Tuesday, November 15, 2011

Risky Business: A Look at “State-Owned Enterprises” Under the FCPA (Part 2)

     Last week, Part I explained how operating in foreign markets can be risky business for U.S. companies subject to the FCPA. To briefly recap, the FCPA makes it a crime for a company to offer or pay a bribe to a foreign official. For those who are not familiar with the FCPA, hearing the words “foreign official” might conjure up images of foreign dignitaries brokering peace and discussing foreign policy with fellow leaders of the free world. A handful of federal courts, however, have recently interpreted this term of art much more expansively to include any employee of a “state-owned enterprise” (SOE) when the SOE serves as an “instrumentality” of a foreign government. As a result, U.S. employees who work with employees of foreign entities may not realize that they are in fact transacting business with “foreign officials” for purposes of the FCPA.
     This raises two important questions: First, should SOEs even be considered government instrumentalities under the FCPA? If so, at what point does a foreign company with state ties lose its characterization as a private enterprise and transform into an instrument of the government? Although very little case law exists on the FCPA, a number of recent decisions take a shot at answering these questions. Last week, Part I looked at the Lindsey Manufacturing Case, which answered the first question in the affirmative, and addressed the second question by providing a laundry-list of characteristics that indicate when an SOE is operating as an instrumentality of the government.
     This post will examine United States v. Carson, a foreign corruption case currently pending before a federal judge in the Central District of California. Consistent with his colleague’s ruling in Lindsey Manufacturing, which I discussed in last week's post, Judge James V. Selna ruled in Carson that "state-owned companies may be considered 'instrumentalities' under the FCPA, but whether such companies qualify as 'instrumentalities' is a question of fact [for the jury].'" Therefore, according to the court's order on the matter, employees of SOEs can in fact qualify as foreign officials, which would, in turn, expose companies to the FCPA. In addition to a common-sense reading of the statute's text, Judge Selna based this decision on the expansive use of the term "instrumentality" in other federal statutes as well as the longstanding tradition of private corporations serving as instrumentalities of governments to help "carry out governmental objectives."
     The court also provided "[s]everal factors [that] bear on the question of whether a business entity constitutes a government instrumentality." These non-exclusive factors, which largely overlap with the items provided in Lindsey Manufacturing, include:
  • "The foreign state’s characterization of the entity and its employees;"
  • "The foreign state’s degree of control over the entity;"
  • "The purpose of the entity’s activities;"
  • "The 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;"
  • "The circumstances surrounding the entity’s creation; and"
  • "The 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)."
The trial date for Carson is set for June 5, 2012.
     See Order Denying Defendants’ Motion to Dismiss Counts 1 Through 10 of the Indictment, United States v. Carson, No. 8:09-cr-00077-JVS-1 (C.D. Ca. May 18, 2011) (download here).

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