29.1 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.
29.2 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.
29.3 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.
29.4 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.
29.5 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.
29.6 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.
29.7 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.
29.8 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).
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.
29.10 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.
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.
1 Daniel Silver is a partner and Benjamin A Berringer is an associate at Clifford Chance US LLP.
2 136 S.Ct. 2090 (2016).
3 EEOC v. Arabian Am. Oil Co. (Aramco), 499 U.S. 244, 248 (1991) (quoting Foley Bros. v. Filardo, 336 U.S. 281, 285 (1949)).
4 See 18 U.S.C. § 1962.
5 See 18 U.S.C. § 1961(1).
6 136 S.Ct. 2090 (2016).
7 136 S.Ct. at 2101.
10 136 S.Ct. at 2091.
11 Id. (citing as an example 18 U.S.C. § 2332(a), which prohibits the killing of a US national outside the United States).
12 Id. at 2102.
14 United States v. Hawitt, 2017 WL 663542, *9 (E.D.N.Y. 17 February 2017).
15 Id. at *10.
16 15 U.S.C. § 78ff(a).
17 561 US 247 (2010).
18 SEC v. Berger, 322 F.3d 187, 193 (2d Cir. 2003) (internal citation and quotation omitted). For example, in SEC v. Berger, the court found that the conduct test was met when creation of false financial information, the transmission of that false financial information overseas, and approval of the resulting false financial statements all occurred in the United States. Berger, 322 F.3d Id. at 194.
19 Id. at 192.
20 See City of Edinburgh Council ex rel. Lothian Pension Fund v. Vodafone Grp. Pub. Co., 2008 WL 5062669, at *3 (S.D.N.Y. 24 November 2008).
21 Id. at 258 (‘[T]o ask what conduct [Section] 10(b) reaches is to ask what conduct [Section] 10(b) prohibits, which is a merits question. Subject-matter jurisdiction, by contrast, refers to a tribunal’s power to hear a case.’ (citation omitted) (internal quotation marks omitted)).
22 Absolute Activist Value Master Fund Ltd. v. Ficeto, No. 11-0221-CV, 2012 WL 661771 (2d Cir. 1 March 2012).
23 Pub. L. No. 111-203, 124 Stat. 1376 (2010).
24 Id. § 929P (codified at 15 U.S.C. § 78aa(b)).
25 See, e.g., Daniel E. Herz-Roiphe, Innocent Abroad? Morrison, Vilar, and the Extraterritorial Application of the Exchange Act, 123 Yale L. J. 1875 (2014); Richard W. Painter, The Dodd-Frank Extraterritorial Jurisdiction Provision: Was it Effective, Needed, or Sufficient?, 1 Harv. Bus. L. Rev. 195 (2011).
26 The provision in its entirety states: ‘The district courts of the United States and the United States courts of any Territory shall have jurisdiction of an action or proceeding brought or instituted by the Commission or the United States alleging a violation of the antifraud provisions of this chapter involving – (1) conduct within the United States that constitutes significant steps in furtherance of the violation, even if the securities transaction occurs outside the United States and involves only foreign investors; or (2) conduct occurring outside the United States that has a foreseeable substantial effect within the United States. 15 U.S.C. § 78aa(b).’
27 See Morrison, 561 US at 253-54.
28 See id. (‘The District Court here had jurisdiction under 15 U.S.C. § 78aa to adjudicate the question whether § 10(b) applies to [the respondent’s] conduct.’)
29 See SEC v. Battoo, 158 F. Supp. 3d 676, 692 n.12 (N.D. Ill. 2016). (‘There is no binding case law that decides whether the Dodd-Frank Act reinstated the conduct-and-effects test for actions brought by the SEC.’)
30 See, e.g., SEC v. Tourre, No. 10 Civ. 3229(KBF), 2013 WL 2407172, at *1 n.4 (S.D.N.Y. 4 June 2012); see also United States v. Vasquez, No. 17-50564, 2018 WL 3746809, at *5 (5th Cir. 7 August 2018) (mentioning that 929P superseded Morrison); SEC v. Chicago Convention Center, LLC, 961 F. Supp. 2d 905, 910 n.1 (N.D. Ill. 2013) (collecting cases).
