The Expanding Reach of United States Law: Extraterritorial Enforcement of U.S. Law, International...

The Expanding Reach of United States Law: Extraterritorial Enforcement of U.S. Law, International Enforcement and Compliance Obligations of International Business

Baach Robinson & Lewis PLLC

Washington | New York | London

August 2007

Introduction

Impact of September 11, 2001 on reach of U.S. criminal law:

American criminal law has expanded to cover activity with only tenuous United States contacts.

Aggressive theories of prosecution have extended the application of existing law enforcement tools in new directions.

Mutual Legal Assistance Treaties (“MLATs”) and other agreements have increased the ability of U.S. and foreign prosecutors to enforce criminal law and to exchange information freely.

Introduction

Recent developments enhance the power of U.S. prosecutors to target, investigate and prosecute foreign individuals, commercial entities, and financial institutions.

These developments also enhance the ability of foreign authorities to use U.S. investigative proceedings and information-gathering resources in conducting their own investigations. U.S. discovery is broad and intrusive.

It is essential that foreign companies and nationals understand the expanded reach of U.S. law.

Introduction

Foreign Corrupt Practices Act (“FCPA”)

Anti-Money Laundering and USAPatriot Act § 319

Office of Foreign Assets Control (“OFAC”)

Mutual Legal Assistance Treaties (“MLAT’s”)

Other International Accords

United Nations

Organization of American States

Organization for Economic Cooperation and Development

Introduction

New YorkCorrespondent

Buyer’s Bank

Supplier

New YorkCorrespondent

Supplier’s Bank

Buyer

FCPA

There is a new emphasis on FCPA enforcement and particularly its expansion to foreign persons and entities. Under the FCPA:

It is unlawful for a person or entity with a minimal nexus to the U.S. to make a corrupt payment to a foreign official for the purpose of obtaining business for or with any person.

Jurisdiction requires a nexus with the U.S., which can now be satisfied by an automatic entry into an electronic database or an electronic pulse through the U.S. payments system.

Extended to apply to foreign firms and persons that act in furtherance of a corrupt payment while in the U.S.

FCPA

New legislation since September 11, 2001 expands U.S. jurisdiction for FCPA violations to foreign persons who make illegal payments outside the U.S. that have a “detrimental effect” within the U.S.

Includes passing illicit money through U.S. financial systems.

Foreign persons and entities can also be charged with money laundering or conspiracy.

FCPA

Five Elements of a FCPA Violation:

Who is making the payment?

Was that person’s intent corrupt?

Was a payment made, offered, promised, or authorized?

Is the recipient directly or indirectly a foreign official?

Was the payment made to facilitate a business purpose?

FCPA

Applies to foreign companies and nationals that cause, directly or through agents, an act in furtherance of a corrupt payment that takes place within the U.S. or has a “detrimental effect” in the U.S.

The payment must be intended to induce the recipient to misuse his official position to direct business to the payer or another person.

Act does not have to succeed; the offer of a payment alone violates the statute.

U.S. parents may be liable for acts of foreign subsidiaries.

Foreign subsidiaries subject to recordkeeping provisions.

Liability for misrecording transactions.

FCPA

What is Permitted?

Payments to facilitate or expedite “routine governmental actions.” Examples: obtain permits or licenses, process visas or work

orders, provide police protection or utilities.

Payments that are legal in that country.

Payments that are part of performing a contractual obligation.

FCPA

FCPA in Practice – Case of Guido Alejandro Antonini Wilson

Potential Bases of Jurisdiction U.S. Nationality Use of Antonini’s U.S. companies Use of U.S. bank accounts

Should corrupt purpose exist then Antonini may be subject to FCPA prosecution.

Other individuals involved could also be subject to FCPA prosecution as a result of U.S. nexus through Antonini.

FCPA

Sanctions

Criminal: Fines of up to $100,000 and imprisonment for up to five years; or a fine of twice the benefit the defendant sought to obtain by making the corrupt payment.

Civil: Fines of up to $10,000, plus possible additional fines ranging from $50,000 to $500,000, or the gain defendant would have earned as a result of the payment.

Parallel enforcement by SEC.

Private cause of action brought by unsuccessful competitors: actions under the Racketeer Influenced and Corrupt Organization (“RICO”) Act or other federal or state laws.

Some recent settlements have been in the $40 million range.

FCPA

What to Do?

Critical to have compliance and training program in place.

Audit and oversight.

Need to consider early cooperation if investigation begins.

Traditional Anti-Money Laundering Statutes & Approaches

Can be used to prosecute any transaction in which the illegal source or use of funds is disguised or misrepresented.

Includes financial fraud as well as trying to hide proceeds of crime.

USAPatriot Act § 319

Requires U.S. banks to respond to the request of regulatory authorities, the Department of Justice, and the Department of the Treasury for anti-money laundering records.

