Daniel Silver and Benjamin A Berringer, Clifford Chance

This is an extract from the third edition of GIR's The Practitioner’s Guide to Global Investigations. The whole publication is available here

Antitrust laws

The principal US antitrust law – the Sherman Act – prohibits ‘every contract, combination . . . or conspiracy in restraint of trade’. How a court examines a particular antitrust violation depends on the nature of the conspiracy. A horizontal conspiracy, that is, a price-fixing arrangement between competitors, is a per se violation of the antitrust laws. Other conduct that may restrain trade is only illegal if it constitutes an unreasonable restraint of trade. Although antitrust laws are often enforced civilly, the DOJ’s Antitrust Division may also bring criminal prosecutions for violations of the antitrust laws. These are typically limited to per se violations such as when competitors fix prices or rig bids.

The Supreme Court addressed the extraterritoriality of antitrust laws in 2004, when it refused to infer a congressional intent to authorise antitrust actions based on wholly extraterritorial conduct with purely extraterritorial effects under the Sherman Act and the Foreign Trade Antitrust Improvements Act (FTAIA). Nonetheless, the DOJ often enforces US antitrust laws against foreign actors. Pursuant to the FTAIA, US antitrust laws apply to any violation that ‘significantly harms imports, domestic commerce, or American exporters’, even if the relevant trade or commerce occurs outside the United States. Moreover, US antitrust law can also reach wholly foreign conduct, as long as it has a ‘direct, substantial, and reasonably foreseeable’ effect on US commerce. In practice, courts have set this ‘direct effects’ bar fairly low. For example, the Ninth Circuit upheld convictions related to a foreign price-fixing conspiracy in which the conspirators fixed the prices of components that were later included in products that were imported into the United States because there was a direct effect in the United States.

Therefore, if the conduct at issue has some effect on trade with, or within, the United States it will probably be subject to US antitrust laws. As part of the settlement of the benchmark interest rate investigations that the CFTC and DOJ conducted, many of the defendants admitted that the underlying conduct also constituted a violation of the Sherman Act. For example, as part of its settlement of the DOJ and CFTC’s investigation into alleged LIBOR and EURIBOR manipulation, Deutsche Bank was charged with one count of wire fraud and one count of price fixing in violation of the Sherman Act pursuant to a deferred prosecution agreement with the DOJ. The DOJ alleged that Deutsche Bank violated the Sherman Act due to its participation in a scheme to coordinate their EURIBOR requests with traders at other banks to benefit their trading positions. The parties agreed that this conduct by Deutsche Bank traders based outside the United States was nonetheless subject to US antitrust jurisdiction because it affected US commerce, as some of Deutsche Bank’s counterparties were based in the United States.

Wire fraud

One of the most widely used US criminal statutes is the wire fraud statute, which prohibits the use of a wire transmission in ‘interstate or foreign commerce’ as part of a scheme to defraud. To prove wire fraud, the DOJ must show that (1) the defendant participated in a scheme to defraud another person out of money or property, (2) the defendant had an intent to defraud, (3) the relevant scheme involved a material deception and (4) the scheme involved an interstate or foreign wire transmission (i.e., a phone call or email). Therefore, so long as there was a wire communication (such as an email or bank transfer) that passed through the United States in furtherance of the fraud, the DOJ could potentially establish jurisdiction.

Moreover, the wire transmission need not be central to the defendant’s conduct or the alleged scheme. Indeed, the defendant does not need to have personally sent the wire to be charged, so long as the use of the wires was a reasonably foreseeable result of the conspiracy. Despite this broad application to schemes that involve the use of US wire transmissions, courts are currently divided on whether the wire fraud statute applies extraterritorially under the principles articulated in Morrison and its progeny. The Third Circuit has held that it applies extraterritorially; the Second Circuit has held that it does not; and a number of other circuits have avoided the question by finding that using US wires is a domestic application of the statute.

