11th Circuit’s Definition of “Instrumentality” Hits the Finance Sector as the SEC Probes Hiring Practices in Asia

June 11th, 2014

Last month, the 11th Circuit ruled in United States v. Esquenazi and held that state-owned businesses fall within the Foreign Corrupt Practices Act (FCPA) for purposes of the statute’s anti-bribery prohibitions. The FCPA defines a “foreign official” as “any officer or employee of a foreign government or any department, agency, or instrumentality thereof.”  The court ruled, “An ‘instrumentality’ under…the FCPA is an entity controlled by the government of a foreign country that performs a function the controlling government treats as its own.” The opinion laid out a multi-factor test in support of this definition, which includes such inquiries as the nature of the foreign government’s formal designation of the entity; whether the government has a majority interest in the entity; and the extent to which the entity’s profits, if any, go directly to the government.

 

Commentators are now urging domestic companies to treat state-owned companies with the same level of care as they use with foreign officials when conducting business.

 

In fact, the Securities and Exchange Commission (SEC) has ramped up investigations in recent weeks related to banks’ foreign hiring practices. Banks such as Goldman Sachs, Credit Suisse Group AG, Morgan Stanley, Citigroup Inc and UBS AG, have received letters from the SEC concerning their hiring in Asia as potential violations of the FCPA. According to the New York Times,  “the practice of hiring the children of [Chinese] government officials was so widespread that banks competed to see who could hire the most politically connected recent college graduates.” Other global sectors affected by the 11th Circuit’s expansive definition of “instrumentality” are oil and gas, telecommunications and consumer products.

 

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