US District Court for the Central District of CA Decides that Bribes Paid to an Officer or Employee of a State-Owned Corporation May Violate the FCPA
On April 20, 2011, the US District Court for the Central District of California issued the first recent judicial decision regarding the definition “foreign officials” under the Foreign Corrupt Practices Act (FCPA). The court determined that “because a state-owned corporation…may be an ‘instrumentality’ of a foreign government within the meaning of the FCPA…officers of such a state-owned corporation…may therefore be ‘foreign officials’ within the meaning of the FCPA.”1 Because foreign governments routinely own and control corporations that are typically entirely within the private sector in the United States, and because routine business activities may be characterized as illegal payments when dealing with government enterprises, individuals and companies engaging in overseas business transactions should proceed with extreme caution.
The relevant facts noted in the court’s decision are as follows:
- On October 21, 2010, the government filed an indictment charging defendants with conspiracy to violate the FCPA alleging that the defendants paid bribes to two employees of the Comisión Federal de Electricidad (CFE), an electric utility company wholly-owned by the Mexican government.
- Under the Mexican Constitution, the supply of electricity is solely a government function.
- Under Mexico’s Public Service Act of Electricity of 1975, CFE is defined as “a decentralized public entity with legal personality and patrimony.”
- CFE’s Governing Board is composed of the Secretaries of Finance and Public Credit, Social Development, Trade and Industrial Development of Agriculture and Water Resources, and Energy, mines, and State industry.
- CFE’s Director General is appointed by the President of the Republic of Mexico.
- CFE is described as a governmental “agency” on its website, which also states that CFE is “a company created and owned by the Mexican government.”
The FCPA states that “it shall be unlawful for any domestic concern…or for any officer, director, employee, or agent of such domestic concern or any stockholder thereof acting on behalf of such domestic concern, to make use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to pay, or authorization of the payment of any money, or offer, gift, promise to give, or authorization of the value to – (1) any foreign official for purposes of…(B) inducing such foreign official to use his influence with a foreign government or instrumentality, in order to assist such domestic concern for or with, or directing business to, any person…”2 Furthermore, the FCPA defines “foreign official” as “any officer or employee of a foreign government or any department, agency, or instrumentality thereof, or of a public international organization, or any person acting in an official capacity for or on behalf of any such governmental or department, agency, or instrumentality, or for or on behalf of any such public international organization.”3 Therefore, the question presented by the defendants was whether an entity’s status as a state-owned corporation disqualifies it as an entity properly addressed by an FCPA indictment.
Perhaps because of the heavy governmental involvement in CFE outlined above, the defendants argued only that state-owned corporations can never be instrumentalities for foreign governments. They presented no arguments as to whether the characteristics of CFE specifically dictate that it is not an instrumentality of the Mexican government. Examining (i) the plain meaning of the word “instrumentality,” and (ii) the legislative history of the FCPA, the court determined that state-owned corporations may, at least in certain circumstances, qualify as government instrumentalities. The court, therefore, denied the defendants’ motion to dismiss.
Although the court did not specify any test for determining whether a state-owned corporation is a government instrumentality, in determining that CFE could be an instrumentality of the Government of Mexico, the court did present the following list of characteristics of government agencies and departments:
- The entity provides a service to the citizens – indeed, in many cases to all the inhabitants – of the jurisdiction.
- The key officers and directors of the entity are, or are appointed by, government officials.
- The entity is financed, at least in large measure, through governmental appropriations or through revenues obtained as a result of government-mandated taxes, licenses, fees or royalties, such as entrance fees to a national park.
- The entity is vested with and exercises exclusive or controlling power to administer its designated functions.
- The entity is widely perceived and understood to be performing (i.e., governmental) functions.
Because the court’s guidance on what factors are relevant in determining when a state-owned corporation is a government instrumentality is (i) only advisory, and (ii) non-exclusive, individuals and corporations engaging in business transactions with foreign entities should do so only after (i) thoroughly investigating the nature of such entities focusing on any relationships with foreign governments, and (ii) determining whether any transactions with officers or employees of such foreign entities could be classified as illegal payments under the FCPA. This is especially true because foreign governments are frequently involved in industries that are typically entirely private in the United States. Failure to conduct such investigations could result in unknowing violations of the FCPA, which may lead to severe criminal and civil penalties.
For further information regarding the FCPA or other anticorruption matters please contact the Arent Fox attorney with whom you work or a member of Arent Fox’s International Trade, White Collar or Securities Practice Groups.
 United States v. Noriega, U.S. District Court, Central District of California (Western Division - Los Angeles), Case #: 2:10-cr-01031-AHM-4.
 15 USC § 78dd-2(a).
 Id. at § 78dd-2(h)(2)(A).