Non-US corporations and financial institutions face an increasing risk of prosecution by US authorities. US criminal jurisdiction has outgrown territorial limits and now impinges on a range of conduct outside the US. This briefing summarises some of the major sources of criminal liability that can apply extraterritorially to non-US companies and financial institutions.
The development of US long-arm prosecutorial jurisdiction
For most nations, including the US, jurisdiction to prosecute criminal offences is generally contained within territorial borders. Why should a foreigner who has never visited the US be subject to prosecution under US law? It would be unreasonable to expect people to obey the criminal laws of every country simultaneously; that could impose inconsistent legal obligations and subject people to ‘double jeopardy’. These concerns apply equally to corporations and to individuals.
Globalisation, high-speed communications and increased interdependence among world economies are among the factors that have unravelled the traditional territorial model of criminal jurisdiction. Today, conduct wholly outside a given country can have an effect in that country, which the government of that country may feel it has a legitimate interest in preventing or punishing. This reasoning led a leading US court to rule in the 1945 Alcoa case that certain US antitrust laws applied to conduct that had effects in the US, even though that conduct occurred abroad.1 The formal recognition of the ‘effects’ test (now almost universally adopted by US courts) marked a paradigm shift: rather than presuming that criminal laws applied only within a nation’s territory, many courts began to presume that laws had extraterritorial reach, at least when foreign conduct had an effect within US borders.
Since Alcoa, the trend has been towards extraterritorial enforcement of US criminal law. Congress’s power to give its laws extraterritorial effect is specifically acknowledged in the US Constitution.2 It has used this power on several occasions, the Foreign Corrupt Practices Act (FCPA) being a prominent example. However, most US legislation is silent on its extraterritorial application, leaving the courts to determine the issue. That involves balancing the need to protect US interests against principles of international law and comity.
The risk for non-US corporations and financial institutions of extraterritorial prosecution for violations of US law is increasing for several reasons, including prosecutors’ appetite for investigating conduct abroad and for expansive interpretations of their jurisdiction, and corporations’ willingness to co-operate to avoid indictment.
Prosecution of corporations and financial institutions in the US
The US Department of Justice (DOJ) is the principal initiator of corporate prosecutions in the US. The cornerstone of its approach is its Principles of Federal Prosecution of Business Organizations3 (the Prosecution Principles), which set out the factors prosecutors must consider before charging a company.4
Since 2003, the Prosecution Principles have contemplated non-prosecution agreements (NPAs) and deferred prosecution agreements (DPAs) as alternatives to indictments. These were rarely used by prosecutors before the collapse of Arthur Andersen but have since been employed more frequently, partly due to concerns about the collateral consequences of corporate indictments. Companies that enter into NPAs and DPAs are not technically convicted of a crime, but prosecutors can still achieve their policy objectives because a DPA or NPA will probably be accompanied by negative publicity, financial penalties and enforced remedial measures. One side-effect of the proliferation of such agreements is that jurisdictional bases asserted by prosecuting authorities are never tested in court.
In addition to the criminal consequences of an indictment, a prosecution often precipitates a slew of civil suits in the US, with foreign (and US) claimants often attempting to take advantage of an apparently claimant-friendly jurisdiction.
Principal sources of criminal liability for non-US corporations and financial institutions
The FCPA is one of the few statutes to provide explicitly for extraterritorial application of its criminal provisions. The DOJ and the US Securities and Exchange Commission (the SEC) have adopted broad interpretations of their jurisdiction over non-US persons and have imposed record fines.
The FCPA comprises two sets of prohibitions and requirements: the ‘books and records’ provisions and the ‘anti-bribery’ provisions. The books and records provisions require certain FCPA issuers (defined below) to keep records that accurately reflect transactions affecting the issuer and to maintain adequate systems and controls so that transactions are recorded for preparation of accurate financial statements. The books and records provisions apply to any ‘issuer’ that has registered US securities or that is required to file certain periodic reports with the SEC (an FCPA issuer).5 Any individual or entity is subject to civil or criminal enforcement if it causes, or is involved with, any violation by an FCPA issuer of its books and records obligations.
Broadly, the FCPA anti-bribery provisions prohibit offers or payments of anything of value made directly or indirectly to any foreign official (defined broadly) or any non-US political party or candidate, if made for the purpose of influencing or inducing that person to exercise influence with a non-US government to assist in obtaining or retaining business or securing any improper advantage. The FCPA’s anti-bribery provisions apply to (1) US citizens and residents wherever located; (2) the worldwide operations of any FCPA issuer or any business organisation formed under US law or having its principal place of business in the US and various persons acting on behalf of such entities; and (3) any other person ‘while in the territory of the United States’.
The phrase ‘in the territory of the United States’ is very broadly interpreted by the DOJ.6 In October 2006, SSI International Far East, a non-US company whose relevant employees were outside the US, pleaded guilty to anti-bribery charges and paid a $7.5m penalty. The sole basis for US jurisdiction was that the company ‘transmitted requests’ to persons located in the US to make improper payments to non-US persons.
