Uncertainty is bad for business. The interpretation by the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) of “an instrumentality of a foreign government” under the Foreign Corrupt Practice Act (FCPA) might discourage business between U.S. and Colombian companies. The compliance programs of American companies can turn into lengthy procedures with long chains of people involved, making business decisions expensive and time-consuming because they could involve hiring foreign attorneys, mitigating a broad category of risks, and hiring employees that understand the Colombian political situation and its laws.
The FCPA prohibits bribing a foreign official for the purposes of influencing any act or decision of the foreign official in his or her official capacity. 15 U.S.C. § 78dd-2(a)(1)(A)(i). A “foreign official” under the FCPA, among other factors, is any officer or employee of a foreign government, or any department, agency, or instrumentality of a foreign government. 15 U.S.C. § 78dd-2(h)(2). However, Congress has not defined what constitutes an “instrumentality of a foreign government.” Rather, courts have filled the gap by defining an instrumentality as a company controlled by a foreign government that performs a function the foreign government treats as its own. For example, in United States v. Esquenazi, 752 F.3d 917, 925 (11th Cir. 2014), the Eleventh Circuit held that there is a two-pronged test to determine whether a company is an instrumentality of a foreign government. The first element is that there must be control from the foreign government over the state-owned company. For the Esquenazi court, “control” existed when the formal designation of the company was public, the government had a majority interest in the company, and the government had the ability to hire and fire the company’s principals, among other factors of control. The second element of the test is that the state-owned company must perform a function the government treats as its own. The Esquenazi court found a government function when the company has a monopoly over the activity that it carries out, when the government subsidizes the costs of the services, when the company provides services to a large population, and when the foreign country perceives the company is performing a governmental function. These factors are not an exhaustive list of all the factors courts can consider to determine what is an instrumentality of a foreign government, however.
The DOJ and the SEC have jurisdiction to investigate actions that violate the FCPA and adopted the Esquenazi factors in their for companies which adds other elements from cases to determine what an instrumentality is, Crim. Div. of the U.S. Dep’t of Just. & the Enf’t Div. of the U.S. Sec. and Exch. Comm’n, A Resource Guide to the U.S. Foreign Corrupt Practices Act, (p 20) (2015). In addition to their investigatory function, the DOJ and the SEC enforce the FCPA, applying the various factors listed in the guide. Deputy Attorney General Rosenstein has stated that the U.S. government will enforce the FCPA against foreign and domestic companies. In addition, Attorney General Jeff Sessions stated that the DOJ “will continue to strongly enforce the FCPA and other anti-corruption laws.”
Unfortunately, neither the DOJ nor the SEC has explained how the factors relate to each other, or how many factors are required to conclude that a foreign company is an instrumentality of a foreign government. When the courts, the DOJ, or the SEC conclude that a foreign company is an instrumentality of a foreign government, all of its employees become government officials under the FCPA. Nevertheless, this conclusion may conflict with the foreign country’s laws. For example, in Colombia, the distinction between a government official and a private employee is blurred when state-owned companies are involved because not all the employees of a state-owned company are government officials. Thus, American companies could risk sanctions by the DOJ or the SEC because Colombian laws are not clear on this subject.
The Colombian government owns stock in several companies, from one percent to 99 percent of the companies’ stock. Nevertheless, to know whether employees of a state-owned company are government officials requires a case-by-case analysis according to Colombian Constitutional Court. Corte Constitucional [C.C.] [Constitutional Court], mayo 4, 2011, M.P: Gabriel Eduardo Mendoza Martelo, Sentencia C-338/11, Gaceta de la Corte Constitucional [G.C.C.] (p. 22) (Colom). If the Colombian government owns more than 90 percent of the stock, there is little room for debate as to whether the company is an instrumentality of the government because Colombian law expressly provides that conclusion. Id. at 24. However, if the Colombian government owns less than 90 percent, the line is blurred between a government official and private employee. For example, the Colombian Constitutional Court held that Ecopetrol, a company of which the Colombian government owns 88.49 percent of stock, is part of the government’s structure, and its employees are government officials despite the fact that Ecopetrol’s bylaws provide that its employees are private. Corte Constitucional [C.C.] [Constitutional Court], septiembre 12, 2007, M.P: Clara Inés Vargas Hernández, Sentencia C-722/07, Gaceta de la Corte Constitucional [G.C.C.] (p. 54) (Colom). Another example is Interconexión Eléctrica S.A. E.S.P. (ISA), where the Colombian government owns 51 percent of the stock and the courts considered ISA an instrumentality of the Colombian government. Consejo de Estado [C.E.], Sala de Consulta y Servicio Civil septiembre 20, 2007 M.P: José Enrique Arboleda Perdomo, Radicación 1.840 (p.5) (Colom).
