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

Extraterritorial application of US laws

US regulators and prosecutors frequently investigate non-US entities and individuals for overseas conduct, even though there is a limited connection to the United States. Despite the broad remit claimed by US authorities, US courts generally apply a ‘presumption against extraterritoriality’ when determining the scope of statutes. The contours of this presumption have been the subject of extensive litigation and several United States Supreme Court rulings in recent years, with the court most recently revisiting the issue in 2016 in RJR Nabisco, Inc v. European Community. In essence, the presumption means that ‘legislation of Congress, unless a contrary intent appears, is meant to apply only within the territorial jurisdiction of the United States.’

Despite the existence of this presumption, US authorities often justify investigating and prosecuting conduct that occurs largely outside the United States by arguing that the use of the US financial system or other limited contact with the United States renders the conduct at issue domestic rather than extraterritorial. Whether there is a sufficient US nexus to render the conduct at issue ‘domestic’ will turn on the focus of the statute. Therefore, it is important to understand the scope of the statutes that US authorities most commonly use to reach overseas conduct as well as the types of overseas activity that can fall within the reach of US law. This chapter will address recent jurisprudence regarding the presumption against extraterritoriality and its application to some of the most commonly invoked statutes in criminal and regulatory investigations.

RJR Nabisco and the presumption against extraterritoriality

Pursuant to the Racketeer Influenced and Corrupt Organizations Act (RICO), it is unlawful to engage in a ‘pattern of racketeering activity’ in association with an ‘enterprise’. Racketeering activity includes a variety of enumerated wrongful acts. These offences are frequently referred to as RICO ‘predicates’. Using RICO, federal prosecutors can bring charges against individuals or corporate entities that are alleged to have engaged in two or more predicate acts. RICO provides for both civil and criminal penalties, as well as a private right of action for victims.

In 2016, in RJR Nabisco Inc v. European Community, a private civil action, the Supreme Court considered the extent to which RICO applies extraterritorially. The court made clear that there is a two-step framework for analysing extraterritoriality. First, a court must ‘ask whether the presumption against extraterritoriality has been rebutted – i.e., whether the statute gives a clear, affirmative indication that it applies extraterritorially.’ Second, if a statute is not extraterritorial, the court must:

determine whether the case involves a domestic application of the statute, and [the court does] this by looking to the statute’s ‘focus.’ If the conduct relevant to the statute’s focus occurred in the United States, then the case involves a permissible domestic application even if other conduct occurred abroad; but if the conduct relevant to the focus occurred in a foreign country, then the case involves an impermissible extraterritorial application regardless of any other conduct that occurred in US territory.

Applying this analysis, the court held that RICO applies extraterritorially only to the extent that the underlying predicate offences have extraterritorial application. The court explained that Congress must have intended that RICO reach at least some foreign activity, given that several RICO predicates expressly apply to conduct that occurred abroad. The court concluded that the incorporation of such statutes, ‘gives a clear, affirmative indication that § 1962 applies to foreign racketeering activity – but only to the extent that the predicates alleged in the particular case themselves apply extraterritorially.’

In RJR Nabisco, the court also clarified that a predicate offence that applies extraterritorially is a necessary, but not sufficient condition for the extraterritorial application of the RICO statute. In addition, there must be proof that the RICO enterprise engages in, or affects in some significant way, commerce directly involving the United States and ‘[e]nterprises whose activities lack that anchor to US commerce cannot sustain a RICO violation.’

In the criminal context, courts have applied RJR Nabisco to determine if a RICO prosecution is domestic or extraterritorial. In criminal cases, the RICO statute’s extraterritorial reach is coterminous with the underlying predicate offences. Therefore, whether a specific application of RICO is extraterritorial will depend on the underlying offence.

Securities laws

The extraterritorial scope of US securities laws has been the subject of frequent litigation in recent years. The Securities Exchange Act of 1934 (the Exchange Act) and, in particular, Rule 10b-5 thereunder, which prohibits fraudulent or manipulative devices in connection with the purchase or sale of any security, is one of the primary laws by which US securities markets are regulated. The SEC can bring civil enforcement actions against companies and individuals for violations of the Exchange Act. Additionally, the United States Department of Justice (DOJ) can seek criminal sanctions for wilful violations. The DOJ can also bring prosecutions under other federal criminal statutes, such as charges alleging wire fraud or bank fraud, for conduct relating to a securities fraud violation.

