International - Written by Barry & Richard on Saturday, June 14, 2014 3:35 - 0 Comments
Mr. Esquenazi & Rodriguez: Why a decision about ‘instrumentality’ under US FCPA turns out to be *very* important in the UK
The 11th Circuit Court of Appeals judgment recently handed down contains some interesting messages for the future in the UK.
The case was one concerning corruption, a US Company ‘Terra’, owned by the two defendants, purchased telecoms minutes from ‘Telecommunications D’Haiti, S.A.M.’ (Telco).
In order to reduce the bill for these minutes an agreement was reached with Telco’s Director General, amongst others, that in return for payments to individuals, which were routed through a company providing non-existent ‘consultancy’ services, Terra’s bill would be significantly reduced.
This arrangement survived a change in personnel at Telco.
In the end Terra saved $2.2m as a result of paying bribes of $840k.
Sentences of 15 years and 7 years for the defendants were upheld on appeal.
Significant for the US & the UK
This was the first time that an appellate court had to deal with the meaning of instrumentality in the context of influencing a foreign official under the FCPA. As the appeal court stated, the appeal was all about arriving at a definition of this word:
15 USC 78 dd-1
(2) any foreign political party or official thereof or any candidate for foreign political office for purposes of—
(B) inducing such party, official, or candidate to use its or his influence with a foreign government or instrumentality thereof to affect or influence any act or decision of such government or instrumentality, in order to assist such issuer in obtaining or retaining business for or with, or directing business to, any person;
The US appeal court found, after reviewing decided cases in different areas of US law, that to qualify as an ‘instrumentality’ the entity must be:
‘under the control or dominion of the government; and,
‘must be doing the business of government.
Importantly, the court did not base its decision on this analysis.
The decision in the case was based upon a Treaty which caused the Bribery Act 2010 to come into being, the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions December 17, 1997.
The court pointed out that in 1998 the US ratified the Treaty and in the same year Congress amended the FCPA to ensure that it was in line with its treaty obligations.
The US court in reaching its decission expressly followed the definitions in the OECD Convention Commentaries:
“Foreign public official” is defined to include “any person exercising a public function for a foreign country, including for a public enterprise”
“ a ‘public function’ being any activity in the public interest, delegated by a foreign country”
“A public enterprise is any enterprise, regardless of its legal form, over which a government may, directly or indirectly, exercise a dominant influence”.
“An official of a public enterprise shall be deemed to perform a public function unless the enterprise operates on a normal commercial basis in the relevant market, i.e.. on a basis which is substantially equivalent to that of a private enterprise, without preferential subsidies or other privileges”.
The US court noted that the only alteration made to the FCPA as a result of the amendment by Congress related to ‘public international organisations’ and so ruled that all of the above was already covered by the FCPA before the US signed the Treaty.
The approach of the court was that the OECD Treaty was the primary source of interpretation, it so happened that their findings as to ‘instumentality’ did not need to change as they were already within the meaning of the Treaty.
The court remained with the definition given under US law for ‘instrumentality’ and pointed out that governmental control and function are fact based conclusions. In order to assist in the analysis of these questions the court set out some factors to be considered. Given the finding the approach of the US court and the wholesale adoption of the OECD Treaty these factors may prove to be very significant tests here in the UK – notwithstanding that the word ‘instrumentality’ appears no-where in the Bribery Act.
Control by government
What is the formal designation of the entity?
Does the government have the ability to hire and fire?
Where do the profits go?
Are there subsidies provided by the government to the entity?
How long have any of the above facts been in existence?
Doing the business of government
Does it perform a function that the government treats as its own?
Does it have a monopoly over that function?
Does the government subsidise the cost of the performance of the function?
Does it provide services to the public at large?
Do the public of the foreign country perceive it to be performing a governmental function?
In the case of Esquenazi and Rodriguez the court had no difficulty in answering both of the above criteria with a ‘yes’.
As enforcement of Bribery Act develops and section 6(5) “Foreign public official” falls to be explored and developed we expect that the US interpretation of these concepts is going to be of importance, aligned as it has been revealed to be with OECD Convention which led to the Bribery Act coming onto the statute books in the UK.