Requests may include information concerning foreign deposits, including deposits at foreign branches or subsidiaries in other currencies.



• Deposits into foreign banks are considered deposits into any bank account the bank may have in the U.S.

• Restraining orders and warrants for seizure related to overseas money laundering deposits can be made against funds held in the U.S. institution even if the depositor has no funds in the U.S., the funds are not in dollars and there is no crime committed in the country of deposit.

• Foreign banks that maintain U.S. correspondent accounts must designate an agent to receive U.S. subpoenas. Subpoenas may request information concerning any bank transaction, account or customer.

• Illustration: Suspected Money Launderer X deposits 10,000 Euros into Bavarian Landesbank in Munich. Bavarian Landesbank has dollar correspondent account with Deutsche Bank NY. US Government can seize equivalent amount in dollars from DB NY.

Office of Foreign Assets Control (OFAC)

• The Treasury Department’s Office of Foreign Assets Control “administers and enforces economic sanctions programs primarily against countries and groups of individuals, such as terrorists and narcotics traffickers.”

• May include individuals or entities (“Specially Designated Nationals”) within countries not on OFAC list.

• Prohibited transactions

• Trade or financial transactions and other dealings in which U.S. persons may not engage unless authorized by OFAC or expressly exempted by statute.

• Who is responsible for OFAC compliance?

• U.S. and foreign offices of U.S. banks.

• U.S. branches of foreign banks.


• Responsibilities of financial institutions

• Must monitor all financial transactions performed by or through them to detect those that involve any entity or person subject to the OFAC laws and regulations.

• Generally, a financial institution should accept deposits and funds subject to OFAC regulations, but freeze the funds and accounts, so that no funds can be withdrawn (this is called “blocking”).

• Responsible banks use “OFAC filtering software” to ensure that proposed wires will not run into such problems. Foreign financial institutions without U.S. branches run liability risks if they do not screen transactions with OFAC filtering software.


• OFAC in Practice - Hypothetical

• Company A, an Argentine company, instructs its bank, Local Bank, to wire $1 million to a Nigerian supplier’s bank account at First Nigeria Bank. Local Bank instructs its correspondent in New York to make the payment to First Nigeria’s correspondent bank.

• The New York correspondent bank blocks/freezes the transaction because while Nigeria may not be an OFAC blocked country, First Nigeria Bank is an SDN under the sanctions against Zimbabwe because it is believed that First Nigeria Bank is a front for the Zimbabwean government.


• OFAC in Practice - Hypothetical cont’d

• While Company A is being threatened with a lawsuit for failure to comply with its contract with its Nigerian supplier, the funds may remain frozen as long as First Nigeria is designated as an SDN.

• This will remain so despite the fact that there is no allegation that the Argentine company, Nigeria, or the Nigerian supplier are in any way involved in illicit activity.

• The New York correspondent bank often is prohibited from advising Company A’s bank that the wire transfer will meet with OFAC problems.


• If any of the following countries or their instrumentalities appear in your transaction then you may have OFAC exposure:

• The Balkans

• Belarus

• Burma

• Cote d'Ivoire (Ivory Coast)

• Cuba

• Democratic Republic of the Congo

• Iran

• Iraq

• Liberia

• North Korea

• Sudan

• Syria

• Zimbabwe

• Additionally, there are thousands of entities unrelated to these nations that can trigger OFAC exposure.

Mutual Legal Assistance Treaties (MLATs)

MLATs, mutual legal assistance treaties, are binding international obligations between two countries that allow a country to request legal assistance related to criminal investigations from another country.

MLATs are increasingly being utilized as governments focus on transnational judicial cooperation.

MLATs entitle the requesting state to assistance in:

Acquiring bank records and financial information,

Questioning witnesses and taking statements,

Obtaining copies of government records,

Serving documents, and

Conducting searches and seizures.

MLATs are not the exclusive tools for U.S. assistance. Governmental and non-governmental parties can use 28 U.S.C. § 1782 to obtain assistance from U.S. courts, including documents and testimony. The documents and testimony available may be broader than what would be obtainable by the requesting party in its home judicial system.

MLATs

MLAT between the U.S. and Brazil was ratified October 21, 1998.

Includes assistance for proceedings related to immobilization and forfeiture of assets.

Recognizes the “particular importance” of money laundering.

MLAT between the U.S. and Argentina was ratified July 2, 1992.

Includes assistance in immobilizing assets and the forfeiture of assets related to an offense located in the other Party’s territory.

There is no MLAT between the U.S. and Chile, however said countries can assist one another via other cooperating agreements:

Chile Free Trade Agreement covers requests for information between parties regarding trade transactions and violations.

Memorandum of Understanding between the U.S. Securities and Exchange Commission and the Superintendencia de Valores y Seguros of Chile allows the exchange of mutual assistance to enforce laws and regulations applicable to the securities markets and conduct investigations or prosecutions in cases where information is located in the other country’s jurisdiction.

