Interesting read on FCPA extra-territorial applicability:

When do white collar criminal statutes apply to extraterritorial conduct?

Contributed by Hogan Lovells US LLP
April 07 2015

Introduction
Broad reach of US criminal statutes
Supreme Court presumption against extraterritoriality
Presumption against extraterritoriality and criminal statutes
Applying Morrison/Vilar test
Comment


Introduction

In the past five years the Supreme Court has steadily restricted the recovery available to civil litigants seeking relief for conduct that occurred outside the United States. At the same time, prosecutors have continued to push for the broad application of criminal laws to extraterritorial conduct, particularly in white collar criminal cases. Courts have only just begun to grapple with the question of how to analyse whether a criminal statute applies extraterritorially. The results thus far have been inconsistent and have confused the analysis of when a foreign company or executive is subject to US criminal jurisdiction.

Broad reach of US criminal statutes

Courts have liberally construed the class of federal criminal statutes commonly charged in white collar cases. These cases often include alleged violations of the Foreign Corrupt Practices Act, wire or mail fraud, false statements, money laundering and conspiracy, among others. It is not unusual for prosecutors to allege and even prosecute any of these crimes when there is any sliver of domestic conduct or a domestic effect of the conduct. A foreign company that stores emails on a US-based server, uses a US bank or conducts business with any entity with these types of US contact could be subject to federal criminal laws.

In recent years the Department of Justice (DOJ) has taken increasing interest in white collar cases against foreign defendants, as evidenced in part by the continued emphasis on Foreign Corrupt Practices Act investigations and high-profile criminal cases in the banking and automotive industries. Non-US companies and executives are often surprised by the expansive, seemingly limitless reach of US statutes over conduct that occurs abroad. Because the vast majority of these investigations conclude with a settlement agreement, these companies and executives often have no chance to challenge the government's ever-widening theories of jurisdiction.

Supreme Court presumption against extraterritoriality

In 2010 the Supreme Court decided Morrison v National Australia Bank Ltd,(1) a blockbuster case that will have far-reaching effects in international cases. Under Morrison, there can be no liability for extraterritorial conduct when the applicable statute does not clearly apply to extraterritorial conduct. This conclusion was based on the presumption against extraterritoriality – a longstanding principle of US law that the legislation of Congress is meant to apply only within the territorial jurisdiction of the United States, unless a contrary intent appears. In Morrison, the Supreme Court held that the scope of civil liability under the Securities Exchange Act does not reach extraterritorial conduct, but rather is limited to cases in which the defendant committed fraud in connection with the purchase or sale of a security listed on a US stock exchange or any other security purchased or sold in the United States.(2)

In contrast to the expanding application of criminal statutes, since 2010 several courts have applied the presumption against extraterritoriality to narrow the types of civil lawsuit that companies face after an internal or government investigation of wrongdoing. Courts have applied Morrison in cases involving securities fraud,(3) the Alien Tort Statute(4) and the Racketeer Influenced Corrupt Organisations Act (RICO).(5) The Second Circuit continued this line of analysis in European Community v RJR Nabisco Inc,(6) which held that RICO can apply extraterritorially, but only to the extent that it is based on predicate statutes that apply extraterritorially – a category that does not include the wire and mail fraud statutes.

Presumption against extraterritoriality and criminal statutes

Morrison did not explicitly state whether its holding applies equally to civil and criminal statutes. This question was not directly addressed by a federal appellate court until 2013, when the Second Circuit Court of Appeals decided United States v Vilar. In Vilar the court clarified that "the presumption against extraterritoriality applies to criminal statutes".(7) The court ruled that the "far-reaching holding in Morrison" did in fact apply to the criminal securities fraud statute, which does not reach extraterritorial conduct.(8)

Vilar included a limitation. The presumption against extraterritoriality does not apply to criminal statutes that are enacted because of the government's right to defend itself against fraud or obstruction.(9) The court based this on century-old precedent (United States v Bowman),(10) which held that criminal statutes apply extraterritorially when they are of a class of statute enacted because of the government's right to defend itself against fraud or obstruction. Numerous cases have relied on Bowman in ruling that the presumption against the extraterritorial application does not apply to criminal statutes.(11) However, in Vilar the Second Circuit stated that Bowman has been overread and that its holding should be limited to the proposition that the government has a right to defend itself outside of the domestic territory.

Further, Vilar concluded that the presumption against extraterritoriality applies in criminal cases for important conceptual reasons. First, the justifications that supported the holding in Morrison – a recognition that Congress generally legislates with domestic concerns in mind and a presumption that US law governs domestically, but does not govern the world – apply in at least equal force to criminal actions in which the US government acts to enforce US law. Second, Morrison established "a method of interpreting a statute, which has the same meaning in every case".(12) The Vilar court rejected the argument that the presumption against extraterritoriality applies only in civil cases because it would establish the "dangerous principle that judges can give the same statutory text different meanings in different cases".(13)

Applying Morrison/Vilar test

As the Vilar court explained, Morrison significantly changed the analysis of whether a criminal statute applies extraterritorially. Before Morrison, the Second Circuit – like many other courts – applied the 'conduct and effects' test, which focused on whether the wrongful conduct:

• occurred in the United States; or
• had a substantial effect in the United States or upon US citizens.

However, "Morrison did away with this test".(14) After Morrison, a statute applies only to domestic conduct, unless Congress has evinced a contrary intent.