One of the most extensive discussions of the extraterritoriality of the wire fraud statute occurred in the Second Circuit’s European Community v. RJR Nabisco decision, which was subsequently reversed by the Supreme Court on other grounds in RJR Nabisco v. European Community. The Second Circuit held that the wire fraud statute lacks extraterritorial effect because the references to ‘foreign commerce’ in the statute are derived from the Commerce Clause of the US Constitution and relate to Congress’s authority to regulate commerce between the United States and foreign nations, rather than a congressional intent that the statute apply extraterritorially. However, the Second Circuit sidestepped the second stage of the analysis, concluding that ‘wherever [the] line should be drawn [between domestic and extraterritorial applications of the wire fraud statute], the conduct alleged here clearly states a domestic cause of action.’ This was so because the plaintiffs had alleged domestic conduct satisfying each of the essential elements of a wire fraud claim.

Following European Community, lower courts are divided on how much domestic conduct is necessary for a domestic application of the wire fraud statute. A district court in New York found that for wire fraud to be domestic it requires the use of US wires plus some additional domestic contacts. The defendants were accused of orchestrating a scheme to steal the corporate identities of Russian companies and use artificial losses to secure tax refunds from the Russian government. While laundering those funds, a wire transfer between two European bank accounts was routed through New York. The court held that this domestic contact ‘was not sufficiently central to the overall fraud scheme to convert this foreign scheme into a domestic one.’ In particular, the court noted that: ‘the Government does not plead that the wire fraud scheme here was formed in the United States, let alone that all of the elements of wire fraud were completed in the United States.’ Further it only involved a single US contact – one wire transfer routed through New York. The court further rejected the DOJ’s contention that a domestic application of the wire fraud statute was appropriate because proceeds of the scheme were used to invest in New York real estate, finding that this argument improperly conflated the conduct constituting wire fraud with subsequent money laundering conduct.

On the other hand, in United States v. Hayes, a criminal wire fraud case arising from the LIBOR scandal, the trial court focused only on whether the scheme involved the use of US wires. In that case, the court concluded that even though the defendant was accused of manipulating a foreign interest rate benchmark (the Yen London Interbank Offered Rate) from foreign locations (London and Tokyo), wire fraud charges were appropriate because he ‘caused the publication of the manipulated interest rate information in New York, New York.’ According to the court, this conduct was the focus of the wire fraud statute because ‘Congress’s legislative concern was “to prevent the use of [US wires] in furtherance of fraudulent enterprises.”. . . [T]he location of the wires is the Court’s primary concern.’

Other courts have imposed relatively high standards for establishing a domestic wire fraud violation. In Laydon v. Mizuho Bank Ltd, for example, the court rejected the plaintiff’s attempted use of wire fraud as a predicate for a civil RICO claim. The conduct at issue in Laydon, manipulation of benchmark interest rates, was substantially similar to the conduct alleged in Hayes. In Laydon, however, the court held that the plaintiff must make ‘extensive factual allegations’ beyond the mere use of US wires to establish a domestic violation. Specifically, the court required allegations detailing that the fraudulent scheme was managed from and directed at the United States. Ultimately, the Laydon court concluded that the alleged actions of ‘foreign and international institutions that submitted false information to [benchmark rate administrators], located in London and Tokyo,’ were insufficient to support a RICO claim predicated on wire fraud. Later courts have attempted to reconcile these cases by emphasising that Hayes was a criminal prosecution and that, in the civil context, mere use of a US wire in a scheme that is otherwise foreign did not create a domestic application.

However, in United States v. Gasperini, a criminal prosecution, the court found that the focus of the wire fraud statute is the fraudulent scheme. The court determined that a domestic application occurs when (1) a substantial amount of the conduct is in the United States, (2) that conduct is integral to the commission of the scheme and (3) some of the conduct involves the use of US wires to further the scheme.

While substantial uncertainty remains, it is clear that many schemes that are based outside the United States may be subject to US jurisdiction.

