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What Is An ‘Instrumentality Thereof’? Let’s Keep It Real

By Michael Volkov

In the world of overseas bribery and the Foreign Corrupt Practices Act, we finally have an opportunity to resolve what many commentators suggest is an intractable issue — the definition of “instrumentality thereof” as used in the FCPA, and as applied to foreign state-owned-enterprises. The issue has been joined in three separate cases — U.S. v. Carson et al, U.S. v. Lindsey Manufacturing, and U.S. v. O’Shea.

This is a most welcome development, especially for practitioners, businesses and even prosecutors and regulators. This latest twist and turn has occurred at the same time that commentators and lobbyists complain that there is no legal avenues for parties to resolve difficult interpretation issues.

While people have lined up with reams and reams of paper to argue the merits one way or the other, let us all hope that the issue are not obfuscated or lost underneath mountains of spurious claims and papers.  Common sense, hopefully, will rule the day. A clear solution exists so long as practitioners and commentators do not inflame the dialogue.

The logic is easy to follow. Congress passed the FCPA in 1977 with a clear intent to address foreign bribery of government officials. The FCPA was not designed to prohibit private, or commercial bribery. The motivation for the law was the scandalous backdrop of corporate malfeasance in this area in the early 1970s. Former Judge Stanley Sporkin, the father of the FCPA, has publicly outlined the circumstances on many occasions and no one disputes his analysis.

First, looking at the definition of a ”foreign official,” the pertinent part includes: “any officer or employee of a foreign government or any department, agency or instrumentality thereof.” From these simple words, the definition encompasses officers or employees from a government entity other than  a “department” or “agency.”

Second, a court will have to answer this question — when it comes to state-owned-enterprises, when is it fair to treat such an enterprise as a “government entity?”

This fundamental question can be answered by considering the purposes of the FCPA, which was to prevent bribes or other improper payments which ultimately undermine the integrity of the foreign government and competition among businesses for government contracts or benefits. One does not need to look very far to answer this question — corporate law has already addressed these issues, and developed tools to evaluate whether or not a person, or group of people, exercise “control” over a company.  That  same inquiry can provide judges a firm foundation to build case law in the FCPA area.

The danger of bribes to government officials is that such acts skew decision-making contrary to the public interest. If the bribe recipient does not have control or sufficient influence within the enterprise to skew that process, then the government interest in the private company should not constitute an “instrumentality thereof.” Applying corporate principles of control to include factors such as ownership percentages, voting rights, participation in day-to-day management of the company, will provide the framework and the tools to develop adequate guidelines in this area.

The fact that foreign governments have decided to play a larger role in the global marketplace through competing with private companies should not have any impact on the applicability of the FCPA.  Otherwise, foreign governments can re-organize themselves without any meaningful change in control and escape the prohibitions of the FCPA and promote bribery without any consequence. That would be the real absurd result of the litigation.

With all the hoopla over this issue, the mega-filings and claims, we need to keep our eye on the ball, solve the problem, and let businesses move on into the market place and compete without fear of absurd enforcement positions. The courts, the DOJ, and SEC should work to make this happen as soon as possible.

Michael Volkov is a partner at Mayer Brown LLP in Washington, D.C. His practice focuses on white collar defense, compliance and litigation. He regularly counsels and represents clients on FCPA and UK Anti-Bribery Act issues. He can be contacted here.

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1 Comment

  1. I absolutely agree with Mr. Volkov's suggestion that the use of corporate law concepts of 'control' can inform the interpretation of whether a state-owned entity is an 'instrumentality' of a foreign government, but should the question of 'control' not apply to the government's control over the entity, rather than the bribe-recipient's control? Should the question of whether an entity is an instrumentality of government be a separate (and preceding) question to that of whether the person receiving the bribe was an official?

    In the interpretation of 'instrumentality' perhaps another valid factor would be whether the entity's function is that of performing an important government activity, rather than simply a commercial one. This is not an easy question in today's world (e.g. what about US government's ownership following bail-outs of financial institutions or car manufacturers?). In the case of the Mexican CEF however, this sort of consideration may not play out well for the defendants. The function of the CEF isthe generation and distribution of what is traditionally a government service (in some parts of the world) – electrical power – and benefits from a constitutionally protected monopoly in Mexico.

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