MLATs

Local Authorities & MLATs

While U.S. state and local authorities are not parties to MLATs or other international agreements, foreign authorities have received investigative cooperation from local authorities through their use of grand jury subpoenas.

Scope of subpoena power is extensive. For example, an offshore bank with an affiliate in New York may

share a computer server and therefore the offshore bank’s deposit records may be subject to a New York grand jury subpoena regardless of the offshore nation’s bank secrecy laws.

U.S. Courts relatively unlikely to uphold objections based on foreign bank secrecy.

United Nations

United Nations Convention against Corruption

Applies to the prevention, investigation and prosecution of corruption and to the freezing, seizure, confiscation, and return of the proceeds of such offenses.

Allows parties to request assistance in the form of evidence, searches and seizures, and the recovery of assets to facilitate investigations, prosecutions, and judicial proceedings.

Entered into force December 14, 2005.

Ratified by Argentina on August 28, 2006; Brazil on June 15, 2005; Chile on September 13, 2006; U.S. on October 30, 2006.

United Nations

United Nations Convention against Transnational Organized Crime

Applies to the prevention, investigation and prosecution of transnational organized crime, or serious offenses (punishable by at least four years imprisonment) committed in more than one State by an organized group of three or more persons.

Allows parties to request assistance in the form of evidence, searches and seizures, and the recovery of assets to facilitate investigations, prosecutions, and judicial proceedings.

Entered into force September 29, 2003.

Ratified by Argentina on November 19, 2002; Brazil on January 29, 2004; Chile on November 29, 2004; U.S. on November 3, 2005.

OAS

Organization of American States: Inter-American Convention Against Corruption

Allows parties to request evidence or other necessary action to assist in the facilitation of legal proceedings regarding investigations or prosecutions of corruption.

Requires national statutes similar to FCPA criminalizing bribery.

Provides for extradition.

Requires access to bank records.

Entered into force March 6, 1997.

Ratified by Argentina on October 9, 1997; Brazil on July 24, 2002; Chile on October 27, 1998; U.S. on September 29, 2000.

OAS

Organization of American States: Inter-American Convention on Mutual Assistance in Criminal Matters

Parties provide one another mutual assistance in investigations, prosecutions and proceedings that pertain to crimes over which the requesting state has jurisdiction.

Scope includes immobilizing and sequestering property, freezing assets, carrying out searches or seizures, and transmitting documents, information, and evidence.

Entered into force April 14, 1996.

Ratified by Argentina December 12, 2006; Chile April 28, 2004; U.S. May 25, 2001. It was signed by Brazil, but not yet ratified.

OECD

Organization for Economic Cooperation and Development Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

Similar requirements to U.S. statutes.

Legal basis for extradition.

Requires cooperation among the parties in investigating possible violations of national laws.

Signed in December, 1997.

Implemented by Argentina, Brazil, Chile and U.S., among others.

Examples of the New Approach

A Czech businessman who had U.S. investors was indicted for bribing Azeri officials in a privatization scheme. His Swiss lawyer was charged and pleaded guilty to money laundering.

Criminal charges included FCPA violations.

Only nexus to U.S. was the presence of the U.S. investors – neither the businessman nor the lawyer are U.S. nationals or residents and none of the criminal acts occurred in the U.S.

Baach Robinson & Lewis is representing a defrauded investor in a related action.


Baach Robinson & Lewis recently represented a South American public official who allegedly utilized public funds in a political election.

Indictment brought by local New York City officials because the money had been wired by a third party through New York City on its way to financial institutions in Europe.

The tenuous nexus between the activity with the U.S. demonstrates the potential scope of U.S. enforcement. Local authorities, such as the New York District Attorney, have

their own fraud and anti-money laundering statutes that can also be the source of prosecution.

Such prosecution can result in attempted extradition and include Interpol “red notices” precluding travel worldwide.


Baach Robinson & Lewis recently represented another South American public figure accused of corruption within a South American country.

Individual allegedly had bank accounts within a Bahamian affiliate of a bank with offices in New York.

While U.S. authorities had no interest in prosecuting this individual, N.Y. District Attorney used a grand jury subpoena to obtain bank records from the New York office of the bank relating to offshore accounts. N.Y. District Attorney then provided the records obtained to local investigators.

Local investigators also obtained related banking records through use of an MLAT.

Conclusions

Records and information believed to be beyond the view of the law may not be secret.

Strategies for response should include compliance programs and if problems are identified early consideration of contact with relevant State Department, Department of Justice, and/or local officials.

Response strategies may include potential challenges to the transnational cooperation in all jurisdictions, especially if U.S. is used to obtain documents from a third country or the U.S. is used to prosecute claims that would not be tenable in home country.

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