I t has long been Department of Justice ( DOJ )

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1 Securities Regulation & Law Report TM Reproduced with permission from Securities Regulation & Law Report, 49 SRLR 553, 4/3/17. Copyright 2017 by The Bureau of National Affairs, Inc. ( ) FOREIGN CORRUPT PRACTICES ACT New Case May Test the Status Of Sovereign Wealth Fund Employees Under the FCPA BY MICHAEL D. MANN AND NICHOLAS M. MCLEAN I t has long been Department of Justice ( DOJ ) dogma that sovereign wealth funds the often independently-run, but state-owned, investment arms of foreign governments are considered instrumentalities of their respective governments under the U.S. Foreign Corrupt Practices Act ( FCPA ). Enacted in 1977, the FCPA makes it unlawful for certain entities and persons to make corrupt payments to foreign officials in order to obtain or retain business. In order to violate the FCPA, the government must prove that the intended recipient of the corrupt payment was a foreign official. The term foreign official is defined as any officer or employee of a foreign government or any department, agency, or instrumentality thereof.... The statute, however, does not define several key terms, including instrumentality, leaving the DOJ and Securities and Exchange Commission ( SEC ) to interpret the law in the most expansive and aggressive manner possible. In the case of sovereign wealth funds we have seen the government s interpretation of instrumentality play out most recently in the high profile princeling cases, where certain financial institutions have been subject to investigation and have paid millions of dollars to resolve SEC allegations of hiring practices that improperly awarded internships to family members of employees affiliated with sovereign wealth funds in exchange for favorable business opportunities with the funds. However, because most FCPA cases are settled, rather than litigated and tested in court, the scope of the FCPA s definition of government instrumentality remains unsettled. A recent prosecution in the Southern District of New York may change that as it squarely implicates the question of whether an employee of a foreign government s sovereign wealth fund is a foreign official within the meaning of the FCPA s anti-bribery provisions. For FCPA practitioners, compliance professionals and others focused on anticipating and mitigating FCPA and other corruption risks, United States v. Bahn, et al., 1:16-cr-00831, is a possible test case to watch and may prove to be an important opportunity for the courts to interpret the FCPA and provide greater clarity regarding the government s often unchecked interpretation of the statute. United States v. Bahn, et al. In a recently-unsealed indictment filed in Bahn, federal prosecutors in the Southern District of New York alleged the existence of a scheme to pay a bribe to an employee of the sovereign wealth fund of an unnamed Middle Eastern country in an attempt to induce the fund to acquire a building complex in Hanoi, Vietnam for approximately $800 million. According to the indictment, two South Korean nationals Joo Hyun Bahn and his father, Ban Ki Sang, along with a U.S. national, Malcolm Harris conspired to pay a $2.5 million bribe, via an agent, to an unnamed Middle Eastern foreign official. A fourth individual, John Woo, allegedly also assisted in the conspiracy to violate the FCPA. The case has received a substantial amount of press attention given the bizarre nature of the allegations and in light of the fact that Joo Hyun Bahn and Ban Ki Sang are the nephew and brother, respectively, of former U.N. Secretary General Ban Kimoon. Prosecutors allege Ban was a senior executive at a South Korean construction company, Keangnam Enterprises Co., Ltd. ( Keangnam ), which financed and COPYRIGHT 2017 BY THE BUREAU OF NATIONAL AFFAIRS, INC. ISSN

2 2 owned Landmark 72, a large building complex located in Hanoi, Vietnam. By 2014, Keangnam was allegedly facing serious financial difficulties and key employees of the company, including Bahn, recognized that they needed sell or refinance the property. Ban engaged his son, Joo Hyun Bahn, who worked as a commercial real estate broker in New York City, to attempt to broker the refinance or sale of the Landmark 72 building complex. The transaction would have yielded a multi-million dollar commission for Bahn, in addition to resolving the financial difficulties facing Keangnam. In order to facilitate a transaction, Bahn contacted co-defendant Malcolm Harris, a New York-based arts and fashion consultant and blogger, who allegedly told Bahn that he had connections to the royal family of the unnamed Middle Eastern country and could assist with the transaction. The alleged plan was for Bahn and Ban to work with Harris to pay a bribe, on their behalf, to an employee of