April 01, 2009
With high levels of privatization in some industries and government bail-outs in others, the always-difficult question of what constitutes a state-owned entity has become more complicated.Carlos Ortiz of DLA Piper, TRACE’s partner firm in New Zealand, Bulgaria and Bosnia, describes an approach that side-steps this difficult issue.
“One outcome of the new era of aggressive FCPA enforcement is that investigations of conduct potentially covered by the FCPA increasingly require the identification of state-owned and state-controlled entities. DOJ and SEC enforcement actions make it clear that a state-owned or state-controlled entity will constitute a government “agency or instrumentality” for purposes of FCPA liability. Less clear, however, is the degree of government ownership or control needed to trigger liability.
Companies must evaluate the totality of the circumstances when determining whether the company at issue is under state control. Although there are certain straightforward indicia for evaluating state control—such as the percentage of shares held by the government or the extent of government representation on the company’s Board and in management—those considerations will not, on their own, resolve the question. For example, the DOJ has indicated that a single, “golden share” can be sufficient to render a company state-controlled if that share grants the government de facto control. Thus, companies and their counsel must identify and evaluate a range of intangible factors such as any formal or informal ties that a company’s Board members or managers might have to the government. Data privacy rules, cultural practices, and limitations on the public availability of corporate governance information all complicate or block entirely such an inquiry.
In the current climate of government bailouts, this process will become more complicated. Looking abroad, those practicing in this area must understand how different countries have structured their bailout packages. Having done so, they also must analyze how the DOJ and the SEC will apply the provisions of the FCPA in an era of government-supported, if not government-controlled, enterprises.
Determining whether a business is state-owned or state-controlled is so complicated that even those familiar with the foreign laws in question may not be in a position to evaluate this issue for purposes of the FCPA. In Opinion Procedure Release 94–01, for example, the DOJ found an individual to be a foreign official under the FCPA despite foreign counsel’s determination that the individual in question was not a government employee or public official under the foreign law.
For simplicity’s sake, one sound approach to compliance and risk management is for multinational companies to adopt policies treating customers at state-owned entities and non-state-owned entities in the same manner. Many companies have moved to this model, prohibiting referral fees, rebates, kickbacks, lavish hospitality, travel without a clear business purpose, etc., to all customers and entities with whom they transact business, regardless of a determination of state ownership or control. Indeed, bright line rules such as these are consistent with the DOJ’s informal recommendation at conferences and elsewhere to companies operating in China, where it recommends that companies treat all individuals as government officials. Finally, looking beyond the FCPA, the bright line rule recommended here may insulate against possible related charges for commercial bribery, an area of increasing concern to the business community.”