Foreign officials under the FCPA – a foreign concept?

1) an electric utility company wholly owned by the Mexican government which has government-appointed members of management and receives government funding;

2) state-owned oil and power firms in Malaysia, Korea, the United Arab Emirates and China (including in China, PetroChina, CNOOC, Jiangsu Nuclear Power Corporation and Dongfang Electric Corporation); and

3) Telecommunications D'Haiti S.A.M. (Haiti Teleco), a telecommunications company in Haiti which is 97% owned by the Haitian Central Bank.

In those cases, the US courts have held that the determination of an entity's instrumentality status requires a fact-specific analysis of its ownership, control, status and function. The courts have found that the instrumentality test was satisfied for each of the SOEs in the above cases, although there is currently an appeal pending in the US Court of Appeal for the Eleventh Circuit relating to the convictions of two individual defendants from the Haiti Teleco case and another appeal pending in the same court relating to the conviction of a former official at Haiti Teleco for money laundering charges. A core issue on appeal in both cases goes to whether Haiti Teleco is an instrumentality within the meaning of the FCPA.

In all of the court challenges to date, the focus has been on the status of the entity which employed the relevant individual being bribed, and not on the specific status or duties of the foreign official. Indeed, the US government has long taken the position that the FCPA “applies to any public official regardless of rank or position”. This would mean that, once an SOE is deemed to be an instrumentality, any employee of that SOE, even the receptionist or an entry level clerk, would be a foreign official.

Mystery surrounds who is and who is not a foreign official. The US government's position has been, and remains, that there is no requirement under the FCPA for the identity of a foreign official, or the details of his or her particular duties to be pleaded with specificity. The US government takes the view that “the FCPA focuses on the purpose of the payment instead of the particular duties of the official receiving the payment, offer, or promise of payment”. Thus, details regarding the foreign officials involved in FCPA enforcement cases are scant.

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Guidance fails to bring clarity

The categorical approach to who is and is not a foreign official under the FCPA is in stark contrast with the Opinion Procedure Release issued by the US Department of Justice in September 2012, in response to a request from a US lobbying firm for an opinion on whether a member of a foreign government's royal family qualifies as a foreign official under the FCPA (the Opinion). In the Opinion, the Department of Justice concluded that the royal family member was not a foreign official for the purposes of the FCPA, and stated that “mere membership in the royal family of the foreign country, by itself, does not automatically qualify that person as a foreign official”. The Department of Justice reached the conclusion after a fact-based analysis which included a consideration of the relevant royal family member's position within the royal family and within the foreign government, as well as the individual's ability to affect governmental decision making.

The Opinion prompted hopes for a change in the US government's FCPA enforcement practices. Those hopes were quickly dashed by the guidance on the FCPA issued by the Department of Justice and the Securities and Enforcement Commission in November 2012 (Guidance), which reaffirms the US government's long-held position that the FCPA covers corrupt payments to “low-ranking employees and high-level officials alike”. The Guidance also fails to give any bright-line rule on what constitutes an instrumentality, although it does confirm that an SOE can be an instrumentality, and endorses the fact-specific, factor based test used in the US courts. The non-exhaustive factors to consider are detailed in figure 1.

Comparisons with other bribery laws

The apparent disregard under the FCPA for the role of the foreign official in the relevant organisation and the actual duties of the official is at odds with its most important international counterpart, the UK Bribery Act, and the PRC's own bribery laws. Under the UK Bribery Act, employees at SOEs are expressly mentioned in the definition of foreign official, but it is qualified by the requirement that the relevant individual performs or exercises a public function at such SOEs.

In China, bribery of both Chinese and foreign government officials is criminalised under the PRC Criminal Law (中华人民共和国刑法). Foreign government official is not defined under PRC law, but the issue of who is or is not a Chinese government official is perhaps more relevant to the present discussion on foreign officials under the FCPA. Under the Criminal Law, there are separate offences for bribery of state officials (Article 389) and non-state officials (Article 164), which distinguishes the two types of personnel based on the individual's role in handling state affairs. Specifically, with respect to SOEs, PRC law clearly distinguishes between those persons conducting public affairs in SOEs (state personnel) and those which do not (non-state personnel).

The categorical approach adopted by the US government in determining foreign officials is likely to have once been tenable – back in the days when SOEs and private enterprise could be clearly separated. As the global economy evolves, it is no longer so easy to categorise SOEs.

A fact-based analysis considering the specific duties of a foreign official, rather than simply the status of the employing entity, is surely the better approach. This is particularly the case with respect to China where state-involvement in enterprises is prevalent, but exists in many different forms which are continually evolving. As noted in The Mckinsey Quarterly (July 2008): “[t]he line between [SOEs in China] and private-sector companies has blurred considerably.” While the more traditional SOEs like China Telecommunications Corporation and China National Offshore Oil Corporation (CNOOC) remain, many other SOEs are market-driven and operate more akin to a private enterprise, for example Lenovo, which is listed in Hong Kong but has a PRC state-owned entity as a substantial shareholder.

It is easy to envisage situations where corrupt payments to employees of an SOE in China are considered violations of the FCPA on the basis that bribes were paid to a foreign official. Yet the relevant individual being bribed may be a low-level employee with administrative duties and would not actually be considered as a government official in China, nor under the UK Bribery Act. Of course, if the other elements of establishing a bribery charge are satisfied, the same conduct could constitute an offence under section 1 of the UK Bribery Act or a charge of commercial bribery under PRC law.

This leaves an unsatisfactory state of affairs, with the same conduct potentially being treated as different offences in different countries, subject to different prosecution thresholds.

The anomaly of the FCPA is potentially all the more problematic for businesses dealing with China, considering the upward trend for China-related FCPA enforcement actions (one-third of the 12 FCPA corporate enforcement actions in 2012 involved allegations of corrupt payments in China – see figure 2) and the growing role of state-directed capitalism. As an illustration, as of 2011, state-controlled companies in emerging markets comprised approximately 65% of the energy sector, 55% of utilities, and 35% of the telecoms and financial services sectors, according to The Economist.

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Mitigating the risks

With guanxi (developing relationships and connections) being such an ingrained part of the culture of doing business in China, particular attention needs to be given to the areas of business development or client relationship management to ensure appropriate guidelines are in place for gifts or hospitality involving clients at SOEs. China's broad ownership of its companies could qualify a substantial percent of Chinese businesspeople as foreign officials, and a precarious balancing act will need to be performed between maintaining business relationships (in particular adhering to the Chinese culture of returning business favours or courtesies) and mitigating the risk of violating the FCPA.

Additionally, while international corporations may traditionally have focused FCPA and anti-bribery training on the more senior employees only or on those employees who would be likely to have dealings with governmental departments, if all levels of employees at SOEs are foreign officials for the purposes of the FCPA, then companies with frequent dealings with SOEs may need to extend their anti-bribery training to all levels of employees.

Tim Coleman and Melissa Handover, Freshfields Bruckhaus Deringer, Washington DC and Hong Kong