The United States leads the world in punishing corruption, money-laundering and sanctions violations. In the past decade, it has increasingly punished foreign firms for misconduct that happens outside America. . . .
America has taken it upon itself to become the world’s policeman, judge and jury. It can do this because of its privileged role in the world economy. Companies that refuse to yield to its global jurisdiction can find themselves shut out of its giant domestic market, or cut off from using the dollar payments system and by extension from using mainstream banks. For most big companies, that would be suicidal.
“The Trouble with America’s extraterritorial campaign against business,” The Economist, (January 19, 2019)
Think your company and its employees are beyond the reach of U.S. authorities? Maybe you don’t have U.S. operations there, or your company isn’t publicly traded on a U.S. stock exchange. Perhaps you don’t directly sell or market your products to the U.S.
If you think this lack of apparent connection to the U.S will protect you from the long arm of U.S. enforcement authorities, think again.
This article presents six scenarios under which companies with no operations (or even business) in the U.S. can still find themselves on the wrong end of an investigation by U.S. enforcement agencies. These scenarios cover bribery, corruption, and fraud, as well as export violations and offshore transactions involving countries and entities “blacklisted” under U.S. sanctions programs. And, in each instance, foreign companies may swiftly – and often unknowingly – subject themselves to U.S. jurisdiction.
Scenario 1: Meet with a consultant in the U.S., who enjoys a good relationship with a government official in another country, thanks to an occasional “token of appreciation.”
During a visit to New York, an employee of your company meets with a consultant from Brazil who was engaged by your firm to help develop Brazilian Government business. The consultant later provides government officials with an extravagant gift to secure a Brazilian Government contract.
The anti-bribery provisions of the U.S. Foreign Corrupt Practices Act (FCPA) apply to any foreign nationals or foreign-incorporated companies that engage in an act in furtherance of an improper payment scheme while they are physically located in the U.S. In this scenario, the payment of a bribe – and under the FCPA, an excessive gift can qualify as a bribe – to a Brazilian official to secure a government contract would qualify as an improper payment scheme under the FCPA. And because the company’s employee met with the bribe-paying consultant in New York, both the employee and the company would be subject to investigation by U.S. Government enforcement agencies.
Recent FCPA enforcement actions demonstrate the myriad – and often overlooked – ways in which foreign nationals can become ensnared by the FCPA. Critical to this analysis can be the concept of conspiracy, which enables prosecutors to charge all co-conspirators with the full range of consequences for the actions of any members of the conspiracy. In 2018, for example, the Insurance Corporation of Barbados Limited (ICBL) voluntarily disclosed FCPA violations to the U.S. Department of Justice (DOJ). In this case, ICBL, a Barbados company with no operations in the U.S., used third-party agents to pay bribes to a Barbadian Government official in exchange for at least two government insurance contracts. The Barbadian government official then attempted to conceal the bribes by agreeing to receive them through a New York-based bank account controlled by a friend, who in turn transferred the funds to a Florida-based bank account in the Barbadian official’s name. Although the illicit scheme occurred in Barbados, the use of the two U.S. bank accounts was sufficient to establish U.S. jurisdiction under the FCPA. The DOJ ultimately forced ICBL to disgorge more than $93,000 in ill-gotten gains earned as a result of the scheme.
In another example, Airbus SE (Airbus) self-disclosed to U.S. enforcement authorities that it had engaged in corrupt schemes in multiple countries to increase sales and to expand its international footprint. The DOJ asserted jurisdiction to prosecute the company because Airbus employees and agents, among other things, sent emails related to these schemes from locations within the U.S. and provided foreign officials (and their families) with all-expense paid trips to U.S.-based resorts. Airbus ultimately entered into a deferred prosecution agreement with the DOJ in January 2020 and agreed to pay $527 million to settle FCPA and other U.S. law violations.
The same principles also apply to foreign officers and directors. In 2019, for example, the DOJ indicted Braskem S.A.’s chief executive officer for his role in the company’s wide-ranging bribery scheme. Although the CEO was a Brazilian citizen, the DOJ asserted personal jurisdiction over him based on the fact that Braskem S.A.’s securities trade on the New York Stock Exchange. More recently, in February 2020, DOJ indicted two former executives of an Indonesian subsidiary of the French company Alstom S.A. The two executives – neither of whom are U.S. citizens or were based in the U.S. – each used consultants to pay bribes to officials in Indonesia. The DOJ asserted jurisdiction over these executives because a portion of the bribe payments was transferred through a Maryland bank account.