Money laundering

Like the wire fraud statute, the Money Laundering Control Act (MCLA) prohibits certain transactions involving interstate or foreign commerce.

The MCLA prohibits, among other things, the transport of money into or out of the United States with the intent to promote or conceal certain specified unlawful activities. In an MCLA prosecution, the DOJ does not need to prove that the defendant engaged in the underlying unlawful activity or had the capacity to commit the underlying crime. Instead it must merely show that the defendant knew the money originated from unlawful activity and that the defendant intended to promote the specified unlawful activity, which must be one of over 250 crimes identified in the statute.

Unlike the wire fraud statute, the MCLA explicitly addresses the extent of its extraterritorial application. The MCLA applies extraterritorially to money laundering if the conduct is by a United States citizen or the ‘conduct occurs in part in the United States’, and the value involved is greater than US$10,000.

Because the MCLA applies extraterritorially, and the DOJ does not need to prove capacity to commit the underlying offence, it is often used by the DOJ to prosecute individuals who might not otherwise be subject to US jurisdiction. One specific class of such individuals is foreign officials who receive bribes (and who are excluded from liability under the FCPA).

Sanctions

The US Treasury Department’s Office of Foreign Assets Control (OFAC) administers US economic sanctions against certain countries, governments, entities and individuals. OFAC may bring administrative enforcement actions for violations of US sanctions and impose civil monetary penalties. The DOJ may bring concurrent criminal actions against entities and individuals for wilful violations and seek monetary penalties as well as potentially imprisonment (for individuals). The primary statute through which sanctions regimes are criminally enforced is the International Emergency Economic Powers Act. The extraterritorial application of each sanctions programme varies according to the specific regulations governing that particular sanctions regime. OFAC administers many distinct sanctions programmes, each pursuant to a complex set of authorising statutes, regulations or executive orders. Prohibitions may apply not only to particular countries or territories, and individuals and entities resident or domiciled in sanctioned countries, but also to targeted individuals and entities globally. For example, OFAC targets individuals and entities by listing them on the Specially Designated Nationals and Blocked Persons List, including designating terrorists, international narcotics traffickers, nuclear proliferators and dealers in weapons of mass destruction. Prohibitions may also apply to persons designated as foreign sanctions evaders (FSEs) by OFAC for engaging in conduct relating to the evasion of US economic sanctions with respect to Iran or Syria. OFAC also imposes blocking sanctions on the Government of Iran and Iranian financial institutions listed on the Executive Order 13599 List. Finally, OFAC imposes limited sanctions on certain companies in specified sectors of the Russian economy through the Sectoral Sanctions Identification List (SSI List). OFAC’s SDN and SSI List sanctions also impose sanctions on entities owned 50 per cent or more, directly or indirectly, by such persons.

The applicability of US sanctions to a specific entity or individual depends on the particular sanctions regime and the nature of the transaction. All OFAC sanctions programmes impose compliance obligations at a minimum on ‘US persons’, defined to include all entities organised under US law (including their foreign branches, but not including foreign affiliates), all persons in the United States, and US citizens or US green card holders globally. OFAC’s Iran and Cuba sanctions also impose compliance obligations on entities that are owned or controlled by US persons. More broadly, any transactions that involve the US financial system or US-origin goods or services may also be subject to OFAC sanctions compliance obligations. Payments and other transactions denominated in US dollars, even if beginning and terminating outside the United States, typically entail a US-dollar clearing payment through the United States that will be subject to OFAC’s jurisdiction.

In addition to OFAC’s primary sanctions (described above), some US sanctions regimes include ‘secondary sanctions’. Unlike primary sanctions, these authorise the imposition of sanctions on non-US persons for engaging in certain ‘sanctionable activity’ that involves no US persons, US-origin goods or other US elements. US secondary sanctions do not impose compliance requirements under the authority of US criminal or administrative law. Thus, a non-US person does not violate US law, in any traditional legal sense, by engaging in such activity. Rather, such activity exposes the non-US person to potential US government action through a range of potential sanctions measures intended to restrict access to US markets. OFAC may also designate (i.e., target) non-US individuals and corporations under these measures.

