State Capitalism and the Foreign Corrupt Practices Act

The application of the Foreign Corrupt Practices Act to sovereign wealth funds and state-owned and/or controlled pension funds—the managers and employees of which would almost certainly be considered “foreign officials” by the DOJ and SEC—raises a host of issues that are only just beginning to be addressed in the growing literature on the FCPA.  I recently wrote a short article (available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2053456) as part of the Ohio State Law Journal’s symposium on the Foreign Corrupt Practices Act that attempts to sketch out some of these issues. 

 First, it is unclear whether the FCPA can or should be read to cover state-owned funds.  There are several practical reasons for arguing that it should not, among them a recognition that most of these enterprises and funds operate as quasi-independent entities that should not be viewed as direct agents of their respective governments.  These funds also typically (but admittedly not always or exclusively) serve economic and financial purposes, rather than a political or governmental purpose.

 Second, even if foreign enterprises and funds can be viewed as foreign instrumentalities, it is not clear that the FCPA provides the best remedy for the type of harm that occurs when a state-controlled fund employee is bribed. In non-FCPA contexts, the SEC has characterized the acceptance of bribes by fund managers as a breach of fiduciary duty to the fund investors.  Cast in these terms, the harm was an agency cost, and the SEC assists the fund investors by applying their enforcement resources to the cover some of the investors’ costs of monitoring the fund managers.  If the fund investors are the beneficiaries of this shifting of agency costs from private investors to public enforcers, who are the beneficiaries of a similar shift when foreign officials are bribed? 

 A third concern, related to the foregoing, is the apparent agency and judicial drift away from the original purpose of the FCPA as a tool to prevent corruption that affects foreign policy.  If this original purpose is to have any meaning in the context of state-controlled enterprises and funds, there must be a link between the foreign government, the instrumentality of the government, and the foreign officials who work for the instrumentality.  Each of these entities must be connected like three links of a chain—the foreign government linked to the instrumentality, and the instrumentality linked to the foreign official.  In this way, the acts of the foreign government have an effect on the foreign official, and the acts of the foreign official have an effect on the government.  Only if there exists this linkage between the foreign official and the foreign government—in the case of state-controlled enterprises and state-controlled funds, through their respective links to an instrumentality—should we expect to find the kind of foreign policy effect that the FCPA was designed to police.  Current SEC and DOJ interpretations, as well as the scant jurisprudence that has tested these interpretations, tends to look only at the connection between the foreign government and the instrumentality.  The legislative history of the FCPA, however, suggests that because foreign policy concerns are central to the FCPA, the link between the instrumentality and the foreign official must also be tested. To more directly rephrase the question of who is benefitted when the U.S. government pays for foreign fund agency costs, why are U.S. taxpayers paying for enforcement that serves to reduce agency costs for foreign governments, their citizens, and in some cases, the stockholders of partially state-controlled enterprises, but has no effect on U.S. foreign policy considerations?    

 

This article attempts to get at the core issue of the proper scope of the FCPA by considering who is an “instrumentality” and “foreign official” under the statute.  Additional clarity could be brought to this question by looking first at the link between the foreign government and alleged instrumentality.  Other areas of the law, including foreign investment law, have developed a substantial base of knowledge on the issues of foreign government control of state-affiliated enterprises and funds that could help inform FCPA jurisprudence.  As noted above, however, the more significant problem concerns the unidirectionality of current tests for “instrumentality” and “foreign official” status.  The tests used by the few courts addressing the issue have tended to look only at the issue of governmental control, but have ignored the link between the foreign official and the instrumentality—in other words, does the foreign official exercise control over the instrumentality so that there is a meaningful connection between the foreign government and the foreign official?  This analysis is key because if one takes the legislative history of the FCPA seriously, an FCPA prosecution is predicated on the ability of the foreign official to affect foreign policy.

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