There have been recent judicial challenges to the broad scope of U.S. jurisdiction over non-U.S. citizens. In February 2020, for example, a federal district court judge in Connecticut overturned the conviction of a British executive on a FCPA-related charge for a lack of jurisdiction, holding that the evidence did not sufficiently demonstrate that the British executive qualified as an “agent” of a U.S. company under the FCPA. Despite overturning the FCPA-related conviction against the British executive, however, the judge still upheld the jury’s convictions on other criminal charges, including money laundering. Thus, even if jurisdiction over non-U.S. citizens may not arise under the FCPA, it could still apply under other U.S. criminal laws.
Scenario 2: Enter into a U.S. dollar agreement with an Iranian distributor.
Your company enters into an agreement to sell products to a distributor in Iran. Your country does not prohibit trade with Iran, but the contract calls for products to be paid for in U.S. dollars.
The U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) exercises sweeping jurisdiction over commercial and financial transactions involving sanctioned countries and parties, such as Iran. This jurisdiction extends to all forms of property – including bank accounts, contracts, currency, insurance, real property, and other assets – that fall within the “possession or control” of U.S. companies or individuals. These requirements extend to U.S. financial institutions as well as to any non-U.S. transactions that may pass through them.
OFAC’s jurisdiction over the U.S. banking system has two implications for U.S. dollar-denominated transactions such as the one proposed in this scenario. First, most foreign financial institutions maintain so-called “correspondent accounts” at U.S. banks for the purpose of conducting U.S. dollar-denominated transactions. Second, any dollar-denominated transactions processed through correspondent accounts at a U.S. financial institution invariably fall within the “possession and control” of an entity subject to U.S. law. This is true regardless of whether the U.S. correspondent account is held at a U.S. bank branch located in London, Paris, Beijing, New Delhi, or any other foreign location. So long as funds related to a sanctioned transaction pass through even a single U.S. bank account, OFAC and the DOJ have jurisdiction over the foreign transaction.
As noted above, Iran is subject to comprehensive U.S. sanctions stemming from numerous statutes, executive orders, and regulations maintained by OFAC. Absent an OFAC-issued license authorizing the proposed business arrangement, the distribution agreement in this scenario would likely run afoul of one or more of these statutes or sanctions programs. And, because transactions under the U.S. dollar-denominated distribution agreement would likely be routed through U.S. correspondent accounts, the use of these correspondent accounts would be sufficient to establish U.S. jurisdiction over these transactions, even if the non-U.S. company has no U.S. presence and does not conduct business in the U.S.
The risks presented in this scenario arise whenever non-U.S. companies conduct U.S. dollar-denominated transactions involving Iran or other states deemed to threaten U.S. national security interests, or when the transaction involves parties appearing on OFAC’s Specially Designated Nationals and Blocked Persons List (SDN List). Such transactions can expose these companies to civil penalties from OFAC, criminal penalties imposed by the DOJ, and related restrictions that could potentially result in the loss of U.S. bank accounts, contracts, and trade privileges. Sanctions violations are often a leading indicator of other criminal activities as well, including FCPA violations, export control violations, and money laundering.
Non-U.S. companies conducting sanctioned business in U.S. dollars may be completely unaware of the corresponding banking transactions exposing them to U.S. jurisdiction. This was the case in the enforcement action that OFAC brought against CSE TransTel Pte. Ltd. (CSE TransTel), a Singaporean company that entered into several contracts with Iranian companies to deliver and install telecommunications equipment. Although these transactions involved contracts, products, and shipments with no discernable connection to the U.S., the parties subjected themselves to U.S. jurisdiction by engaging in U.S. dollar-denominated transactions. CSE TransTel ultimately agreed to pay $12 million to settle alleged violations of the International Emergency Economic Powers Act (IEEPA) and OFAC’s Iranian Transactions and Sanctions Regulations (ITSR). This settlement closely mirrors the scenario discussed above, and it serves as a warning for non-U.S. companies conducting business with countries and parties subject to U.S. sanctions programs.
