When It Comes to the FCPA, Better to Stay on the Safe Side

Last month, a federal jury in Los Angeles handed down guilty verdicts against all the defendants on trial in the well-publicized Foreign Corrupt Payments (FCPA) case against Lindsey Manufacturing.

The results were devastating for the company and the individuals. The CEO and other officials, as well as Lindsey Manufacturing itself, were convicted after only a single day of deliberations on charges involving violations of the FCPA and conspiracy to violate that law.

The illegal payments in question, the government contended, were made to Nestor Moreno, an official at Comision Federal de Electridad (CFE), a Mexican state-owned electric utility, in exchange for contracts awarded to the company.

The case went to the jury only after the defendants mounted a major but unsuccessful challenge to the Department of Justice’s definition of the term “foreign official” under the FCPA. According to The FCPA Blog, a leading blog in this area of law, this was the strongest challenge yet to the government’s expansive position on this issue.

The issue centered on whether CFE, as a state-owned corporation, is an “instrumentality” of the Mexican government and thus covered by the FCPA’s prohibitions. The defendants asserted that as a matter of law, it is impossible for a state-owned corporation to be an “instrumentality” of a government for the purposes of the FCPA. However, U.S. District Judge A. Howard Matz of the Central District of California rejected those contentions and permitted the case to go to trial.

Judge Matz’s detailed opinion, issued April 20, 2011, went into considerable detail about the precise definition of “instrumentality” and about the legislative history of the FCPA. Ultimately, Judge Matz concluded that because CFE fulfills a public function – the provision of electricity to Mexican citizens – it should be considered an “instrumentality” of government.

As observers of litigation under the FCPA, we don’t express any thoughts here about Judge Matz’s opinion. As counselors to companies that need to think, pretty much every day, about FCPA compliance, we have a distinct view.

We believe that when it comes to possible allegations of foreign bribery or illegal payments, companies need to stay above reproach and clearly on the right side of the law. Many foreign nations use corporations with various structures to fulfill various governmental functions. Some of these may, after years of litigation, possibly be viewed by the courts as outside the FCPA’s purview.

We don’t think companies should let employees guess about what’s acceptable. Communicate, and give employees tools to understand ethics issues in new environments and to comply with the law. The message should be clear: if something looks like a part of a foreign state in any way, treat it as the state. Train employees to spot possible FCPA violations involving government-sponsored entities. Encourage early detection and avoidance. Give them a way to bring issues to the highest levels of the company, at any time. When it comes to this criminal statute, it’s a lot better to stay safe.

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