Meaning Of FCPA's 'Foreign Official' Causes Uncertainty For Companies Doing Business Abroad

Author:Ms Alison Kleaver and Joseph D. Barton
Profession:Sheppard Mullin Richter & Hampton

One of the goals of the Foreign Corrupt Practices Act ("FCPA") is to prevent U.S. companies and individuals from paying bribes to foreign officials in exchange for business. To this end, the FCPA prohibits any domestic individual or business entity from making payments to a "foreign official" for the purpose of obtaining or retaining business. 15 U.S.C. § 78dd-2(a)(1). However, who, precisely, qualifies as a "foreign official" is the subject of much uncertainty. In particular, whether employees of a state-owned company qualify as foreign officials for purposes of FCPA is an area of great concern—and potential liability—particularly for U.S. companies doing business in Latin America where governments often have at least some level of involvement in various business sectors from education to utilities to health care.

The FCPA defines a "foreign official" as "any officer or employee of a foreign government or any department, agency or instrumentality thereof." 15 U.S.C. § 78dd-2(h)(2)(A). Thus, whether an employee of a state-owned company is a foreign official depends, in part, upon whether state-owned companies are "instrumentalities" of a foreign government. Two courts have recently weighed in on this issue, finding that the determination is a fact-specific inquiry. In United States v. Carson, 2011 U.S. Dist. LEXIS 88853 (C.D. Cal. May 18, 2011), the court identified several factors including: (1) the foreign state's characterization of the entity and its employees; (2) the foreign state's degree of control over the entity; (3) the purpose of the entity's activities; (4) the entity's obligations and privileges under the foreign state's law, such as whether the entity has exclusive or controlling power to administer its functions; (4) the circumstances surrounding the entity's creation; and (5) the extent of the foreign state's ownership of the entity and level of financial support, such as subsidies, special tax treatment, and loans. 2011 U.S. Dist. LEXIS 88853, at *11-12. The court emphasized that state ownership by itself is insufficient to determine that the company is an "instrumentality" under the FCPA. Id. at 12. In United States v. Aguilar, 783 F. Supp. 2d 1108 (C.D. Cal. 2011), the court considered various characteristics of government agencies and departments to assist it in understanding whether a state-owned company is an "instrumentality." 783 F. Supp. 2d at 1115. In addition to several of the factors identified by the Carson...

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