Vetting Third-Party Vendors to Insure FCPA Compliance: Courts Offer Guidance on Meaning of Government “Instrumentality”December 2011 – Advisories
An important weapon in the battle being waged by the U.S. Department of Justice (“DOJ”) against foreign corruption is the Foreign Corrupt Practices Act (“FCPA”). Companies doing business abroad ignore the FCPA at their peril. In recent years, the DOJ has significantly increased its enforcement efforts under the FCPA. Eight of the ten largest FCPA settlements have been announced in the past two years. In a settlement announced in March 2010, one corporation agreed to pay a $400 million criminal fine.
Any business attempting to insure compliance with the FCPA must consider two important questions: (1) who represents the company in its foreign business activities and (2) with whom are the representatives dealing?
At a recent conference on the FCPA held in Washington, D.C., a senior DOJ official identified the use of third-party representatives as the single most significant risk factor for FCPA violations. Nineteen of the last twenty-one FCPA settlements have involved cases in which consultants and sales agents were used to funnel cash to foreign officials. The DOJ official emphasized the need for companies doing business abroad to conduct due diligence on their third-party representatives to insure that they do not have a history of illegal conduct and that they are not owned, in whole or in part, by government officials.
As for the question of “with whom are the representatives dealing,” one significant grey area under the FCPA has been the concept of a government “instrumentality.” The definition of “foreign official” under the FCPA includes any officer, director or employee of a government instrumentality, but the term “instrumentality” is not defined in the statute. The absence of a statutory definition has afforded the DOJ substantial leeway in fashioning its own definition of the term. The DOJ has initiated numerous enforcement actions involving payments to entities in which a foreign government has an ownership interest, although the DOJ has been quick to point out that ownership is only one of many factors it considers in determining whether an entity is an instrumentality of a foreign government.
Three 2011 U.S. District Court decisions have finally provided some judicial guidance. These decisions contain a non-exclusive list of the factors to be considered in determining whether a foreign entity qualifies as a government instrumentality:
- the extent of the government’s ownership interest in the entity
- the government’s characterization of the entity and its employees
- whether the entity is financed by the government
- whether the key officers and directors are government officials or appointed by the government
- whether the entity provides a service to the government’s citizens
- the entity’s obligations and privileges under foreign law, including whether the entity exercises exclusive or controlling power to administer its designated functions
- the circumstances surrounding the formation of the entity
- whether the entity is widely perceived as performing governmental functions
If your company is making payments of any sort to employees of an entity that could potentially be characterized as an instrumentality of a foreign government, appropriate steps should be taken to insure that such payments comply with the FCPA.
During the FCPA conference referenced above, DOJ officials repeatedly stressed the need for companies to conduct internal reviews designed to insure that their practices comply with the FCPA. A documented record of due diligence, internal reviews, and the implementation of an appropriate compliance program are key factors considered by the DOJ in determining what, if any, action should be taken when an FCPA violation is discovered. In its effort to foster a corporate culture of internal review and self-regulation, the DOJ has been transparent with respect to the benefits accorded to companies that can demonstrate a good faith effort to comply with the FCPA. Even in cases involving large bribes over extended periods of time, the DOJ frequently enters into deferred prosecution (and sometimes non-prosecution) agreements with companies that have discovered and disclosed FCPA violations, cooperated fully with the DOJ in its subsequent investigation, and instituted enhanced compliance procedures designed to prevent a repeat occurrence.
This advisory should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own lawyer concerning your situation and any specific legal questions you may have.
Pursuant to IRS Circular 230, please be advised that, this communication is not intended to be, was not written to be and cannot be used by any taxpayer for the purpose of (i) avoiding penalties under U.S. federal tax law or (ii) promoting, marketing or recommending to another taxpayer any transaction or matter addressed herein.
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