“Instrumentality”: Ways the Government’s Power-to-Appoint Creates Control Over SOEs

I read the article below by Matteson Ellis Law PLLFC, and noted the stark parallels in the governance gap created by the incorporation and operation of hybrid public/private entities in Haiti and other English Speaking Caribbean States.  

“Instrumentality”: Ways the Government’s Power-to-Appoint Creates Control Over SOEs 

This week, the DOJ filed its reply brief in the Esquenazi appeal before the 11th Circuit on the meaning of “foreign official.” This is the first time that an appeals court will consider the heated issue of “instrumentality” under the FCPA – what types of entities constitute “foreign officials” for purposes of foreign bribery. In its brief, the DOJ argues that one of the factors establishing that the company Teleco was an instrumentality of Haiti was that “Haiti’s president and high-level ministers controlled Teleco through their appointment of Teleco’s board of directors and general director.”

What does this type of “control” look like? In the last six months, I have had the opportunity to work directly with two state-owned enterprises (SOEs) to advise them on building anticorruption compliance mechanisms. Through these experiences, I have seen ways in which such “control” can manifest itself:

Board appointees selected for political reasons, not commercial ones. When this happens, board members do not always have the necessary qualifications for the job. In cases I have seen, a board’s audit committee members could not read financial statements. Governance committee members had never served on a board before. Many board members were not experienced in the specific industry and thus were unable to make informed decisions on strategy and technology. Some board members saw their positions as rewards for political good acts, not as fiduciary duties. Some thought they were supposed to be involved in the day-to-day decision-making of the company, not long-term strategy-setting.

Unqualified lower-level hires. The government can impact the company’s business by pressuring it to hire people at lower levels of the operation. In cases I have seen, these people were not qualified to do their jobs. They became burdens, not assets. This undermined the effectiveness of the particular business unit and wasted resources.

Unfavorable suppliers and third parties. The government can impact the company’s decisions on use of suppliers and third parties. A company might be pressured to hire a supplier with a relationship with a government official and whose equipment is more expensive and less reliable. It might be asked to hire a marketing agent who has no knowledge of that market.

Misguided investment decisions. The government can impact the company’s decision-making on investments. Decisions on the provision of services might be made to please certain constituent groups for short-term political gain rather than lay the groundwork for long-term commercial success.

Such political interference means that the company is not fully operating like a commercial entity. It is somewhat serving a political purpose, and somewhat performing a commercial role. This bipolar existence has the effect of damaging morale. Employees want their company to succeed. They want their own performances to be measured against transparent standards. They are frustrated when decisions are made, not to improve the bottom line, but for other reasons. Constant turnover of a country’s political leadership leads to turnover of state-owned company’s own leadership, which thwarts planning and growth.

The FCPAméricas blog is not intended to provide legal advice to its readers. The blog entries and posts include only the thoughts, ideas, and impressions of its authors and contributors, and should be considered general information only about the Americas, anti-corruption laws including the U.S. Foreign Corrupt Practices Act, issues related to anti-corruption compliance, and any other matters addressed. Nothing in this publication should be interpreted to constitute legal advice or services of any kind. Furthermore, information found on this blog should not be used as the basis for decisions or actions that may affect your business; instead, companies and businesspeople should seek legal counsel from qualified lawyers regarding anti-corruption laws or any other legal issue. The Editor and the contributors to this blog shall not be responsible for any losses incurred by a reader or a company as a result of information provided in this publication. For more information, please contact Info@MattesonEllisLaw.com.

The author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author.

@2012 Matteson Ellis Law, PLLC

Author: Matt Ellis

Categories: Enforcement, FCPA, Foreign Official/Instrumentality

Two Senior Executives Convicted In Haiti Teleco Bribes Case

Following a two week trial, on August 4, 2011, a federal jury convicted Joel Esquenazi and Carlos Rodriguez, former executives of Terra Telecommunications Corp. (“Terra”), on all counts for their roles in a scheme to pay bribes to Haitian government officials at the state-owned Telecommunications D’Haiti S.A.M (Haiti Teleco).  The DOJ’s press release is here.

Conduct

• Esquenazi was the president and Rodriguez the vice president of Miami-based Terra.  Both were convicted of one count of conspiracy to violate the Foreign Corrupt Practices Act (FCPA) and wire fraud, seven counts of FCPA violations, one count of money laundering conspiracy, and 12 counts of money laundering.

• According to the DOJ, Esquenazi and Rodriguez “authorized more than $800,000 in illegal bribe payments to Haitian officials in exchange for business advantages” in violation of the FCPA."

• Per DOJ, the purpose of these bribes “was to obtain various business advantages from the Haitian officials for Terra, including the issuance of preferred telecommunications rates, reductions in the number of minutes for which payment was owed, and the continuance of Terra’s telecommunications connection with Haiti.”

• The DOJ also said they “used shell companies to pay $890,00 in bribes from 2001 through 2005 to "successive directors of international relations" at Haiti Telco, and “created false records claiming that the payments were for “consulting services,” which were never intended to be performed or actually performed.”

Penalties

• The defendants face a maximum penalty of five years in prison and a fine of the greater of $250,000 or twice the value gained or lost on the FCPA conspiracy charge. Each of the seven FCPA counts carries a maximum penalty of five years in prison and a fine of the greater of $100,000 or twice the value gained or lost.

• The money laundering conspiracy counts carry a maximum penalty of 20 years in prison and a fine of the greater of $500,000 or twice the value of the property involved in the transactions.

• The government is seeking forfeiture against all defendants.

Notes

• This is just the latest entry of the DOJ's extensive FCPA enforcement action regarding bribes allegedly paid to Haitian government officials at Haiti Teleco.  The jury verdicts rendered in this case were based upon indictments filed in December 2009.  Multiple individual defendants had already pled guilty to FCPA violations and related money laundering charges. 

• Esquenazi and Rodriguez are unique in the Haiti Teleco prosecutions in that they contested the DOJ’s charges at trial and also challenged the DOJ’s definition of “foreign official” under the FCPA.  Esquenazi and Rodriguez almost certainly will appeal both the Court’s pre-trial ruling and their convictions. 

• Additionally, whether the Court’s jury instruction on what constitutes an “instrumentality” of a foreign government under the FCPA survives appellate scrutiny is worth watching and should be instructive as to the limits of the FCPA’s jurisdictional reach.