31 See Chicago Convention Center, 961 F. Supp. 2d at 916-17 (N.D. Ill. 2013) (holding after a lengthy discussion of Section 929P and its legislative history that, ‘[t]he Court need not resolve this complex interpretation issue, however, because . . . under either the Morrison ‘transactional’ inquiry or the allegedly revived ‘conducts and effects test,’ the SEC’s Complaint survives the present motion to dismiss’).
32 See 15 U.S.C. §§ 78dd-1 to -3 (2012); id. § 78m. Issuers may also be liable for failing to maintain adequate internal controls to prevent corrupt activity. See 15 U.S.C. § 78m(b)(2).
33 Id. §§ 78dd-1(g), 78dd-2(i).
34 Id. §§ 78dd-1(a), 78dd-2(a).
35 Id. § 78dd-3(a).
36 Id. §§ 78dd-1(a), 78dd-2(a), 78dd-3(a).
37 Criminal Division of the US Department of Justice and the Enforcement Division of the US Securities and Exchange Commission, A Resource Guide to the US Foreign Corrupt Practices Act 27 (2012).
39 Id. at 11.
40 Deferred Prosecution Agreement, United States v. JGC Corporation, No. 11 CR 260, 2011 WL 1315939 (S.D. Tex. 6 April 2011).
41 Trial Pleading, United States v. JGC Corporation, No. 11 CR 260, 2011 WL 1359521 (S.D. Tex. 6 April 2011).
42 United States v. Hoskins, No. 3:12CR238 (JBA), 2016 WL 1069645 (D. Conn. 16 March 2016).
43 Id. at *5. Similarly, in United States v. Yakou (a case that arose in the context of a criminal prosecution for violation of the Arms Export Control Act (AECA)), the US Court of Appeals for the District of Columbia Circuit rejected a prosecution of a foreign defendant who was not personally covered by the AECA, holding that ‘[t]he aiding and abetting statute is not so broad as to expand the extraterritorial reach of the underlying statute.’ 428 F.3d 241, 252 (D.C. Cir. 2005).
44 United States v. Hoskins, 2018 WL 4038192, at *11.
45 Id. at *12.
46 7 U.S.C. § 1a(9).
47 See Commodity Futures Trading Comm’n v. American Bd. of Trade, Inc., 803 F.2d 1242, 1248 (2d Cir. 1986). (‘[A]nything other than onions could become a “commodity” . . . simply by its futures being traded on some exchange.’) (Footnote omitted.)
48 7 U.S.C. § 1a(9).
49 See, e.g., Commodity Futures Trading Comm’n v. Lake Shore Asset Mgmt. Ltd., 2007 WL 2659990, at *26-27 (N.D. Ill. 28 August 2007) (exercising subject-matter jurisdiction over the CFTC’s claim under the conduct test because the foreign defendant used a US futures exchange to defraud foreign investors), vacated in part on other grounds, 511 F.3d 762 (7th Cir. 2007).
50 Id. at *26 (quoting Pyrenee, Ltd. v. Wocom Commodities, Ltd., 984 F.Supp. 1148, 1155 (N.D. Ill. 1997).
51 764 F.3d 266 (2d Cir. 2014). In Loginovskaya, the court first found that there is an ‘absence of any “affirmative intention” by Congress to give the CEA extraterritorial effect’, and thus, it must be presumed that the CEA ‘is primarily concerned with domestic conditions’. Id. at 273. The court next considered the ‘focus of congressional concern’ for the Section 22 private right of action, deciding that because ‘CEA § 22 limits the private right to suit over transactions [in the commodities market], the suits must be based on transactions occurring in the territory of the United States’. Id. Finally, the court found that the plaintiff had not sufficiently alleged a ‘domestic transaction’, because although the plaintiff took certain steps toward her transaction within the United States, the complaint failed to allege that either title had passed or irrevocable liability was incurred within the United States. Id.