the Middle Eastern country s sovereign wealth fund. This official is referred to in the indictment only as Foreign Official-1, and the country is described only as Country-1. Another individual, John Woo, worked with Bahn to collect the necessary $500,000 in alleged bribe funds for Harris to pass along to the employee of the sovereign wealth fund. Instead of passing along the money to Foreign Official-1, however, prosecutors allege that Harris hoodwinked his co-defendants by keeping a $500,000 down payment on the $2.5 million bribe for himself. According to the indictment, Harris, who never intended to complete the bribery scheme, spent the money on lavish personal expenses. When the deal that Ban and Bahn had sought to secure with the sovereign wealth fund failed to materialize, Keangnam was forced into receivership. On December 15, 2016, Bahn and Ban were charged in an indictment with one count of conspiracy to violate the FCPA, three substantive FCPA counts, one count of conspiracy to commit money laundering, and one substantive count of money laundering. Harris was charged with wire fraud, money laundering, and identify theft. Bahn and Woo were arrested in the United States on January 10, 2017, while Harris was arrested in Mexico on January 12. Ban remains at large. The government alleges in the indictment that the sovereign wealth fund in question was controlled by the government of [an unnamed Middle Eastern country], and thus the Fund was an instrumentality of a foreign government. The allegations in Bahn set up what could be an important challenge to the government s view that sovereign wealth funds necessarily possess the characteristics of an instrumentality under the FCPA. The Meaning of the Term Foreign Official The FCPA prohibits making, or offering to make, a corrupt payment to a foreign official for the purpose of, among other things, obtaining or retaining business. A foreign official is defined in the statute as any officer or employee of a foreign government or any department, agency, or instrumentality thereof, or of a public international organization. The term instrumentality, however, is not defined in the statute and relatively few courts have considered the scope of this provision. Thus, to date, the question of just who counts as a foreign official for the purposes of the FCPA lacks a definitive answer. There is also limited legislative history in connection with the meaning of the term instrumentality that might assist in determining how broadly Congress intended this provision to sweep. Over the past decade the DOJ and the SEC have adopted aggressive, expansive positions regarding the scope of the FCPA and this provision in particular. For example, in the November 2012 FCPA resource guide, the DOJ and SEC suggested that [t]he term instrumentality is broad and can include state-owned or state-controlled entities, though they noted that [w]hether a particular entity constitutes an instrumentality under the FCPA requires a fact-specific analysis of an entity s ownership, control, status, and function. Many settlements, deferred prosecution agreements, non-prosecution agreements and plea agreements have nonetheless been based on broad understandings of what an instrumentality is, with minimal analysis in the documents. For example, in United States v. Condrey, 8:15-cr (D. Md. 2015), a 2015 prosecution resolved via a plea agreement, the government alleged that conspiring to bribe an employee of a U.S. subsidiary of a nuclear energy supply and servicing company fell within the scope of the FCPA, where that subsidiary was indirectly owned by the Russian government. Similarly, in a 2014 prosecution, United States v. Alstom S.A., 3:14-cr (D. Conn. 2014), the government advanced the theory that a former Vice President of Bechtel Corporation working on a project in Egypt, and operating as the general manager of a joint venture with an Egyptian utility company, also was acting as an instrumentality of Egypt and thus was a foreign official of Egypt within the meaning of the FCPA. Many criticisms of such an expansive interpretation have been advanced. First, it is questionable whether such a broad interpretation is consistent with the FCPA s legislative history and Congress s purpose in enacting the statute. The legislative history for the FCPA implies that at least the House of Representatives did not intend the law to include officials whose duties were ministerial or clerical. Second, under such an expansive reading, the definition of the term is unmanageable, and it is difficult to discern the precise outer limits of FCPA liability. The statute itself provides no guidance as to what amounts to an instrumentality. Few cases have dealt with this issue head on, and no court has expressly decided whether an employee of a sovereign wealth fund is a foreign