THE FCPA, FOREIGN OFFICIALS AND STATE OWNED ENTERPRISES
Since the FCPA only applies to foreign officials, the definition of that term is critical to the application of the statute. Government enforcement officials have routinely included with the definition state owned enterprises and employees of those companies. They have also include in that category various other entities controlled by a foreign government. In contrast, where bribes are paid to the government the FCPA bribery provisions do not apply. Thus in the U.N. Oil For Food cases where the bribes and kickbacks were paid to the Iraqi government the books and records provisions were the predicate for the actions by the SEC and, in criminal cases, the wire fraud statutes.
In the Lindsay Manufacturing FCPA case which is currently on trial, Judge Matz in the Central District of California, recently rejected a challenge to a indictment claiming that a state owned enterprise and its employees are not within the statutory definition of foreign official. U.S. v. Noriega, Case No. 2:10-cr-01031 (C.D. Ca.). The pending indictment charges defendants Keith Lindsey, President of privately owned Lindsey Manufacturing, Steve Lee, Vice President and CFO of the company and Lindsey with conspiracy to violate the FCPA as well as substantive violations.
The defendants are alleged to have paid bribes to two high ranking employees of the Comision Federal de Electricidad or CFE, an electric utility company wholly owed by the Mexican government. The payments were made through Grupo International, a company incorporated in Panama and headquartered in Mexico. Employees of that company were also charged but are not on trial. The payments from Lindsay to an employee of Grupo were suppose to be commissions. The government claims that in reality they were bribes paid to Nestor Moreno and Arturo Hernandez, both Mexican citizens and employees of CFE.
The defendants moved to dismiss the indictment claiming that officers and employees of state owned enterprises are not foreign officials within the meaning of the FCPA. The Act defines a foreign official as “any officer or employee of a foreign government or any department, agency or instrumentality thereof . .. “ The question raised by the defense motion is whether a state owned enterprise is an instrumentality of a foreign government.
Under the Mexican Constitution electricity is supplied solely by the government the Court’s opinion notes. Under Mexico’s Public Service Act of Electricity of 1975, the organic law that created CFE, the entity is described as a “decentralized public entity with legal personality and its own partrimony.” On its website CFE is described as a government agency created and owned by the Mexican government.
Defendants claimed however that “as a matter of law no state-owned corporation is an ‘instrumentality,’ meaning that no CFE employee is a ‘foreign official’ under the FCPA.” This argument was based on two key points: 1) the plain meaning of instrumentality and 2) the legislative history of the FCPA.
To support the first proposition defendants cited definitions from three different dictionaries stating that the term focused on “serving as a means or agency.” This concept does not include corporations according to the defense argument. Rather, the word “instrumentality” should be interpreted in view of the preceding words in the definition of foreign official which are “department” and “agency.” While the government agreed that “instrumentality” should be interpreted in view of the earlier words in the statute it disagreed the defense interpretation.
The Court rejected defendants’ contention concluding that: “Defendants’ very language reveals an illogical flaw in their ‘all or nothing’ approach. That is, they argue that a state-owned corporation can never be an ‘instrumentality’ because state-owned corporations ‘do not always’ share the characteristics of departments and agencies. This formulation implicitly concedes that some state-owned corporations can and do share the characteristics of departments and agencies. And defendants never explain why those corporations must be excluded from the definition of ‘instrumentalities.’” Based on this analysis defendants’ motion must fail the court concluded.
Second, the Court considered the legislative history of the Act although in fact it found this exercise unnecessary. Both the defendants and the government claimed that the history of the FCPA supported their position. The Court concluded however that the legislative history is at best equivocal. Accordingly the motion was denied.
In an Addendum the Court expressed astonishment over the position of the government. During briefing and oral arguments on the motion the government referred to CFE as a corporation. After the motion concluded it requested that the Court take judicial notice of the fact that CFE is not in fact a corporation but a “decentralized public entity . . “ a fact it failed to point out to the Court.