CHAPTER 14 EXPOSURE OF NON-U.S. COMPANIES TO U.S. PROSECUTION FOR CONDUCT OUTSIDE THE U.S.: IMPLICATIONS FOR COMPLIANCE PROGRAMS

• Jurisdiction: United States

Strategic Risk Management for Natural Resources Companies
(May 2008)
CHAPTER 14
EXPOSURE OF NON-U.S. COMPANIES TO U.S. PROSECUTION FOR CONDUCT OUTSIDE THE U.S.: IMPLICATIONS FOR COMPLIANCE PROGRAMS
James L. Gunderson ¹
Governance & Transactions LLC
Aibel Group Limited
New York, New York

I. Introduction

Globalization of business has been accompanied by globalization of law and regulation, including criminal law. While legal compliance has been a major concern of leading international companies for years, and extraterritorial enforcement of U.S. business law and regulation has been an issue for non-U.S. companies for some time, recent prosecutions of non-U.S. companies suggest that many leading companies may still be underestimating their potential exposure, perhaps not realizing that their U.S. contacts may be subjecting their conduct outside the U.S. to U.S. prosecution, or not appreciating what is expected of them under the U.S. law and regulation applicable to their non-U.S. activities. With regard to the risk of U.S. antitrust law enforcement, the ability to detect and quickly cease any detected wrongdoing can be particularly important. With regard to the risk of U.S. anti-corruption law enforcement, in addition to those abilities, effective internal controls and the ability to conduct thorough due diligence on the companies one does business with are crucial.

This paper will first address the extent to which business activity outside the U.S. by non-U.S. companies may be subject to U.S. criminal law and prosecution, then focus on extraterritorial enforcement of U.S. antitrust and anti-corruption laws, and finally consider what recent cases and deferred prosecution agreements suggest is expected of companies subject to those laws.

II. Extraterritorial Application of U.S. Criminal Law

Under common law, before modern advances in transportation and communication, and the globalization of human activity, criminal law and its enforcement was considered domestic in nature.² Over the course of the twentieth century, however, American

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lawmakers and the courts have developed a more permissive approach to the extraterritorial application of particular criminal laws.³ Today a country may exercise "subjective territoriality" over local conduct even if it has effects outside the country, or "objective territoriality" over conduct that has effects within the country even if the activity occurs outside the country. The basic principle governing the extension of the law to conduct outside the country's territory by non-nationals is reasonableness, determined by such factors as the nature of the state interests being protected, the extent that the activity outside the country has substantial, direct and foreseeable effect upon or in the country (or connections between the perpetrator or victim with the country), the extent that the regulation of the activity is consistent with general international practice, and the improbability of conflict with regulation by the country where the activity took place.⁴

From a constitutional law standpoint, there is nothing beyond the above-referenced principles preventing Congress from passing extraterritorial criminal laws. Article 1, Section 8 of the Constitution, the Foreign Commerce Clause, provides the power to regulate commerce "with foreign Nations", which certainly covers business between the U.S. and other countries, but would also seem to require at least some connection with the U.S. (since the phrase is "with" rather than "among" foreign Nations).⁵

The Fifth Amendment to the Constitution would also place due process limits on the extent to which a criminal law that was generally applicable extraterritorially could be applied to a particular non-U.S. person outside the U.S. (i.e. its application in the particular case cannot be too arbitrary or unfair). One commentator's analysis of case law suggests that "[f]or an extraterritorial application of law to be consistent with due process there must be notice: (a) that the conduct in question is illegal; and (b) of the law one subjects oneself to by its commission, such that the application is neither arbitrary nor unfair."⁶

Although Congress may pass extraterritorial criminal laws and they may be applied to non-U.S. persons acting outside of the U.S. within the above constraints, in many cases there is a presumption that a law is meant to apply only domestically unless there is a clear expression of a contrary intent by Congress.⁷ Another approach is a variation of the

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nexus theme referred to above, looking either at whether the foreign conduct has a substantial, direct, and foreseeable effect upon or within the U.S.,⁸ or at the extent to which conduct occurred within the U.S. that played a part in accomplishing the illegal activity occurring outside the U.S.⁹

While criminal laws may extend to conduct in foreign lands, the legal and practical impediments to investigating and enforcing them overseas have been a major practical reason for restraint by Congress as well as enforcement agencies. Prosecutors of one country attempting to carry out their functions in another country without the host country's consent can cause diplomatic controversy and risk criminal prosecution in the host country. However extensive diplomatic efforts, advances in international investigative techniques and changes in policy have overcome many of those barriers, leading to the expansion of extraterritorial criminal laws related to business, and their enforcement.