Foreign companies may also face severe penalties for deliberately “stripping” references to sanctioned countries and parties in order to process dollar-denominated payments through U.S. banks. Between 2002 and 2014, OFAC and other U.S. Government enforcement agencies brought several high-profile cases against British, European, and Australian financial institutions that used this practice to disguise U.S. dollar transactions involving prohibited parties. Chief among them was the investigation of the leading French bank BNP Paribas, which in 2014 resulted in an $8.9 billion deferred prosecution agreement between the DOJ, OFAC, and New York state authorities. Among the many factors compounding this penalty was the French bank’s initial refusal to acknowledge the U.S. Government’s jurisdiction over the “stripped” transactions routed through correspondent accounts held by leading U.S. financial institutions based in New York.
Finally, it is important to note that OFAC and the DOJ both have the authority to bring enforcement actions against individual executives and employees. The DOJ’s criminal investigation of Dandong Hongxiang Industrial Development Company in China is one notable example. In this case, DOJ prosecutors brought criminal charges against both the company and four of its officers for money laundering and conspiracy to violate IEEPA, based on the company’s fertilizer sales to North Korea. Although DOJ’s efforts to extradite these corporate officers from China to face trial in the U.S. are unlikely to succeed, the combination of these indictments and OFAC’s decision to place officers on the SDN List significantly restricts their ability to travel and conduct business internationally.
Scenario 3: Agree with a competitor to divide up markets, leaving the U.S. market to your competitor.
Your company agrees with its main competitor to divide up certain markets. You agree to forego a planned expansion into the U.S., leaving that market to your competitor.
Laws prohibiting anti-competitive behavior are another way that non-U.S. companies may find themselves subject to an enforcement action by enforcement agencies, including the DOJ and the U.S. Federal Trade Commission (FTC). These laws work in three notable ways. First, the Sherman Antitrust and the Federal Trade Commission Act each prohibit anti-competitive conduct involving commercial imports into the U.S. Thus, an agreement between two non-U.S. competitors, in which one party agrees not to sell product to the U.S. in exchange for the other company’s agreement not to import its products into Canada, would be subject to U.S. jurisdiction even if the underlying conduct occurred outside U.S. territory.
Second, U.S. antitrust law also applies to conduct that occurs entirely outside the U.S. if it involves foreign trade that has a “direct, substantial, and reasonably foreseeable effect” on U.S. commerce. In this scenario, two non-U.S. companies conspiring to allocate sales into the U.S. market (including the company foregoing a planned expansion into the U.S.) would leave the U.S. market with fewer competitors. Because this outcome would constitute a “direct, substantial, and reasonably foreseeable effect” on U.S. commerce, the conduct would subject both foreign companies to U.S. jurisdiction.
Third, U.S. antitrust laws also prohibit anti-competitive conduct that takes place in the U.S., regardless of the actors’ nationalities. This approach is similar to the territorial jurisdiction that the U.S. Government exercises in FCPA and economic sanctions cases. Under this approach, communicating with a competitor about an agreement at a meeting or trade show in the U.S., or via phone calls, emails, or other communications that pass through U.S. servers or telecommunications networks, would give the DOJ and the FTC jurisdiction over the entire conspiracy. This would be true regardless of whether that conspiracy or the resulting conduct had a “direct, substantial, and reasonably foreseeable effect” on U.S. commerce.
The DOJ and FTC routinely bring antitrust charges against non-U.S. companies. One notable examples is NHK Spring Co. Ltd. (NHK Spring), a Japanese company that manufactures suspension assemblies for use in hard drive disks. The DOJ brought criminal charges against NHK Spring for conspiring with its competitors to fix prices and allocate market shares for suspension assemblies that were sold in the U.S., sold for delivery to the U.S., or used in assemblies sold to other countries that were ultimately incorporated into products sold to the U.S. In this case, two NHK Spring salesmen and Japanese citizens allegedly communicated with their competitors and agreed to fix prices and allocate market share for products sold in the U.S. The Japanese salesmen then used pricing information obtained from NHK Spring’s competitors to inform their future bids and pricing quotes for U.S. customers. The indictment also alleged that the businessmen instructed U.S. sales employees to do the same. The consequences of this conduct were severe. NHK Spring pled guilty to conspiracy and paid a $28.5 million fine. The DOJ also indicted both of the salesmen for combination and conspiracy in their individual capacities as a result of the same conduct.