Government collection of evidence located abroad

DOJ policy acknowledges that: ‘US law, in the form of mutual legal assistance treaties, requires that the United States attempt to obtain records using the mutual legal assistance process prior to resorting to unilateral compulsory measures.’ Further, efforts to collect evidence abroad can violate a foreign nation’s sovereignty or criminal law. Therefore, federal prosecutors need permission from the DOJ’s Office of International Affairs before seeking to compel production of documents held abroad. US regulators also face similar restrictions.

However, electronic data is treated differently in some circumstances. The Stored Communications Act (SCA) (as amended by the CLOUD Act), requires that providers of electronic communication services (ECS) or remote computing services (RCS) preserve, back up or disclose, pursuant to a warrant or a court order, electronic data within the ‘provider’s possession, custody, or control, regardless of whether such communication, record, or other information is located within or outside of the United States.’ The SCA defines an ECS as ‘any service which provides to users thereof the ability to send or receive wire or electronic communications’. The DOJ has taken the view that any entity ‘that provides others with the means to communicate electronically can be a “provider of electronic communication service” relating to the communications it provides’. However, the DOJ has acknowledged that ‘a commercial website is not a provider of ECS, even though it may send and receive electronic communications from customers.’ This is consistent with precedent, which generally looks to whether an entity allows customer to send third-party messages to determine whether it is an ECS.

An RCS is separately defined in the SCA to constitute ‘the provision to the public of computer storage or processing services by means of an electronic communications system.’ An ‘electronic communication system’ is further defined as ‘any wire, radio, electromagnetic, photooptical or photoelectronic facilities for the transmission of electronic communications, and any computer facilities or related electronic equipment for the electronic storage of such communications’. According to the DOJ, this means that ‘[r]oughly speaking, a remote computing service is provided by an off-site computer that stores or processes data for a customer.’

The CLOUD Act also introduced a new framework for the United States and foreign governments to enter into agreements to facilitate the cross-border transfer of data for law enforcement purposes. The SCA now grants privileged status for ‘qualifying foreign government[s]’, that enter into an agreement with the United States regarding SCA data. Qualifying foreign governments may then request customer data from providers pursuant to a court order from the foreign government if the provider is required to make the disclosure under the foreign government’s law and the order is issued in connection with the investigation of a serious crime. Pursuant to an order from a qualifying foreign government, service providers may also intercept or disclose the contents of a wire or electronic communication, through the CLOUD Act’s amendment of the Wiretap Act. When a data provider complies with an order from a qualifying foreign government, the CLOUD Act immunises the service provider from civil causes of action for providing the data to that government.

Providers who receive an SCA warrant have a limited ability to challenge. For data held in a country with a qualifying foreign government, the court may modify or quash the order only if:

(i) the required disclosure would cause the provider to violate the laws of a qualifying foreign government;

(ii) based on the totality of the circumstances, the interests of justice dictate that the legal process should be modified or quashed; and

(iii) the customer or subscriber is not a United States person and does not reside in the United States.

In deciding a motion to modify or quash under the SCA, the court must perform a comity analysis, considering the various interests at stake including those of the US government and the foreign government, the likelihood and nature of penalties that may be imposed on the provider, and the importance to the investigation of the information required to be disclosed. For data held in a country with a non-qualifying foreign government, traditional means of resisting disclosure likely remain available, including common law international comity arguments.

 Conclusion

Despite the long-standing presumption against extraterritoriality, US prosecutors and regulators continue to take a broad view of their authority to investigate and prosecute the conduct of non-US persons and entities that occurs largely overseas. As a result, it is critical that attorneys advising non-US clients carefully analyse the statutes at issue and their elements to determine whether there may be a sufficient nexus to the United States to impose liability.