III. Antitrust Law

The key U.S. antitrust law for non-U.S. companies operating primarily outside the U.S. is the Sherman Act, which prohibits agreements, combinations or conspiracy in restraint of trade or commerce, and monopolization or attempts to monopolize any part of trade or commerce.¹⁰

Extraterritorial Application

The Sherman Act is meant to ensure the competitive integrity of the marketplace, and in a world where so much economic activity is global in nature, anticompetitive activity outside the U.S. often has a substantial, direct and foreseeable effect upon competition in U.S. Harmonization of competition laws and their enforcement around the world, and increased cooperation among the enforcement agencies of various countries, has dramatically reduced the potential conflicts associated with extraterritorial enforcement of U.S. antitrust laws. Understanding is widespread among business executives around the world that price fixing and other cartel behavior is illegal.

Congress has been explicit regarding application of the Sherman Act to conduct involving "trade or commerce with foreign nations": Section 7 of the Sherman Act limits the Act's application to those situations where (i) the conduct has a direct, substantial and reasonably foreseeable effect on domestic trade or commerce; on import trade or import commerce with foreign nations; or on export trade or export commerce with foreign

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nations to the extent the conduct injures the export business in the U.S; and (ii) where that effect gives rise to a Sherman Act violation.¹¹ Section 8 clarifies that the Act applies to foreign as well as domestic companies.¹²

Under the above standard, a non-U.S. industrial company with no manufacturing or other operations in the U.S., and no direct sales in the U.S., that made an agreement or reached an understanding with a competitor that restricted competition (e.g. through fixing or controlling prices, allocating products or markets, or limiting sale or production of products), might be violating the Sherman Act if its products were resold into the U.S. market, if the agreement or understanding had a direct, substantial and reasonably foreseeable impact on the U.S. market for the products.¹³ In addition, a non-U.S. distributor with no distribution or other operations in the U.S., that made an agreement or reached an understanding with a non-U.S. manufacturer not to resell a competing U.S. export product in a non-U.S. market, might be violating the Sherman Act if the result would be to foreclose access by the U.S. exporter to a distribution channel with a direct, substantial and reasonably foreseeable impact on the U.S. exporter's business.

Whether a particular non-U.S. company could be deemed subject to the Sherman Act would depend on application of the due process standard referred to above; i.e. whether the non-U.S. company has sufficient contacts with the U.S. to meet the "fair play and substantial justice" threshold.¹⁴ These contacts might consist of business directly conducted by the non-U.S. company, or business conducted through an agent, subsidiary or affiliate deemed to be the "alter ego" of the non-U.S. company.

Extraterritorial Enforcement

The United States Department of Justice (the "DOJ") began seriously focusing on enforcement of the Sherman Act against non-U.S. companies and foreign nationals in the 1990s, and has continued to do so.¹⁵ At the end of its 2007 fiscal year, 50 of the DOJ's

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135 pending antitrust grand jury investigations pertained to suspected international cartel activity.¹⁶

What distinguishes antitrust enforcement by the DOJ's Antitrust Division from DOJ enforcement of other business criminal laws discussed below is its "corporate leniency program", which offers the first company that comes forward and "blows the whistle" on a cartel in which it has been participating, and which then cooperates fully with the Antitrust Division's investigation, complete amnesty from prosecution, so long as the company meets the conditions set forth in the program.¹⁷ This all-or-nothing approach, combined with enormous potential fines and significant jail sentences, has been a very effective enforcement tool, with non-U.S. as well as U.S. companies participating in the race to be the first to disclose if agreements or understandings with competitors about prices, market allocation or...