official within the meaning of the FCPA. The handful of courts that have considered the scope of the FCPA in this context at all have suggested that certain factors are particularly relevant to determining whether a particular employee is acting as an instrumentality of a foreign government. The leading case on this issue is United States v. Esquenazi, 752 F.3d 912 (11th Cir. 2014), cert. denied 135 S. Ct. 293 (2014). In Esquenazi, the United States Court of Appeals for the Eleventh Circuit considered whether Haiti Teleco, a state-owned company that operated as the sole provider of landline telephone service in Haiti, was an instrumentality of the Haitian government. Joel Esquenazi, along with a co-defendant, stood trial in Florida for making illegal payments to officials at Haiti Teleco in exchange for various business advantages. Esquenazi was convicted following a jury trial and appealed his conviction, challenging the way the jury had COPYRIGHT 2017 BY THE BUREAU OF NATIONAL AFFAIRS, INC. SRLR ISSN

3 3 been instructed on how to define instrumentality under the FCPA. On appeal Esquenazi advanced a narrow interpretation that Congress intended the FCPA only to apply to traditional government officials, not employees of state-owned enterprises. The government, in contrast, urged a much broader view. The court concluded, building on earlier district court decisions that an instrumentality under the FCPA is an entity [1] controlled by the government of a foreign country that [2] performs a function the controlling government treats as its own. As the quotation above suggests, the court outlined a two-part test to determine whether an employee is acting as an instrumentality. As to the first element, the Esquenazi court found the following factors were particularly relevant to determining whether a government controls an entity: (1) how the entity is formally designated; (2) whether the government has a majority interest in that entity; (3) whether the government has the ability to hire and fire the entity s principals; (4) whether the entity s profits go directly to the government; and (5) the extent to which the government funds the entity if it fails to break even. As to the second element, the court deemed the following factors relevant to whether an entity performs a function the government treats as its own: (1) whether the entity has a monopoly over the function it exists to carry out; (2) whether the government subsidizes the costs associated with the entity providing services; (3) whether the entity provides services to the public at large in the foreign country; and (4) whether the public and the government of that foreign country generally perceive the entity to be performing a governmental function. Applying this test, the Esquenazi court concluded that Haiti Teleco, a state-owned telecommunications company, was in fact an instrumentality within the meaning of the FCPA, and that Haiti Teleco employees thus were foreign officials subject to the FCPA s antibribery provisions. Among other things, the court found persuasive that the company had a monopoly over telecommunications in Haiti, was 97% owned by the Haitian national bank, and had its director appointed by the President and the Prime Minister of Haiti. In addition, expert testimony established that the company was perceived to be performing a public function. In closing, the Esquenazi court suggested (perhaps optimistically, in retrospect) that it would be relatively easy to decide what functions a government treats as its own for the purposes of this analysis. Sovereign Wealth Funds as Instrumentalities Under the FCPA While the Esquenazi court thought the analysis would be relatively easy, sovereign wealth funds are not quite the same species as a public utility provider like Haiti Teleco. Sovereign wealth funds are often pools of government money used to invest for profit, but even within the genre of sovereign wealth funds there are notable differences from one fund to the next. Each fund has its own unique investment objectives, management structures, and relationships with its respective government. For example, some funds invest to protect from volatility in commodities such as oil exports, while other funds focus on socio-economic projects, such as infrastructure development. Some funds are designed to help protect future pension obligations, while others are intended to diversify the vast wealth generated by non-renewable resources, such as oil, or to put to use vast budget surpluses in higher yield, often alternative investments. Most sovereign wealth funds have more than one of these objectives, particularly in resource rich countries around the world. More critically than a fund s investment objectives, however, is the fact that each fund also has its own legal framework, with different delegations of