Morrison and its application

Prior to the Supreme Court’s 2010 decision in Morrison v. National Australia Bank Ltd, courts employed the ‘conduct and effects test’ to analyse the foreign application of the Exchange Act. Pursuant to this test, US law applied if there was sufficient domestic conduct or a substantial effect in the United States. This required an intensive inquiry into the operative facts. The conduct prong was satisfied if ‘substantial acts in furtherance of the fraud’ were committed within the United States. This occurred when ‘(1) the defendant’s activities in the United States were more than “merely preparatory” to a securities fraud conducted elsewhere and (2) the activities or culpable failures to act within the United States “directly caused” the claimed losses.’ The effects test was satisfied where there was ‘a substantial effect in the United States or upon United States citizens.’ A claimant did not need to prove both conduct and effects, but courts often looked at the two in combination.

The Morrison court replaced this long-standing approach with a new standard. The Morrison case was a ‘foreign-cubed’ private civil securities fraud suit involving claims by foreign investors who purchased shares of a foreign company on a foreign exchange. The investors claimed that the defendant, an Australian company, had defrauded them by issuing misleading financial statements. The US Supreme Court rejected the argument that the Exchange Act applied to these extraterritorial claims, holding that because the Exchange Act is silent as to its extraterritorial application, it only applies to claims that concern securities listed on domestic exchanges or other domestic transactions in securities. In reaching this decision, the court clarified that the extraterritorial application of US statutes is a merits, rather than jurisdictional, question. Even if a court has subject-matter jurisdiction over the proceeding and personal jurisdiction over the defendants, if the statute in question has no extraterritorial application, a plaintiff cannot state a cause of action.

Following Morrison, the Second Circuit has found that transactions involving securities that are not traded on a domestic exchange are nonetheless ‘domestic transactions’ if irrevocable liability is incurred or title passes within the United States. The exact meaning of ‘irrevocable liability’ remains ambiguous, but the test would probably be satisfied if a party enters into a binding agreement to purchase a security in the United States.

Just days after the Morrison decision was handed down, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). In section 929P of Dodd-Frank, Congress included a provision apparently aimed at overturning Morrison’s holding and restoring the conduct and effects tests, at least with respect to criminal and SEC enforcement actions. However, many courts and commentators have questioned whether the provision accomplishes what Congress seemingly intended.

Section 929P provides that the ‘district courts of the United States . . . shall have jurisdiction’ over actions brought by the SEC or the United States that allege a violation of the Exchange Act’s anti-fraud provisions and involve conduct within the United States in furtherance of the violation or conduct occurring outside the United States with a substantial effect within the United States. While this provision purports to grant jurisdiction to US courts, Morrison explicitly stated that a statute’s extraterritorial reach is a merits question, determined by the scope of the statute itself, rather than by the court’s subject-matter jurisdiction. Therefore, read literally, Section 929P merely grants courts the jurisdiction they already possessed to determine whether particular violations fall within the scope of US law.

Whether Section 929P was successful in reinstating the ‘conduct and effects’ tests remains an open question. A number of courts have assumed Section 929P had such an effect, but did so in dicta, and without analysis. One of the few courts to have directly confronted the issue ultimately avoided reaching a conclusive determination by holding that the SEC’s complaint satisfied both the ‘conduct’ and ‘effects’ tests, as well as the Morrison ‘transactional’ test. Companies or individuals facing potential regulatory or criminal liability under US securities laws should therefore consider not only whether the relevant transactions occurred in the United States, but also whether conduct forming part of the alleged fraud occurred in the United States or affected investors in the United States.

Foreign Corrupt Practices Act

The Foreign Corrupt Practices Act (FCPA) prohibits two main types of activities – bribery of foreign officials and falsification of the books and records of an issuer of US securities. The SEC may seek civil penalties for violations of the FCPA by regulated entities, and the DOJ may pursue criminal penalties. The FCPA specifically delineates the companies and individuals that are subject to its anti-bribery provisions, namely, if they (1) are a US entity or individual (i.e., a ‘domestic concern’), (2) have securities listed on a US stock exchange or are required to file periodic reports with the SEC or (3) use ‘the mails or any means or instrumentality of interstate commerce’, or ‘commit any other act in furtherance of’ a corrupt payment, ‘while in the territory of the United States’. Additionally, the FCPA applies to any stockholder, officer, director, employee or agent acting on behalf of a company that is subject to the FCPA, including consultants, contractors, joint venture partners or other business associates.

As the foregoing description makes clear (not to mention the title of the act itself), Congress clearly intended for the FCPA to cover conduct that might otherwise be considered ‘extraterritorial’, namely occurring outside the United States. As far as the DOJ and SEC are concerned, although the FCPA does not directly apply to non-US subsidiaries of US issuers or domestic concerns, guidance from both authorities explains that a parent company may nonetheless be liable under the FCPA’s anti-bribery provisions for the actions of a subsidiary not only when the parent directly participated in the subsidiary’s misconduct, but also ‘under traditional agency principles’. To determine whether a subsidiary is an agent of its parent such that its knowledge and conduct are imputed to the parent, the DOJ and the SEC evaluate ‘the parent’s control – including the parent’s knowledge and direction of the subsidiary’s actions, both generally and in the context of the specific transaction’.

