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Article: DOJ’s Use of Expansive Legal Theories Broaden FCPA Jurisdiction

April 01, 2014
Business Litigation Reports

Enacted in 1977 in response to the revelation of widespread bribery of foreign officials by U.S. companies, the Foreign Corrupt Practices Act (“FCPA” or “the Act”) was “intended to halt those corrupt practices, create a level playing field for honest businesses, and restore public confidence in the integrity of the marketplace.” A Resource Guide to the U.S. Foreign Corrupt Practices Act, U.S. Department of Justice (“DOJ”) and the Enforcement Division of the U.S. Securities and Exchange Commission (“SEC”), Nov. 14, 2012, at 2 (“FCPA Guidance”). To that end, Congress included an anti-bribery provision in the Act that prohibits companies and their employees and agents from paying bribes to foreign officials in order to obtain or retain business.

For decades following its enactment, FCPA enforcement was largely non-existent. It was not until the early 2000s when, following the second amendment of the Act, enforcement activity proceeded in earnest. Since that time, FCPA enforcement has been rampant, peaking at 74 actions initiated by either DOJ or SEC in 2010, as compared to five actions in 2004. See Melissa Aguilar, 2010 FCPA Enforcement Shatters Records, Compliance Week (Jan. 4, 2011).

Despite the government’s increased enforcement of the FCPA, the actions are seldom litigated in federal court. The government increasingly enters into non-prosecution agreements (“NPAs”) and deferred prosecution agreements (“DPAs”) with companies in which the government agrees not to prosecute in exchange for proof of continuing compliance. Actions not resolved through NPAs or DPAs are typically resolved through plea agreements or settlements, usually accompanied with large criminal or civil monetary penalties. There is very little case law interpreting the breadth of the Act, leaving DOJ and SEC free to pursue aggressive legal theories that have been largely untested in federal court. This article discusses some of the government’s most recent theories and examines the increased expansion of the FCPA’s scope.

“Foreign Official” Under the FCPA
DOJ and SEC have taken an expansive view of who qualifies as a “foreign official” under the FCPA. In general, the anti-bribery provision of the Act prohibits the payment of money or anything of value to a foreign official in order to influence any act or decision of the foreign official in his or her official capacity or to secure any other improper advantage in order to obtain or retain business. See 15 U.S.C. § 78dd. “Foreign official” is defined, in part, as “any officer or employee of a foreign government or any department, agency or instrumentality thereof.” §§ 78dd-2(h)(2)(A).

The Act does not define the term “instrumentality.” Without any formal legislative guidance, DOJ and SEC have affixed their own definition to the term, interpreting it to include state-owned or state-controlled enterprises (“SOEs”). By classifying SOEs as an “instrumentality” of a foreign government, DOJ and SEC consider individuals employed by SOEs to be “foreign officials” under the Act.

DOJ and SEC Expansion of the Term “Instrumentality”
Over the past few years, DOJ and SEC have focused on illicit payments to employees of SOEs. For example, in 2010, DOJ charged Alcatel-Lucent with making improper payments to employees of a Malaysian telecommunications company, Telekom Malaysia Berhard (“TMB”). The payments were made in exchange for non-public information relating to ongoing public tenders for which an Alcatel-Lucent subsidiary was competing. Although TMB was only 43 percent owned by the Malaysian government, DOJ still considered it to be an “instrumentality” of the Malaysian government. Specifically, DOJ’s criminal information claimed that the Malaysian Ministry of Finance had veto power over all of TMB’s major expenditures and made important operational decisions. DOJ also claimed that the Malaysian government owned its interest in TMB through the Minister of Finance, who had the status of a “special shareholder.” Furthermore, DOJ claimed that most senior TMB officers were political appointees. Based on these factors, DOJ deemed the employees of TMB to be “foreign officials.”