Non-U.S. executives and employees are also frequently charged under the U.S. antitrust laws. In one recent example, Maria Christina “Meta” Ullings, a Dutch national and former Senior Vice President of Cargo Sales and Marketing for Martinair Holland N.V. (Martinair), pled guilty to conspiracy to fix prices in violation of the Sherman Act and was sentenced to 14 months in prison and a $20,000 fine. Martinair, a Dutch company, transported cargo internationally, including to and from the U.S. The DOJ alleged that Ullings conspired with Martinair competitors to fix the price of various surcharges for international air cargo shipments to and from the U.S. Ullings was charged as part of a broader DOJ investigation into price fixing in air transportation, which resulted in more than $1.8 billion in criminal fines and prison sentences for at least eight executives. Her indictment outlines several jurisdictional hooks that made Ullings subject to prosecution in the U.S., including: (i) the transmission of contracts, invoices, and other “documents essential to the provision of air cargo services” in U.S. interstate and foreign commerce between and among Martinair and its customers; (ii) Ullings and her co–conspirators transporting substantial volumes of cargo “in a continuous and uninterrupted flow of interstate and foreign commerce” involving the U.S.; and (iii) air cargo services that “were within the flow of, and substantially affected” U.S. interstate and foreign commerce.
Scenario 4: Accept wire payments in U.S. dollars for a non-U.S. transaction without checking the funding source.
Your company sells products in Russia through a distributor that is owned by a prominent oligarch with ties to the Kremlin. Your company then accepts U.S. dollar wire payments from the oligarch that are routed through different bank accounts in Cyprus, Malta, and Luxembourg.
In addition to targeting specific countries and parties, OFAC also targets companies owned by sanctioned entities and individuals. Under the so-called “50 percent rule,” most OFAC sanctions programs capture any entity that is at least 50-percent owned by one or more SDNs, be it directly or indirectly. This rule presents a particular challenge in Russia, where oligarchs appearing on the SDN List own a number of seemingly “clean” companies. Similar rules apply under other sanctions programs as well, including those restricting certain transactions in the Russian defense, energy, and financial services sectors.
The scenario presented above presents two potential concerns. First, the 50 percent rule’s broad application underscores the need to conduct reasonable due diligence on business partners in Russia and other higher-risk jurisdictions. Failure to conduct this diligence may lead companies to unknowingly violate U.S. economic sanctions programs. This risk is particularly pronounced in Russia, where parties on the SDN list will conduct business through seemingly legitimate companies or hide their ownership through complex corporate structures.
Second, the use of U.S. dollar transactions implicates the same concerns discussed in the second scenario discussed above. Although routing payment through three European banks may give the appearance of a legal transaction, there is a strongly likelihood that the funds in question passed through at least one (if not several) correspondent accounts at U.S. financial institutions. The use of any one account would be sufficient to establish U.S. jurisdiction over what ostensibly appears to be a non-U.S. transaction.
Recent OFAC enforcement actions illustrate these risks. In April 2019, for example, UniCredit Group (UniCredit) entered into a $1.3 billion deferred prosecution agreement with the DOJ, OFAC, and state regulators. This agreement included three separate OFAC settlements with UniCredit branches located in Germany, Austria, and Italy respectively. Although none of these banks maintains a physical presence in the U.S., each of them facilitated transactions on behalf of sanctioned entities by processing payments through the U.S. financial system.
The use of multiple foreign accounts to process these payments presents another potential concern: namely, money laundering. Under U.S. law, money laundering includes actions designed to conceal the proceeds of illicit activity. And because conducting business with companies owned by Russian SDNs is prohibited, any steps taken to conceal such business could potentially trigger money laundering charges. These possibilities further compound the threat of separate changes for conspiracy, sanctions evasion, and the underlying sanctions violations. In some instances, they could also lead OFAC to place your company on the SDN List, effectively ending your ability to conduct business with the U.S. States.
Scenario 5: Export products with some U.S. components to U.S.-sanctioned countries.
Your company manufactures products outside the U.S. but incorporates components purchased from U.S. suppliers. These U.S.-origin components account for 15 percent of the finished products’ value. Your company then sells these finished products to a private company in Iran. The transaction is denominated in Euros, and the Iranian party does not appear on any U.S. or European Union sanctions lists.
At first blush, this transaction appears to fall outside U.S. jurisdiction. The parties are located outside the U.S., the transactions do not implicate the U.S. financial system, and the Iranian party does not appear on U.S. sanctions lists. Based on these limited facts, the transaction between your company and its Iranian customer seems to fall outside OFAC’s remit and would probably not be subject to U.S. economic sanctions.
