriate training and communication with employees, agents, and other third parties having dealings with the entity to ensure that the company’s anti-corruption guidelines are applied and followed.
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Alexandra J. Marinzel
1 Foreign Corrupt Practices Act Review, U.S. Department of Justice, Criminal Division, Opinion Procedure Release No. 12-01 (Sept. 18, 2012).
2 FCPA: A Resource Guide to the U.S. Foreign Corrupt Practices Act, Criminal Division of the U.S. Department of Justice and the Enforcement Division of the U.S. Securities and Exchange Commission (Nov. 14, 2012).
3 Foreign Corrupt Practices Act of 1977 (FCPA), 15 U.S.C. § 78dd-1(f)(1)(A).
4 United States v. Carson, No. 09-00077, 2011 WL 5101701, at *3 (C.D. Cal. 2011).
5 Complaint at 4, S.E.C. v. Comverse Technology, Inc., No. 11-1704 (E.D.N.Y. Apr. 7, 2011), ECF No. 1; Indictment at 3, United States v. Esquenazi, No. 09-21010 (S.D. Fla. Dec. 4, 2009), ECF No. 3.
6 Complaint at 4, S.E.C. v. Pfizer Inc., No. 12-01303 (D.D.C. Aug. 7, 2012), ECF No. 1.
7 U.S. Department of Justice, Criminal Division, supra note 1, at 2.
8 Criminal Division of the U.S. Department of Justice and the Enforcement Division of the U.S. Securities and Exchange Commission, supra note 2, at 20.
9 Id. at 21.
10 Id. (citing Criminal Information, US. v. Alcatel-Lucent France, S.A., No. 10-cr-20906 (S.D. Fla. Dec. 27, 2010), ECF No. 1).