DOJ’s action against TMB reflects the government’s most expansive position on when an entity qualifies as an instrumentality of a foreign government. See Mike Koehler, Foreign Official Limbo . . . How Low Can It Go? FCPA Professor (Jan. 10, 2011). That is, never before had DOJ or SEC ever taken action against a commercial enterprise as an “instrumentality” of a foreign government that was only 43 percent owned by that foreign government. Now, in the wake of TMB, corporations are left to wonder exactly how much “ownership” must a foreign government have in a given enterprise for the government to consider it “state-owned.” While the exact answer to that question remains unclear, DOJ and SEC have stated that ownership, per se, is not the determining factor; rather, the focus should be on elements of “control, status, and function to determine whether a particular entity is an agency or instrumentality of a foreign government.” FCPA Guidance at 20.

Challenges to DOJ and SEC Interpretation of “Instrumentality”
Recently, several targets of DOJ and SEC enforcement actions have moved to dismiss criminal indictments on the basis that employees of SOEs could not qualify as a “foreign official.” These challenges, however, have been largely unsuccessful. In fact, of the five cases challenging the government’s expansive interpretation of “foreign official,” three were summarily denied. See e.g., United States v. Esquenazi, et al., 1:09-cr-21010 (S.D. Fla. 2009); United States v. O’Shea, No. 09-00629 (S.D. Tx. 2009); United States v. Nguyen, No. 2:08-cr-00522 (E.D. Pa. 2008). The two remaining cases, United States v. Carson, No. 09-77 (C.D. Cal. 2009) and United States v. Noriega, No. 10-1031 (C.D. Cal. 2010), resulted in opinions that affirmed DOJ and SEC’s enforcement theory that employees of SOEs can be “foreign officials” under the FCPA.

In Carson, executives of Control Components, Inc. were charged with allegedly paying approximately $4.9 million in corrupt payments to employees of state-owned customers in China, Korea, Malaysia, and the United Arab Emirates. The defendants moved to dismiss on the basis that employees of SOEs could never be “foreign officials” under the FCPA. See United States v. Carson, 2011 WL 5101701, *1 (C.D. Cal. May 18, 2011). Although the court denied the defendants’ motion, it nevertheless observed “that the question of whether state-owned companies qualify as instrumentalities under the FCPA is a question of fact.” Id. That “a company is wholly owned by the state is insufficient for the Court to determine as a matter of law whether the company constitutes a government ‘instrumentality.’” Id. As such, the court went on to identify:

     [s]everal factors that bear on the question of whether a business entity
     constitutes a government instrumentality, including: [1] [t]he foreign state’s
     characterization of the entity and its employees; [2] [t]he foreign state’s degree
     of control over the entity; [3] [t]he purpose of the entity’s activities; [4] [t]he
     entity’s obligations and privileges under the foreign state’s law, including whether
     the entity exercises exclusive or controlling power to administer its designated
     functions; [5] [t]he circumstances surrounding the entity’s creation; and [6] [t]he
     foreign state’s extent of ownership of the entity, including the level of financial
     support by the state (e.g., subsidies, special tax treatment, and loans).

Id. at 3-4. Based on these factors, the court concluded that the SOEs were instrumentalities of foreign governments. Id. Therefore, the payments made by the executives of Control Components to the employees of the various SOEs implicated the FCPA.

Carson is a pivotal case in FCPA “foreign official” jurisprudence because the court embraced the government’s position that elements of control, status, and function are relevant to the determination of when, and under what circumstances, an SOE may be considered an instrumentality of a foreign government. Notwithstanding this guidance, cultural considerations can make this determination a challenge. Indeed, the government has acknowledged that “when a foreign government is organized in a fashion similar to the U.S. system, what constitutes a government department or agency is typically clear” but when “governments [are] organized in very different ways” spotting an SOE can be more difficult. FCPA Guidance at 20. For example, in Asia, state-ownership and state-control of commercial enterprises are quite common, though not always outwardly apparent. Specifically, in China, the vast majority of hospitals are SOEs, likely rendering the doctors, nurses, and hospital administrators as “foreign officials” under the government’s expansive interpretation of the Act. This could cause potential FCPA problems for foreign drug companies that sell their drugs in Chinese hospitals where “it is well known in China that doctors who prescribe drugs in state-operated hospitals are often given a ‘kickback’ in the form of a commission by the supplier of the drugs.” Daniel Chow, China Under the Foreign Corrupt Practices Act, 2012 WIS. L. REV. 573, 585 (2012).