authority from the government, and entirely separate legal entities often with the ability to act independently from the government to minimize possible political interference. The institutional frameworks differ as well, as some funds use what is referred to as a manager model, whereby the owner of the assets, usually a ministry of finance, provides the authority to invest to one or more asset managers, potentially even with an external fund manager entirely unaffiliated with the government. Is a private asset manager of government funds an instrumentality? Other funds operate in an investment company model that has its own peculiarities. For example, in some cases the fund is a division of the central bank, where in other cases the fund acts as an entirely separate entity. Applying the Eleventh Circuit test set forth in Esquenazi requires a fact-intensive analysis and a court may very well deem some sovereign wealth funds are not instrumentalities within the meaning of the FCPA. At the outset, however, there is a question as to whether a sovereign wealth fund performs a true governmental function. After all, the task of managing investments is not necessarily viewed as a core government function and is more typically a function performed in the private sector. Indeed, there is a commercial or economic component to the very existence of sovereign wealth funds, rather than a governmental or political purpose. Under Esquenazi, a court may also consider the structure of the sovereign wealth funds. How did the foreign government designate the entity at the time of the payment? Does the government have a majority interest in the entity? Some sovereign wealth funds are structured such that the state has a less than 100% ownership stake potentially further complicating the analysis. Would a minority stake suffice? The SEC or the DOJ would likely conclude it would, but a court may not. How big must a government ownership stake be before an entity becomes an instrumentality? What happens if a sovereign wealth fund takes a majority stake in a U.S. company? Could that U.S. company become an instrumentality of a foreign government? And if so, could its U.S. employees be considered foreign officials under the FCPA? There is potentially no limiting principle. Moreover, as previously noted, some sovereign wealth funds take significant steps to hold themselves out as autonomous and independent from government control. Esquinazi considers whether the foreign government has the ability to hire and fire the principals and exert other influence over the entity. Indeed, maintaining independence from potential political influence or interference is widely regarded as an important principle of sovereign-wealth fund governance. Funds generally do not want a particular investment viewed as po- SECURITIES REGULATION & LAW REPORT ISSN BNA

4 4 litically motivated, which could in turn result in negative publicity for a sponsoring country or a political response from another nation. Such independence, perhaps in conjunction with other factors, could militate against a finding that a fund is an instrumentality under Esquinazi. Depending on how the particular sovereign wealth fund in Bahn is structured in particular, features such as control, exclusivity, hiring and firing authority, subsidization, and how profits are allocated the defendants may have colorable arguments that the sovereign wealth fund at issue would not constitute an instrumentality under the FCPA. Moreover, when it comes to defining instrumentalities under the FCPA, it is possible that a court sitting in the Southern District of New York may decline to follow the lead of the Eleventh Circuit and consider other factors unique to sovereign wealth funds. Conclusion The SEC and DOJ have long adopted expansive interpretations of what it means to be a foreign official and, because FCPA cases so rarely go to trial, the government s aggressive positions are typically not tested in court. However, as federal prosecutors increasingly target individuals for prosecution under the FCPA, it becomes more likely that courts will be called upon to clarify how expansive the FCPA s prohibitions are. Whether sovereign wealth funds and the entities they control, both directly and indirectly fall within the scope of the FCPA is an important question that may significantly impact compliance and legal risk assessments. Bahn may well be just the case to provide further guidance on this issue, particularly if the district court or, eventually, the Second Circuit depart from the Eleventh Circuit s definition of instrumentality, increasing the possibility that the U.S. Supreme Court might decide to provide more definitive guidance on this issue COPYRIGHT 2017 BY THE BUREAU OF NATIONAL AFFAIRS, INC. SRLR ISSN

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