Seal of the 11th Circuit Court of Appeals
Haiti in 2001 might have seemed like an entrepreneur’s playground — the kind of place where the stakes were high, the risks were big, and if you played your cards right, you might find fabulous riches. Sure, it was one of the poorest countries in the world, but after decades of political turmoil, democracy seemed finally possible. The country had committed itself to modernization and had begun privatizing state-owned entities. More importantly, America had backed the fledgling Haitian government in a huge way: with military intervention to support the democratically elected President Aristide, and billions of dollars in foreign aid.
Joel Esquenazi and Carlos Rodriguez, co-owners of the Florida-based company, Terra Telecommunications Corp. (“Terra”), seized the opportunity. They would buy phone time from the Haitian provider, Telecommunications D’Haiti, S.A.M. (“Teleco”), and re-sell those minutes to American customers. By October 2001, Terra was failing. It owed Teleco over $400,000. Esquenazi arranged a meeting between his company’s comptroller and a director at Teleco. Suddenly, Terra was presented a lifeline. If Terra made side-payments to the director—through various discreet channels that included a grocery store owner and the director’s sister—Terra would see its debts reduced. Esquenazi and Rodriguez were ecstatic. Who would care about bribes made to a phone company? Teleco was majority-owned by the Haitian government, but nowhere was it formally designated as a public entity. Besides, this is how business was done in Haiti.
On May 16, 2014, the United States Court of Appeals for the Eleventh Circuit handed down a landmark decision in United States v. Esquenazi, which held that state-owned enterprises qualify as “government instrumentalities” under the Foreign Corrupt Practices Act (“FCPA”). The court affirmed the convictions of Esquenazi and Rodriguez for bribery of foreign officials, resulting in 15-year prison sentences.
As the first appellate level decision on the issue, the Esquenazi court defines “government instrumentality” as “an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own.” Thus, two elements must be satisfied: both government control and a public function. Commentators have heralded the clarity the decision brings to an area of the FCPA otherwise shrouded in doubt. The emerging consensus seems to be that the Esquenazi test defines instrumentality broadly, in accordance with how the DOJ and SEC have previously brought FCPA charges.
In evaluating the two elements of government instrumentality, the court provides a “non-exhaustive” set of factors to consider. In looking at government control, courts should consider whether the government has a majority interest, the ability to hire and fire principals, and whether profits and losses are shared. Courts are to consider the entity’s function as public if the entity enjoys a monopoly, its services are subsidized by the government, the services are provided to the public at large, or if the public perceives the services to be a governmental function.
But key questions remain over just how broadly the definition sweeps. How much of each element must be present to satisfy the test? Would strong evidence of government control bolster weaker evidence of public function, or vice versa? Neither of these scenarios are purely hypothetical. For example, what if a country outsources its police functions, as some towns in California have already begun to do? On the other hand, what if a company, like a sovereign wealth fund, is controlled by the government but does not perform any traditional governmental function?
Although the Eleventh Circuit’s decision may have broadened and helped clarify some aspects of the definition of the ‘government instrumentality’, it may not be the final word. Many suspect that the case will be appealed to the Supreme Court. Either way, questions of how to apply the court’s multi-factor test are still likely to play out in the lower courts.