If the Esquenazi factors are applied to Colombian state-owned companies, where the distinction between a government official and private employee is not clear, is possible to obtain a contradictory conclusion. For example, the Colombian government owns 32.5 percent of the stock of Colombia Telecomunicaciones (Telefoníca), a cable, phone, and internet company. Due to the stock ownership, the Colombian government has one seat on the board of directors. The Colombian government and the public perceive Telefoníca as a private company, although Telefoníca is part of the government. Nevertheless, Colombian courts have not yet ruled whether Telefoníca is part of the government or if its employees are government officials. In Telefoníca’s case, the Esquenazi factors support two contradictory conclusions: that Telefoníca is an instrumentality of the Colombian government because it is part of the government, and that Telefoníca is not an instrumentality because the public and the government perceive that Telefoníca does not perform a government function. Consequently, the Esquenazi factors are not clear enough to apply to the hard cases and may promote decisions against the laws of foreign countries.
Another example of the lack of clarity of application of the Esquenazi factors is the special obligation that Colombian state-owned companies owe to Comptroller General of the Republic (CGR) investigations. The CGR, Colombia’s equivalent to the U.S. Government Accountability Office, annually conducts an internal investigation in state-owned companies to protect public money. The companies must answer all the requests made by the CGR and are subject to an annual report that includes an assessment of the company’s administration. Only the companies that have government participation (over 100 state-owned companies) are specially obligated to allow the CGR’s investigation.
Under the broad application of the instrumentality definition, any Colombian company subject to the CGR’s investigations could be considered an instrumentality of the Colombian government. According to the DOJ and SEC guides, a state-owned company is an instrumentality of a foreign government when the state-owned company has special obligations. The Colombian state-owned companies have the obligation to allow the CGR’s investigations, answer its questions, and submit reports to the CGR. Therefore, the DOJ and the SEC may conclude that any state-owned company is an instrumentality of the Colombian government because the company has special obligations and provides services to the public at large, and the company is performing a governmental function. However, for the Colombian government, not all the state-owned companies are instrumentalities of the government. Consequently, American companies’ compliance programs must take into consideration the risk that if they are dealing with any Colombian state-owned company, the DOJ and the SEC might conclude that the Colombian company is an instrumentality of the Colombian government.
American companies’ compliance programs must mitigate a broad category of risks, and is a proper way to avoid sanctions from the DOJ or the SEC. Another way American companies can avoid sanctions is to avoid making any payment to a foreign employee or official, although in business some payments are allowed. Nowadays, the legal denominations of a Colombian company—LLC., Inc., or Co.—is not enough to determine whether it is an instrumentality of the government. American companies must know whether the Colombian government owns stock in the Colombian company, directly or through another company. In addition, American companies must know whether the Colombian company is subject to the CGR’s investigations.
The lack of clarity as to what is “an instrumentality of a foreign government” increases the possibility that the DOJ or the SEC will open an investigation against a company. In Colombia, state-owned companies are a risk to American companies because the DOJ and the SEC may start an administrative procedure alleging that the American company is dealing with a Colombian government official when in reality it is a private employee. Hence, companies’ compliance programs must mitigate a broad category of risks, including the possibility of dealing with a private employee who could be considered a government official.
To mitigate such risks, American companies must have qualified employees that understand Colombia’s political situation and its laws, which could include hiring attorneys in Colombia. Given lack of clarity as to what constitutes an instrumentality, the company may seek the DOJ’s opinion about the Colombian company’s status, and that could take time. Before an American company engages in a negotiation with a Colombian company, the American company should take steps to determine whether the Colombian company is considered an instrumentality of the government under the Colombian law or under the broad interpretation of the DOJ and the SEC. However, compliance programs can turn into costly and lengthy procedures, with long chains of people involved, making decisions expensive and time-consuming. Finally, the combination of Esquinazi factors and the eagerness of the DOJ and the SEC to enforce the FCPA could affect U.S.-Colombian business, discouraging investment in oil, energy, banking, telecommunications, transportation, agriculture, and health because the American companies are at risk of investigation if the Colombian companies are dealing with a foreign official.