52 886 F.3d 229 (2d Cir. 2018) at 235.
53 Id. at 235-36.
54 In one action brought by the CFTC, the court applied Morrison’s holding that extraterritoriality is a merits question, as opposed to a jurisdictional one, to find that a claim of impermissible extraterritorial application cannot be used to set aside a default judgment. U.S. Commodity Futures Trading Comm’n v. Alcocer, No. 12-23459-CIV, 2018 WL 3730218, at *4 (S.D. Fla. 26 June 2018).
55 See Loginovskaya v. Batratchenko, No. 13-1624, CFTC Letter to Clerk of Court at 2 (2d Cir. 10 September 2014).
57 Sherman Act, 15 U.S.C. § 1 (2004).
58 Leegin Creative Leather Prods., Inc.v. PSKS, Inc., 551 US 877, 893 (2007).
59 Id. at 885 (‘[T]he Court has repeated time and again that § 1 [of the Sherman Act] “outlaw[s] only unreasonable restraints”.’) (Quoting State Oil Co. v. Khan, 522 U.S. 3, 10 (1997).)
60 The Antitrust Laws, available at https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/antitrust-laws (last visited 16 August 2017).
61 See F. Hoffman-LaRoche Ltd. v. Empagran S.A., 542 US 155, 169 (2004).
63 15 U.S.C. § 6a.
64 See, e.g., United States v. Hui Hsiung, 778 F.3d 738, 746-49 (9th Cir. 2015) (affirming criminal conviction of foreign company and executives in connection with price-fixed LCD panels sold abroad).
65 United States v. Deutsche Bank AG, 15-cr-61 (D. Conn. filed on 23 April 2015). DB Group Services UK Limited, a London-based affiliate pled guilty to one count of wire fraud. United States v. DB Group Services UK Limited, 15-cr-62 (D. Conn. filed on 23 April 2015).
68 18 U.S.C. § 1343 (2012).
69 See United States v. Sidorenko, 102 F. Supp. 3d 1124, 1132 (N.D. Cal. 2015) (dismissing wire fraud claim that did not include the use of US wires).
70 United States v. Iorio, 465 F. App’x 60, 61 (2d Cir. 2012).
71 United States v. Gill, 909 F.2d 274, 278 (7th Cir. 1990).
72 United States v. Georgiou, 777 F.3d 125, 137-38 (3d Cir. 2015) (holding that the wire fraud statute applies extraterritorially based on Congress’s inclusion of the phrase ‘foreign commerce’).
73 European Community v. RJR Nabisco, Inc., 764 F.3d 129, 140-41 (2d Cir. 2014) rev’d on other grounds, 136 S. Ct. 2090 (2016).
74 See, e.g., United States v. Coffman, 574 F. App’x 541, 558 (6th Cir. 2014) (finding that the wire fraud statute was being applied domestically because US wires were used in the scheme).
75 764 F.3d 129, 140-41 (2d Cir. 2014) rev’d on other grounds, 136 S.Ct. 2090 (2016).
76 Id. at 142.
78 United States v. Prevezon Holdings Ltd, 122 F. Supp. 3d 57, 71 (S.D.N.Y. 2015).
79 Id. at 62.
80 Id. at 63.
81 Id. at 71-72.
83 Id. at 72.
84 99 F. Supp. 3d 409 (S.D.N.Y.), aff’d on other grounds, 118 F. Supp. 3d 620 (S.D.N.Y. 2015), appeal dismissed (15 March 2016).
85 Id. at 629.
86 Id. at 628 (quoting United States v. Kim, 246 F.3d 186, 191 (2d Cir. 2001)).
87 2015 WL 1515487, at *9 (S.D.N.Y. 31 March 2015).
