Toward greater guidance: reforming the definitions of the Foreign Corrupt Practices Act.

AuthorMuma, Matthew W.
PositionDefining a "foreign official"

The Foreign Corrupt Practices Act of 1977 is the cornerstone of the United States' efforts to combat the involvement of U.S. companies and individuals in corruption abroad. Enforced by both the Securities and Exchange Commission ("SEC") and the Department of Justice ("DOJ"), the Act targets companies and individuals that pay bribes to "foreign officials," a nebulous category of persons that includes everyone from foreign cabinet members to janitors at companies only partially owned by a foreign state. After only sporadic enforcement in the early years of the Act's existence, the SEC and DOJ now bring many cases annually. This increased enforcement has raised the ire of the business community, and many commentators have criticized the government for haphazard enforcement and unclear guidance. The definition of "foreign official," which has always been deliberately broad and vague, has particularly vexed many companies. This Note proposes a creative amendment to the Act to solve this problem, not by changing the definition of "foreign official" but by requiring in-country State Department employees to provide country-specific guidance on who is--and who is not--a bona fide "foreign official" in a given place.

TABLE OF CONTENTS INTRODUCTION I. DEFINITIONAL PROBLEMS BUNDLED INTO THE CURRENT FCPA REGIME A. The FCPA's Definitions: Vagueness and a Lack of Guidance B. Judge-Made Common Law Is Unlikely to Bring Clarity II. THE CURRENT FCPA REGIME HAS NEGATIVE FOREIGN POLICY IMPLICATIONS A. The Law Risks Unfairly Punishing Smaller Entities B. Perverse Incentives Create a Real Risk of "Sham Compliance" C. The Black Knight Problem D. Other Proposed Solutions Are Ineffective III. AMENDING THE FCPA: STATE DEPARTMENT COUNTRY SPECIFIC GUIDANCE A. State Department Country-Specific Guidance Inspired by the Tate Letter 1. Sovereign Immunity and the Tate Letter 2. A Proposal for State Department Guidance in the FCPA Context B. Potential Problems with Country-Specific Guidance Rebutted CONCLUSION INTRODUCTION

Between 2001 and 2004, Joel Esquenazi and Carlos Rodriguez paid kickbacks to two employees of the Haitian Telecommunications Company, Telecommunications d'Haiti S.A.M. ("Haiti Teleco"). (1) Esquenazi and Rodriguez's Miami-based telecommunications company, Terra Telecommunications Corp., had just consummated a joint-venture agreement with Haiti Teleco. (2) The duo apparently paid kickbacks to the Haiti Teleco employees to maintain the relationship and ensure favorable rates. (3) The Department of Justice ("DOJ") later brought suit against both individuals, alleging that they violated the Foreign Corrupt Practices Act of 1977 ("FCPA"), the chief U.S. law that prohibits U.S. companies, and companies that do business in the U.S., from bribing foreign governmental officials. (4) The DOJ alleged that Haiti Teleco--while perhaps not a traditional component of a national government, like a ministry of foreign affairs or a telecommunications regulatory body--counted as an instrumentality under the "control[]" of the Haitian government for the purposes of the FCPA. (5) The defendants did not deny committing the underlying acts but instead argued that the FCPA was inapplicable because employees of Haiti Teleco are not "foreign officials" and the company itself is not a "foreign instrumentality" for purposes of the law. (6)

The Esquenazi case is a good example of both the FCPA's reach and the ambiguities and uncertainties underlying that reach. While it is clear from the facts of the case that the defendants engaged in unethical business practices, it is not clear whether they knew or should have known they were bribing a foreign official. Haiti Teleco was an important company in Haiti, but its ownership structure was ambiguous; at the time, it was not obviously or wholly owned by or under the control of the government. (7) In their briefs, both defendants claimed, in fact, that the company was not so owned and that even if it was majority owned by the Haitian government, the company was never really in the control of the government or directly used to further its goals. (8) The Esquenazi case is therefore emblematic of several problems that have haunted FCPA enforcement in the last decade.