Similarly, the US authorities’ published guidance suggests that limited conduct within the United States may render an otherwise foreign scheme subject to the jurisdiction of the FCPA. If, for example, a foreign scheme involves ‘placing a telephone call or sending an email, text message, or fax from, to, or through the United States’ or ‘sending a wire transfer from or to a US bank or otherwise using the US banking system, or traveling across state borders or internationally to or from the United States’ the US authorities will probably contend that those actions suffice to bring the conduct within the FCPA’s scope. Enforcement actions have supported the government’s expansive view. For example, in United States v. JGC Corp, the court approved a deferred prosecution agreement (DPA), which charged a Japanese defendant with violating the FCPA. Pursuant to the agreed statement of facts in that case, the government alleged that the defendant bribed Nigerian officials to obtain government contracts. The jurisdictional basis for the charge was that the defendant allegedly conspired with an American joint-venture partner, and that wire transfers in furtherance of the scheme, which one foreign bank sent to another, were routed at some point through New York.

Through cases like United States v. JGC Corp, US authorities have sought to expand the FCPA’s extraterritorial reach through aggressive use of accessorial theories of liability. Specifically, US authorities have asserted that individuals and entities who do not fall within the scope of the enumerated categories set forth in the FCPA may nonetheless be liable if they aid and abet, or conspire with, individuals or entities that are subject to the statute. However, a recent decision by the Court of Appeals for the Second Circuit rejected the government’s use of conspiracy liability to expand the reach of the FCPA.

In United States v. Hoskins, the DOJ brought criminal FCPA charges against a British national who was formerly employed by a French conglomerate. Although Mr Hoskins never entered the United States during the course of the alleged scheme, the DOJ contended that Mr Hoskins acted as an ‘agent’ of his employer’s US subsidiary, and moreover was liable under the general conspiracy and aiding-and-abetting statutes for working in concert with others within the United States who were subject to the FCPA. The trial court ruled in Mr Hoskins’s favour, finding that non-US persons who were not expressly covered by the FCPA could not be subject to secondary liability for conspiring with, or aiding and abetting, individuals or companies who were covered by the statute. In August 2018, the Second Circuit affirmed the trial court’s decision, finding that ‘Congress did not intend for persons outside of the statute’s carefully delimited categories to be subject to conspiracy or complicity liability’, and that ‘nonresident foreign nationals outside American territory without an agency relationship with a US person, and who are not officers, directors, employees, or stockholders of American companies’ are not subject to the FCPA’s prohibition.’ This ruling constitutes binding precedent on federal courts within the Second Circuit (which includes New York and Connecticut), and, at first blush, seems likely to be influential on courts in other regions as well.

Commodity Exchange Act

The US Commodity Futures Trading Commission (CFTC) is responsible for enforcing the Commodity Exchange Act (CEA). As a result, the CFTC has enforcement authority over ‘commodities’, which are broadly defined under the CEA to include ‘all services, rights, and interests . . . in which contracts for future delivery are presently or in the future dealt in.’ In effect, a commodity is any product that is or may in the future be traded on a futures exchange. This includes financial instruments and currencies, as well as traditional commodities such as oil, metals and agricultural products. As with the Exchange Act, the DOJ has concurrent authority to seek criminal penalties for any wilful violations of the CEA, and can also bring criminal charges under related statutes, including wire fraud.

Prior to Morrison, courts applied the CEA extraterritorially when either the conduct or effects test was satisfied. This occurred when manipulative conduct in the United States caused harm abroad or when foreign activities caused ‘foreseeable and substantial harm to interests in the United States’. However, courts hearing civil CEA claims brought by private litigants after Morrison have begun to apply it to these cases, and the Second Circuit Court of Appeals endorsed the application of Morrison’s transaction-based test to private suits under the CEA in Loginovskaya v. Batratchenko. However, in Myun-Uk Choi v. Tower Research Capital LLC, the Second Circuit noted that the language in the Exchange Act that the Supreme Court relied on to develop the transaction-based test had no analogue in the CEA. Ultimately, the Court did not have to revisit the issue because it found the transaction-based test satisfied.

Whether Morrison applies to actions brought by the CFTC, rather than by private plaintiffs, has yet to be determined. Although Dodd-Frank specifically provides for the SEC’s continued use of the conduct and effects tests, no such explicit provision was made for the CFTC. However, the CFTC has noted that, in light of other Dodd-Frank amendments that provide the CFTC with jurisdiction over swaps that have a ‘direct and significant connection’ with the United States, the CEA is no longer silent with respect to its extraterritorial application. In the CFTC’s view, this means that Congress has specified that the CEA does apply overseas to swaps activity with a ‘sufficient nexus’ to US commerce.