88 Id. at *1.
89 Id. at *9.
92 Sonterra Capital Master Fund Ltd. v. Credit Suisse Grp. AG, 277 F. Supp. 3d 521, 582 (S.D.N.Y. 2017); see also FrontPoint Asian Event Driven Fund, L.P. v. Citibank, N.A., No. 16 CIV. 5263 (AKH), 2017 WL 3600425, at *14-15 (S.D.N.Y. 18 August 2017) (holding that ‘simply alleging that some domestic conduct occurred cannot support a claim of domestic application’ and finding ‘Plaintiffs’ reliance on criminal RICO cases . . . unfounded’).
93 No. 16-CR-441 (NGG), 2017 WL 2399693, at *7-8 (E.D.N.Y. 1 June 2017).
94 Id. at *8.
95 18 U.S.C. §1956(3).
96 United States v. Kozeny, 493 F. Supp. 2d 693, 706 (S.D.N.Y. 2007), aff’d, 541 F.3d 166 (2d Cir. 2008).
97 United States v. Santos, 553 U.S. 507, 516 (2008).
98 18 U.S.C. § 1956(f).
99 See, e.g., U.S. v. Duperval, 777 F.3d 1324 (11th Cir. 2015), cert. denied, 136 S. Ct. 859, 193 L. Ed. 2d 757 (2016) (MCLA prosecution of Haitian official who was found guilty of laundering bribe payments).
100 50 U.S.C. §§ 1701-1706.
102 OFAC maintains and frequently updates a complete list of SDNs included in OFAC’s Consolidated Sanctions List, available at https://www.treasury.gov/resource-center/sanctions/SDN-List/Pages/consolidated.aspx. OFAC sanctions also apply to entities owned, directly or indirectly, 50 per cent or more by persons or entities on the SDN List.
103 OFAC maintains the Foreign Sanctions Evaders List, the EO13599 List and the SSI List, which are included in OFAC’s Consolidated Sanctions List. OFAC sanctions also apply to entities owned, directly or indirectly, 50 per cent or more by entities listed under the same Directive on the SSI List.
104 31 C.F.R. Part 560.
105 See, e.g., Iranian Financial Sanctions Regulations (31 CFR Part 561); Iran Freedom and Counter-Proliferation Act of 2012 (22 U.S.C. § 8801, et. seq.).
106 U.S. Dep’t of Just., Justice Manual § 9-13.525.
107 Id. § 9-13.510
108 Id. § 9-13.500.
109 See e.g., United States Securities and Exchange Commission Division of Enforcement, Enforcement Manual § 18.104.22.168.
110 18 U.S.C. § 2713.
111 Id. § 2510(15).
112 US Department of Justice Computer Crime and Intellectual Property Section Criminal Division, Searching and Seizing Computers and Obtaining Electronic Evidence in Criminal Investigations at 117, ((internal citation omitted), available at https://www.justice.gov/sites/default/files/criminal-ccips/legacy/2015/01/14/ssmanual2009.pdf.
113 Id. at 118.
114 See e.g., Kaufman v. Nest Seekers, LLC, No. 05-6782, 2006 WL 2807177, at *6 (S.D.N.Y. 2006). (‘An on-line business which provides its customers, as part of its commercial offerings, the means by which the customers may engage in private electronic communications with third-parties may constitute a facility through which electronic communication service is provided.’)
115 18 U.S.C. § 2510(17)(A).
116 Id.§ 2510(17)(B).
117 US Department of Justice Computer Crime and Intellectual Property Section Criminal Division, Searching and Seizing Computers and Obtaining Electronic Evidence in Criminal Investigations 117 (2013) at 119, available at https://www.justice.gov/sites/default/files/criminal-ccips/legacy/2015/01/14/ssmanual2009.pdf.
118 18 U.S.C. § 2703(h)(1)(A)(i).
119 Id. §§ 2702(b)(9); 2523(b)(3)(D)(i), (iii).
120 18 U.S.C. § 2511(2)(j).
121 Id. §§ 3124(d), 3124(e).
122 Id. § 2703(h)(2)(B).
123 Id. § 2703(h)(3).