Congress passed the FCPA in 1977, after Watergate and revelations of corrupt payouts to foreign officials by employees of several American companies, including Northrop Grumman and Exxon Mobil. (9) The FCPA criminalizes two distinct practices: first, it makes it illegal for a U.S. company or its agent to bribe a "foreign official" who works for an "agency[] or instrumentality" of a foreign state for the purpose of "securing any improper advantage"; (10) second, it requires companies that are publicly traded in the United States, and thus registered with the Securities and Exchange Commission ("SEC"), to keep accurate accounting records. (11)

In passing the FCPA, Congress was attempting to ensure that U.S. companies did not engage in bribery overseas because it found bribery both "unethical" and "bad business." (12) From the start, the FCPA's goal was to have both foreign and domestic importance. It encouraged American companies to behave well abroad at least partly under the assumption that they would then be less likely to behave badly at home. (13) After 1977, however, the FCPA languished for nearly twenty years, with only "sporadic" enforcement. (14) The DOJ considered prosecution to be a foreign policy risk. (15) Enforcement actions began to rise only with the end of the Cold War (16) and then soared to even greater numbers after the turn of the millennium. (17)

In many ways, this development has been salutary. Many more companies now have compliance programs, and U.S. firms that operate abroad today face pressure to avoid local extortion. (18) The extent of international bribery is extremely hard to quantify (19): it is possible, for example, that the rising number of cases in recent years is simply evidence that the authorities are discovering more instances of bribery. Overall, however, criminalizing bribe giving by U.S. companies and those companies doing business in the United States has probably benefited U.S. foreign policy while furthering Congress's aims in passing the Act. (20) Bribery is almost universally acknowledged as a net negative for the world economy: laws that uncover and deter it are advantageous in the long run. (21) Outside of more extreme conservative think tanks, the FCPA--or at least the law's motivating idea--enjoys wide support. (22)

Yet the language of the statute has fallen behind its use. The last FCPA amendment was in 1998, and that amendment brought the FCPA in more complete accordance with the Organization for Economic Co-operation and Development ("OECD")'s 1997 antibribery convention, an international agreement seeking to curtail bribery worldwide. (23) But the amendment, at the time essentially an academic exercise because the FCPA had basically lain dormant since its enactment, did very little to address the underlying vagueness in the definitions. (24) Given this vagueness, the DOJ has adopted an expansive interpretation of both "foreign official" and "instrumentality." (25) Despite vocal opposition from businesses and lobbying groups, (26) the DOJ has interpreted both terms broadly enough to potentially include foreign officials of all stripes, from the lowest janitor to a governmental minister. According to the DOJ, an employee who works for a state-owned or state-controlled enterprise, and not for the government itself, may be a "foreign official." (27) Indeed, the SEC at one point defined state-owned enterprises to include institutions less than half-owned by the relevant government. (28) The current enforcement regime may cost U.S. companies millions annually. (29) Because the FCPA affects a vast number of companies and has a large effect on the global economy, its definitions and workability remain points of controversy.

Various reforms have been proposed. The U.S. Chamber of Commerce has taken the lead in proposing revisions that would substantially weaken the law--for example, by introducing a de jure compliance defense, by allowing companies to escape prosecution if they show that employees circumvented reasonable in-house compliance programs, or by eliminating successor liability when companies merge or purchase new subsidiaries. (30) While few commentators have yet called for the law's repeal, the idea has occasionally been floated. (31)

This Note argues that Congress should amend the FCPA to authorize Foreign Service officers to specify the identities of both "foreign officials" and "instrumentalities" of foreign governments. Such an amendment would ensure that the FCPA reflects U.S. foreign policy goals, make FCPA enforcement more attentive to cultural differences, and increase all-around compliance and buy-in. Part I argues that the Act's definitions of "foreign official" and "instrumentality" are too vague, and it focuses on both the DOJ and SEC's lack of real guidance and the federal courts' inability to adequately address the problem. Part II urges that this current trajectory has negative implications for commerce and for U.S. foreign policy: the current regime disproportionately harms smaller enterprises; encourages expensive sham compliance by larger companies; and even fosters a "Black Knight Problem" in which less scrupulous countries and companies fill the vacuum left when U.S. companies avoid developing countries for fear of FCPA liability. Section II.D then addresses three other proposed solutions and explains why they are inadequate. Finally, Part III proposes that Congress amend the FCPA to require the State Department to craft evolving country-specific guidance to more precisely designate both foreign officials and instrumentalities, a solution inspired by the Tate Letter regime that preceded the passage of the Foreign Sovereign Immunities Act ("FSIA") of 1976.

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