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Reproduced with permission from Securities Regulation & Law Report, 49 SRLR 553, 4/3/17. Copyright 姝 2017 by
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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
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
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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
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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 ‘‘for4-3-17
eign 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-cr00336 (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-00246
(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
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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 exSECURITIES REGULATION & LAW REPORT
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ports, 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 poBNA
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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.
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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.
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