With so much uncertainty about when, and under what circumstances, an SOE may be considered an instrumentality of a foreign government, further judicial guidance on this issue is necessary. Last fall, a U.S. appellate court (the Eleventh Circuit) heard oral arguments in United States v. Esquenazi, No. 11-15331-C, concerning the propriety of the government’s enforcement theory that employees of SOEs can be foreign officials under the FCPA. That decision, which is expected this spring, will provide guidance on the continued viability of the government’s expansive interpretation of the term “instrumentality.”

“Territorial Jurisdiction” Under the FCPA
DOJ and SEC have also taken an expansive view of the “territorial jurisdiction” provision of the Act. As the global economy rapidly expanded following the passage of the Act, U.S. companies complained that the FCPA created a competitive disadvantage for them by failing to curtail corrupt practices among foreign actors. To that end, Congress amended the Act in 1998 to, among other things, add a “territorial jurisdiction” provision. Under this provision, foreign entities, other than issuers (i.e., companies that have securities registered in the U.S. or that are required to file reports with SEC) and foreign individuals, are subject to the FCPA if they “corruptly . . . make use of the mails or any means or instrumentality of interstate commerce,” or if they commit “any other act in furtherance of” a corrupt payment “while in the territory of the United States.” 15 U.S.C. § 78dd-3(a). Thus, any action taken “while in the territory of the United States,” irrespective of the nationality of the individual actor, or the place of domicile of the corporation, confers U.S. jurisdiction.

DOJ and SEC Correspondent Bank Transfers Theory
DOJ and SEC have taken an expansive view of what it means for conduct to have taken place “while in the territory of the United States”—to the point that physical presence in the U.S. is not required. For instance, DOJ has taken the position, albeit in conjunction with other jurisdictional bases, that territorial jurisdiction extends to those who cause foreign funds to be transferred through correspondent bank accounts in the U.S. See e.g., United States v. Technip S.A., No. 10-cr-00439 (S.D. Tx. filed June 28, 2010); United States v. Kellogg Brown & Root LLC, No. 09-cr-00071 (S.D. Tx. filed Feb. 6, 2009). Correspondent bank transfers occur when a foreign transaction is denominated in U.S. dollars. The foreign currency must be converted into U.S. dollars and for the conversion to take place, the foreign currency must pass through a correspondent bank in the U.S. According to DOJ, this fleeting contact with U.S. banking institutions occurs “within the territory of the United States.”

In one recent FCPA action, JGC Corporation, a Japanese company, agreed to pay approximately $218 million for its role in a conspiracy to bribe Nigerian officials as part of a joint venture with other corporations that themselves were charged with FCPA violations. JGC was neither a domestic concern nor an issuer, and was not alleged by DOJ to have been an agent of a domestic concern or issuer. Nevertheless, DOJ asserted jurisdiction because JGC’s co-conspirators were either issuers or domestic concerns. While the conspiracy and aiding-and-abetting bases for the action were apparently adequate to proceed in the JGC matter, DOJ nevertheless included allegations suggesting that FCPA liability could also be based on a “territorial jurisdiction” theory because of the use of correspondent bank accounts.

Using these and other expansive legal theories, DOJ and SEC have extracted nearly $5 billion in civil and criminal penalties from individuals and corporations alleged to have violated the FCPA since 2009. See Robert Cassin, 2013 FCPA Enforcement Index, FCPA Professor (Jan. 2, 2014). Accordingly, if the government continues to be aggressive in its FCPA enforcement, individuals and corporations may be less likely to acquiesce to the government’s settlement demands and more likely to litigate against DOJ’s and SEC’s expansive legal theories.