Sunday, November 6, 2011

Risky Business: A Look at “State-Owned Enterprises” Under the FCPA (Part 1)

     Operating in foreign markets can be risky business for U.S. companies. A series of recent cases brought under the Foreign Corrupt Practices Act (FCPA) highlight the fact that the line separating public entities from private entities is not always clear.
     The FCPA’s anti-bribery provisions generally prohibit companies from giving (or offering) anything of value to a foreign official. The Act defines “foreign official” to include employees of government “instrumentalities,” but fails to clarify exactly what constitutes an “instrumentality.” Federal prosecutors, however, have interpreted this term expansively to include “state-owned enterprises” (SOEs), which often resemble private-sector companies. SOEs typically provide water, electricity, telecommunications, and other goods and services, but are owned or controlled, at least in part, by the state within which they operate. Based on this interpretation, any employee of an SOE—from the mailroom clerk to its CEO—may be considered a “foreign official” under the FCPA.
     As one might expect, employees of U.S. companies conducting business abroad often do not realize that they are dealing with an SOE, unwittingly exposing their company to prosecution under the FCPA. This raises two important questions: First, should SOEs even be considered government instrumentalities under the FCPA? If so, what exactly constitutes an SOE? Although very little case law exists on the FCPA, a number of recent decisions take a shot at answering these questions.
     This is the first of a series of posts that will examine the characteristics that differentiate SOEs serving as instrumentalities of foreign governments from private-sector entities that merely conduct business with foreign governments, for purposes of the FCPA.
     This post will examine the “Lindsey Manufacturing Case,” in which District Judge Matz recently ruled that SOEs may serve as an instrumentality of a foreign government under the FCPA. Judge Matz provided the following non-exclusive list of characteristics that indicate when an SOE operates as an instrumentality of the government:
  • "The entity provides a service to the citizens – indeed, in many cases to all the inhabitants – of the jurisdiction."
  • "The key officers and directors of the entity are, or are appointed by, government officials."
  • "The entity is financed, at least in large measure, through governmental appropriations or through revenues obtained as a result of government-mandated taxes, licenses, fees or royalties, such as entrance fees to a national park."
  • "The entity is vested with and exercises exclusive or controlling power to administer its designated functions."
  • "The entity is widely perceived and understood to be performing official (i.e., governmental) functions."
See Criminal Minutes, U.S. v. Noriega, et al., No. 2:10-cr-01031 (C.D. Ca. Apr. 20, 2011). You can download the ruling here.

1 comment:

  1. This is a very useful and informative post - thank you very much, Mr. Wagoner! The FCPA is a major compliance concern for multinational entities.