The same is not true for the purposes of U.S. export control laws, however. Under the Export Administration Regulations (EAR), the U.S. Department of Commerce’s Bureau of Industry & Security (BIS) exercises jurisdiction over certain foreign-made products containing U.S.-origin inputs. In most cases the relevant threshold is 25 percent. But in cases involving sales to Iran and other state sponsors of terrorism, U.S. jurisdiction extends to any foreign-made products that have at least 10 percent U.S. content. With the products in this scenario exceeding that amount, this seemingly “offshore” transaction falls squarely within the U.S. Government’s reach.
These so-called de minimis rules apply regardless of where the products are located, who owns them, or the terms of sale. They also apply to re-exports by third parties (and other parties) involved in lengthy global supply chains. So long as the U.S. content requirements are met, jurisdiction under the EAR and other U.S. export control laws follow the products wherever they may go. This is true even if the products are simple commodity items that are not subject to special product-based or destination-based controls.
The U.S. Government enforces export controls just as vigorously as it does economic sanctions programs. And in some instances, the DOJ, OFAC, and BIS will all exercise jurisdiction over the same underlying transaction. In March 2017, for example, Chinese telecommunications technology company Zhongxing Telecommunications Equipment Corporation (ZTE) entered into an $872 million agreement with the U.S. Government to settle allegations that it procured and re-exported U.S.-origin products to Iran. This amount included a $100 million settlement with OFAC for violating U.S. economic sanctions programs. Three months later, BIS announced an additional $1.4 billion settlement with ZTE for alleged EAR violations involving the same underlying conduct. All told, ZTE’s total liability for combined export controls and economic sanctions violations was nearly $2.3 billion.
Scenario 6: Import products into the U.S. that might violate U.S. IP rights.
Your non-U.S. company manufactures products that fully comply with the laws in your country. You recently hired an employee from a competitor, and you use his knowledge and know-how to manufacture your products, all in a manner compliant with the laws of your home country. You sell your products to a distributor, who then sells the products in the U.S.
Even if you comply with the laws enforced in your own country, the U.S. International Trade Commission (ITC) may exclude your products from entry into the U.S. if your business practices run afoul of Section 337 of the Tariff Act of 1930. Under that law, the ITC may issue orders barring articles from the U.S. domestic market if the importer violated another party’s U.S.-based intellectual property rights (IPR) or committed other unfair acts relating to imported products.
Many Section 337 investigations allege IPR violations such as patent, copyright, or trademark infringement. In such cases, the complainant must show that a valid and enforceable U.S. patent, copyright, or trademark is infringed by imported products and that a domestic industry for those products exists or is being established. These cases arise when foreign companies sell infringing products for importation into the U.S., and when infringing products are sold within the U.S. following importation.
The ITC also has the authority to bar imported goods in non-intellectual property cases where a U.S. domestic industry is harmed by other unfair acts. Notable examples include antitrust claims, customs circumvention claims, claims based on importation of non-approved drugs, and Lanham Act claims based on false advertising and false designation of origin. U.S. companies may also try to bar foreign imports by alleging theft of trade secrets, including theft that occurred overseas and through computer hacking. The ITC has also recently instituted investigations where the foreign manufacturer is alleged to have engaged in price-fixing in violation of U.S. antitrust laws, even where the alleged antitrust conspiracy occurred entirely outside the U.S. A successful claim under one of these theories can bar your company’s imports, even if the conduct in question was legal under foreign law.
The ITC’s decision in Certain Rubber Resins illustrates the scope of these authorities. In that case, two employees of a company that manufactured chemical compounds left their employer and joined a Chinese competitor. Soon thereafter, the competitor began making and importing chemical compounds from China into the U.S. The ITC found a violation of Section 337 for theft of trade secrets and imposed a 10-year exclusion order, even though the conduct occurred exclusively within China and complied with Chinese law. The U.S. Court of Appeals later affirmed the decision. And, notwithstanding the Chinese Government’s claims that the ruling violated the China’s sovereignty, the U.S. Supreme Court ultimately rejected the Chinese importer’s appeal.
This ruling underscores the U.S. Government’s ability to police foreign commercial practices. Even if those practices occur outside U.S. jurisdiction and comply with applicable foreign laws, the ITC may still exclude imported products benefitting those practices. This can result in the seizure, re-export, or even the destruction of excluded products. These consequences can increase costs and compound lost sales revenues. Against this backdrop, foreign companies planning to sell their products in the U.S. must carefully consider the requirements that apply in their home countries while also complying the requirements imposed under U.S. law.