Instrumentality in the United States

Agencies or Instrumentalities in the Foreign Sovereign Immunities Act of 1976

Note: for information about the Separate legal entity criterion in Agencies or Instrumentalities in the Foreign Sovereign Immunities Act of 1976, see the entry about “Foreign Immunities Legislative History.”

Second criterion

According to research about Terminox from the Federal Judicial Center: As indicated above, to qualify as an agency or instrumentality, the separate legal entity in question must also be either an organ of a foreign state or political subdivision thereof, or an entity a majority of whose ownership interest is owned by a foreign state or political subdivision thereof.

This criterion includes the following:

• State-owned corporations
• Tiering
• Organs or political subdivisions

State-owned corporations

To take the easier (and more common) situation first, a foreign corporation incorporated in, and at least 50% owned by, a foreign state (or a political subdivision of that state) will typically qualify as an “agency or instrumentality” under the second criterion of § 1603(b). State-owned commercial banks are one example. Of course, as explained below, to the extent that the corporation’s activities fall within the “commercial activity” exception, it will not enjoy immunity.

Tiering

In certain fields, the question of separate entities arises in the context of more complex organizational structures involving a series of holding companies and subsidiaries. Under Dole Food Co. v. Patrickson, an entity qualifies under the majority ownership clause of § 1603(b)(2) only if the foreign state (or political subdivision) itself directly owns a majority of the entity’s shares (“one tier only”). The reasoning is that a corporation and its shareholders are distinct entities, and therefore “[a] corporate parent which owns the shares of a subsidiary does not, for that reason alone, own or have legal title to the assets of the subsidiary; and, it follows with even greater force, the parent does not own or have legal title to the subsidiaries of the subsidiary.”

Thus, an entity wholly owned by a corporate parent, which is in turn wholly owned by the sovereign, is not entitled to benefit from that sovereign’s immunity. (Dole also held that the entity’s status must be determined as of the time the complaint is filed, not when the alleged tort or other actionable conduct occurred.85) In some situations, the separate entity in question may be majority- owned by more than one foreign state. Such “pooled entities” may meet the definition of “agency or instrumentality” under § 1603(b)(2).

Organs or political subdivisions

In practice, the more difficult issue has been in applying the first branch of the second criterion of the definition of “agency or instrumentality”— that is, in determining whether a particular defendant is properly considered an organ of a foreign state or a distinct political subdivision thereof when it is a separate entity but not one in which the government has a majority ownership interest. The distinction arose from a recognition that not all “public commercial enterprises” created by foreign governments take independent corporate form as understood in U.S. law.

The point was that a non-corporate structure—one as to which the notion of “ownership interest” was inapposite—could still fall within the meaning of “agency or instrumentality” if it met the separate entity and nationality criteria. Organ. Again, unfortunately, the term “organ of a foreign state” is not defined by the statute. Clearly, an entity that is a “separate legal person” may be an “organ” and therefore an agency or instrumentality entitled to immunity even if it is neither a corporation nor directly “owned” by a state. To be an “organ” for these purposes, the entity must have a clear measure of independence and autonomy from the foreign government.

To determine whether an entity satisfies this definitional test, courts typically examine • the circumstances surrounding the entity’s creation; • its organizational structure; • the purpose of its activities; • the level of government supervision and financial support; • whether the foreign state requires the hiring of public employees and pays their salaries; and • the entity’s status, obligations, and privileges under state law.

In Alperin v. Vatican Bank, the Ninth Circuit held that the Vatican Bank constitutes an organ of the Vatican because of its status, structure, and role under Vatican law.88 The Vatican Bank was created by the Pope for the purpose of supporting religious and charitable work, and its highest administrative level is composed of high-ranking government officials appointed by the Vatican. Furthermore, it has exclusive control over several obligations assigned to it by Vatican law and is immune from suit in Italy as a foreign sovereign. In Filler v. Hanvit Bank, the Second Circuit affirmed the district court’s holding that the Korean Deposit Insurance Corporation is an organ of a foreign state, noting that it performs functions traditionally performed by the government (such as protecting depositors and promoting financial stability) and government officials appoint its upper-level managers and oversee its operations.

Political subdivision

Section 1603(b)(3) covers components of the foreign government’s structure that are more properly considered “political subdivisions” than “organs.” Like organs, such entities must still have a separate legal identity or “personality” and the capacity to engage in commercial transactions, but they must function as part of the government structure itself. The difference between the two is admittedly unclear. Moreover, use of the term “political subdivision” here, as part of the definition of “agency and instrumentality,” as well as part of the definition of “foreign state” itself in § 1603(a), has understandably led to a certain amount of confusion.91 Core functions. More generally, the predominant mechanism for making the broad distinction between “foreign state” and “agency or instrumentality” has been the so-called “core functions” test.

