By Ryan Morgan
Last week the DOJ filed a reply brief in U.S. v. Lindsey Manufacturing on the issue of who’s a “foreign official” under the FCPA.
The DOJ makes a compelling argument that Comisión Federal de Electricidad is not only a state-owned enterprise but essentially an agency of the Mexican government itself. The brief also clarifies how the DOJ defines a government corporation.
If the case had not been brought against the Lindsey defendants, the DOJ argues, the United States government would be, in essence, “out of compliance” with its OECD obligations. In fact, in the International Anti-Bribery and Fair Competition Act of 1998, the U.S. Congress said, “This Act amends the FCPA to conform it to the requirements of and to implement the OECD Convention.”
As the prosecutors point out, the OECD defines “foreign official” this way:
“[F]oreign public official” means any person holding a legislative, administrative or judicial office of a foreign country, whether appointed or elected; any person exercising a public function for a foreign country, including for a public agency or public enterprise; and any official or agent of a public international organisation . . . “
And expands the definition this way:
12. “Public function” includes any activity in the public interest, delegated by a foreign country, such as the performance of a task delegated by it in connection with public procurement.
13. A “public agency” is an entity constituted under public law to carry out specific tasks in the public interest.
14. A “public enterprise” is any enterprise, regardless of its legal form, over which a government, or governments, may, directly or indirectly, exercise a dominant influence. This is deemed to be the case, inter alia, when the government or governments hold the majority of the enterprise’s subscribed capital, control the majority of votes attaching to shares issued by the enterprise or can appoint a majority of the members of the enterprise’s administrative or managerial body or supervisory board. (bold emphasis added)
The OECD’s use of the term “majority” is critical. During the past five years, many companies have disclosed to me that they are revising their FCPA program to designate any company with government ownership of over 1% to be high risk and treated as a government-controlled company or SOE. But using this 1% or higher logic could lead to mislabeling a potentially low-risk corporation with a high-risk rating. That in turn could result in dedicating time and resources in the wrong place.
A case in point is the sovereign wealth fund called the Chinese Investment Corporation, or CIC, through which the Chinese government has ownership positions in many publicly held corporations around the world, including Morgan Stanley.
CIC owned just under 10% of the equity of Morgan Stanley as of February 2011. Applying the 1% or higher logic, every executive at Morgan Stanley would be a foreign official. This could mean anyone taking a Morgan Stanley executive to dinner, or sending them a holiday gift, could be violating the FCPA. It also means the due diligence process requires the vetting of U.S. blue chips and the need to investigate their ownership structures. That would be a wild goose chase and in the end do more harm than good.
The real risk is control by a foreign government. While control is not easily measured on a company balance sheet or in the public domain, ownership, voting power, and board membership are. Using these indications of control are now becoming the standard and, with the DOJ’s brief in the Lindsey Manufacturing case as a guide, defining who is or is not a foreign official in the eyes of the DOJ just became clearer.
Download a copy of the DOJ’s memorandum in opposition to the defendants’ motion to dismiss in US v. Lindsey Manufacturing et al here.
Ryan Morgan is the FCPA Specialist for WorldCompliance, offering clients insight on risk evaluation, implementing effective due diligence policies, as well as best practices in protecting their company’s reputation. He works with Fortune 500 companies and others to develop effective FCPA policies and procedures.