The US authorities have also broadly interpreted the concept of ‘agents acting on behalf of’ FCPA issuers and domestic concerns. In May 2005, DPC (Tianjin), a Chinese subsidiary of a US company, pleaded guilty to criminal charges that it paid $1.6m in bribes to government employees at hospitals in China. DPC (Tianjin) and its parent company paid $4.8m in penalties to the DOJ and SEC, whose jurisdictional basis was that the subsidiary acted as the ‘agent’ of its US parent, sending related financial information to it in the US by email and fax.
Recently, US prosecutors have imposed substantial criminal penalties on non-US banks and companies that have business dealings with targets of US sanctions. Very generally, the sanctions prohibit most dealings with: (1) persons in or doing business from Iran, Cuba, Sudan or Myanmar; (2) several thousand individuals and entities (wherever located) included in a list of ‘specially designated nationals’; (3) the governments of Iran, Cuba or Sudan, their agents and entities controlled by them; and (4) Cuban nationals and companies, their controlled entities and agents, and Cuban branches of non-Cuban companies.
All ‘US persons’ must comply with the sanctions. This is a broadly defined term that includes the worldwide operations of any entity organised under US law, but generally excludes subsidiaries formed under non-US law and non-US persons outside the US.
Prosecutors have increasingly been pursuing non-US persons for actions entirely outside the US. The cases can be broadly broken down into those against banks and those against companies dealing in US-origin goods.
Non-US banks have been prosecuted for causing USdollar funds transfers to be made for the benefit of targeted persons. Lloyds TSB recently agreed to pay $350m to prosecutors to resolve criminal economic sanctions violations. Jurisdiction was asserted based on the actions of non-US employees, outside the US, who indirectly caused the export of financial services to Iran by causing correspondent banks in the US to process USdollar funds transfers for Iranian and Sudanese persons. The authorities say similar investigations continue into several other non-US banks.
Non-US export companies have been prosecuted for purchasing goods from the US with the intention of ‘re-exporting’ them to targeted persons or countries. In September 2007 the DOJ announced that a criminal complaint had been filed against the Dutch company Aviation Services International and others for prohibited exports of US-origin goods to Iran. The defendants were not ‘US persons’ under the sanctions regulations and appear never to have been in the US. Jurisdiction was apparently based solely on their allegedly having caused US persons to export the relevant articles from the US to the Netherlands. In March 2009, an indictment was unsealed against the Irish company Mac Aviation Group, its owner and two employees, based on similar facts and charging violations of the Iran sanctions regulations.
US criminal antitrust investigations are conducted by the DOJ and, in practice, are limited to ‘hard-core’ violations of section 1 of the Sherman Act,7 such as market allocation, price-fixing and bid-rigging. In addition to statutory fines of up to $100m for each violation, under separate statutory authority8 fines equal to the pecuniary gain or loss are regularly imposed even in excess of $100m. Under sentencing guidelines, fines are calculated as 20 per cent of affected sales, adjusted upwards or downwards based on culpability, co-operation and other factors.
An individual defendant may be fined up to $1m or imprisoned for up to 10 years, or both. Although dual criminality limitations make extradition to the US for criminal antitrust offenses difficult, the US has recently used Interpol and other mechanisms to detain and charge foreign suspects.
The Foreign Trade Antitrust Improvements Act9 limits extraterritorial application of the Sherman Act to instances in which the defendant intended to produce, and did produce, a substantial effect in the US. It has done little to shield cartels with even minimal US contacts. In 2007, British Airways pleaded guilty to charges and paid a $300m fine for agreeing to fix air cargo rates and the fuel surcharge applied to longhaul passengers. Although the British Airways fine was calculated using only cargo shipments from the US (and not to it), the subsequent Cathay Pacific plea agreement in the same global investigation imposed a fine based solely on price-fixing on shipments to the US. It did not matter where the agreements were made: the jurisdictional predicate was apparently satisfied even by foreign shipments to the US.
SEC civil enforcement actions under the Securities Act and the Exchange Act
The SEC does not exercise criminal jurisdiction, but its enforcement activities often progress alongside criminal prosecutions and the civil penalties imposed are often no less onerous than criminal ones. The principal legislation enforced by the SEC (the Securities Act of 193310 and the Exchange Act of 193411) is silent on extraterritorial reach, but there is much case law dealing with the issue.
The anti-fraud provision on which the SEC principally relies12 makes it unlawful for any person through ‘any means or instrumentality of interstate commerce… to use [in the purchase or sale of any security] any manipulative or deceptive device or contrivance in contravention of such rules and regulations [as the SEC] may prescribe… in the public interest or for the protection of investors’. This provision has broad application.
US securities laws are generally applied if losses are incurred: (1) by US residents (wherever the unlawful acts occurred); (2) by US citizens abroad (if the unlawful acts occurred mostly in the US); and (3) by foreigners outside the US (if the unlawful acts occurred in the US and were the direct cause of the harm).13 The SEC will also, in some circumstances, seek remedies against US issuers even if the principal losses are to non-US citizens. The rationale for this jurisdiction is a presumption by courts that Congress could not have ‘intended to allow the United States to be used as a base for manufacturing fraudulent [securities] for export, even when they are peddled only to foreigners’.14 Accordingly, the courts have entertained civil suits when only a few US residents have been affected, though considerations of comity will lead courts and the SEC to refrain from exercising jurisdiction (or to share jurisdiction) when a non-US court or regulator has more appropriate grounds for jurisdiction.15