The test was initially developed with regard to the service provisions of § 1608, not the distinctions in § 1603. However, the test has subsequently been applied in additional contexts. In the D.C. Circuit, for example, an entity that is an “integral part” of a foreign state’s political structure is treated as the state itself, but an entity which is commercial in its structure and “core function” is treated as an “agency or instrumentality.” In Garb v. Republic of Poland, the Second Circuit referred to the core functions test in determining, for purposes of the “takings” exception, that Poland’s Ministry of the Treasury is “an integral part of Poland’s political structure” and not an agency or instrumentality.

Agents

Although not expressly addressed in the statute itself, agents of foreign governments may also be covered. For example, in Phaneuf v. Republic of Indonesia, the Ninth Circuit held that, in order to invoke the commercial activity exception, a government’s agent must have acted with actual authority. The Fourth Circuit concurred in Velasco v. Government of Indonesia, stating that “[w]hether a third party reasonably perceives that the sovereign has empowered its agent to engage in a transaction … is irrelevant if the sovereign’s constitution or laws proscribe or do not authorize the agent’s conduct and the third party fails to make a proper inquiry.” In Batters v. Vance International, Inc., a private security company hired by a foreign government was found to be entitled to immunity as an agent.

See also Immunity from Suit.

Personal Jurisdiction in the Foreign Sovereign Immunities Act of 1976

Agencies and instrumentalities

According to research about Instrumentality from the Federal Judicial Center:By contrast with foreing states and political subivisions, service on agencies and instrumentalities is governed by § 1608(b) and may be made 1. under any special arrangement between the parties; or 2. by personal delivery to an officer or authorized agent in the United States; or 3. if it cannot be made under (1) or (2) above, then by delivery of a copy of the summons and complaint as directed by letter rogatory, or by any form of mail requiring signed receipt, or “as directed by order of the court consistent with the law of the place where service is to be made.” It should be noted that a number of foreign states do not permit service by mail (including under the Hague Service Convention).32 The “state vs. agency or instrumentality” distinction has another consequence regarding service. Some courts have held that the requirements of § 1608(a) must be strictly complied with, while substantial compliance will suffice under § 1608(b).

On FCPA

On May 16, 2014, in the first appellate decision of its kind, United States v. Esquenazi,1 the Eleventh Circuit affirmed a broad definition of “instrumentality” of a foreign government, as the term is used in the Foreign Corrupt Practices Act (FCPA) to define who qualifies as a “foreign official” under the statute,2 and upheld the longest prison sentence ever imposed in an FCPA case. The decision generally supported the position that the US government has advanced on this issue. The court provided a two-part definition of “instrumentality” as (1) “an entity controlled by the government of a foreign country” that (2) “performs a function the controlling government treats as its own.” The court also laid out a non-exhaustive list of factors to consider in applying each part of the test.

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In the Foreign Sovereign Immunities Act of 1976

States vs. Agencies and Instrumentalities

According to research about Instrumentality from the Federal Judicial Center:In respect of enforcing judgments (as with jurisdictional issues), courts have generally taken care to respect the distinction (codified in § 1610(a) and (b)) between the foreign state or government and its agencies and instrumentalities. A separate juridical entity cannot be held liable for a judgment against a foreign state.195 For example, in Alejandre v. Telefonica Larga Distancia de Puerto Rico, Inc., the Eleventh Circuit Court of Appeals vacated the district court’s decision issuing writs of garnishment over amounts owed to a Cuban telecommunications company that was majorityowned by companies owned and controlled by the Cuban government. Although the telecommunications company was found to be an instrumentality of the government of Cuba, it was held to be a separate entity and therefore not liable for execution of a judgment rendered against the government of Cuba.196 Relying on First National City Bank v. Banco Para El Comercio Exterior de Cuba (“Bancec”), the court held that in cases of attachment or execution, there is a presumption of separate juridical status for governmental instrumentalities.197 That presumption can only be overcome either by piercing the corporate veil under state law or by applying the broader equitable principle that “the doctrine of corporate entity will not be regarded where to do so would work fraud or injustice or defeat overriding public policies.”

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In the Foreign Sovereign Immunities Act of 1976

Attachment and Execution: Agency or Instrumentality

According to research about Instrumentality from the Federal Judicial Center:See Foreign Immunities Attachment and Execution in this legal Encyclopedia.

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