Morrison and Vilar have established a two-step test to analyse the extraterritoriality of a criminal statute. First, if the statute gives a clear indication that it applies extraterritorially, then it does. The money laundering statute (18 USC § 1956), for example, plainly evinces Congress's intent that it apply to extraterritorial conduct by applying to any person that transfers funds "from a place in the United States to or through a place outside the United States or to a place in the United States from or through a place outside the United States".

Second, if there is no clear indication, the outcome turns on whether the statute in question prohibits a crime against the government or a crime against private persons or their property. Statutes that prohibit crimes against the government may be applied extraterritorially, even in the absence of clear evidence that Congress so intended. By contrast, statutes that prohibit crimes against private persons or their property do not apply extraterritorially, unless Congress clearly says otherwise. Vilar also suggests that the presumption against extraterritoriality may apply to all fraud crimes. It clarifies that even when a statute forbids a variety of fraud, if its purpose is to prohibit crimes against private individuals or their property, the presumption should apply.

The government's approach in Foreign Corrupt Practices Act cases illustrates the confused jurisdictional analysis. The DOJ has adopted an increasingly expansive view of its mandate under the Foreign Corrupt Practices Act that has included assertions of jurisdiction over foreign entities based on minor domestic contacts, including use of a US bank and storage of emails on US servers. If any corrupt act takes place in the United States, the DOJ has asserted that the Foreign Corrupt Practices Act can reach any co-conspirators, no matter whether they took any action within the United States. However, because most Foreign Corrupt Practices Act cases conclude in settlement agreements, these aggressive positions have rarely been challenged.

In cases involving the wire or mail fraud statutes or the false statements statute, courts often dodge the question of extraterritorial application by finding that the defendant committed domestic conduct within the statute's ambit or that its conduct had domestic effects. Even if courts apply the Morrison/Vilar test instead, the muddled state of the law could lead to varying results. For example, assume that prosecutors want to bring a case under the wire fraud statute (18 USC § 1343), which criminalises the use of wires to obtain money or property by false pretences. If these prosecutors pursue a wire fraud charge based on materially fraudulent statements to the government, the action will be based on the government's right to defend itself from fraud and will thus likely fall under the Bowman exception. However, if the charge were based on fraudulent statements to the public at large only, the government's charge would be for harm to private property – precisely the type of crime that falls outside the Bowman exception.

The general conspiracy statute (18 USC § 371) – which could be charged based on a conspiracy to defraud the government or a conspiracy to defraud private persons or their property – poses the same issue. Similarly, the false statements statute (18 USC § 1001) can cover statements to government agents, but also to investors and consumers. In civil RICO cases, numerous courts have applied Morrison. Vilar's emphasis on giving the same statute the same meaning in all cases suggests that Morrison should also apply to criminal RICO cases as well.(15)

By analysing the domestic conduct and effects of the alleged crime, many courts have returned to the conduct and effects test, despite the fact that Morrison did away with it. This leaves unclear when the presumption against extraterritoriality applies, particularly with many of the most commonly charged white collar criminal statutes.

Comment

Courts are split on whether Morrison displaces the conduct and effects test and whether it applies categorically to all federal statutes. The Ninth Circuit has agreed with the Second Circuit that Morrison applies in criminal cases,(16) but a federal court in Oregon has rejected Morrison's application in criminal cases.(17) Numerous other cases simply avoid the question and instead focus on domestic conduct and effects.

The Supreme Court recently bypassed the chance to clarify this analysis by denying writ of certiorari in an appeal from United States v Coffman,(18) a Sixth Circuit decision that affirmed the conviction of Bryan Coffman for securities fraud, wire and mail fraud, money laundering and conspiracy to commit money laundering. Coffman, a private attorney, represented two oil investors who raised money from foreign investors and also helped with associated state tax and regulatory filings. Coffman challenged the Sixth Circuit's failure to apply Morrison to the charges regarding agreements for securities that were struck in Canada and the Bahamas. The Sixth Circuit, like many courts before, instead applied the conduct and effects test, reasoning that "[b]ecause portions of the transactions involved in this case occurred in the United States, it is fair to characterise them as domestic".

This arguably conflicts with Morrison (and almost certainly with Vilar), which established that whether a statute applies to extraterritorial conduct is a question about Congress's intent, not about whether there is some domestic activity involved. It also provides support for prosecutors to continue applying criminal statutes aggressively in international investigations and ultimately in settlement agreements.

In 2005 the Supreme Court declined to hold that the wire fraud statute applied extraterritorially, instead applying the conduct and effects test. In dissent, Justices Ginsburg and Breyer expressed their belief that, despite the statute's coverage of frauds executed "in interstate or foreign commerce", the majority had "ascribed an exorbitant scope to the wire fraud statute, in disregard of our repeated recognition that Congress legislates against the backdrop of the presumption against extraterritoriality".(19) Since then, the scope of white collar criminal statutes has seemingly expanded. The Supreme Court should take the next opportunity to clarify when these statutes apply extraterritorially.

For further information on this topic please contact Brooks M Hanner at Hogan Lovells US LLP by telephone (+1 202 637 5600) or email (brooks.hanner@hoganlovells.com). The Hogan Lovells US LLP website can be accessed at www.hoganlovells.com.
Endnotes
(1) 561 US 247 (2010).
(2) Id at 273.
(3) City of Pontiac Policemen's & Firemen's Ret Sys v UBS AG, 752 F 3d 173 (2d Cir 2014).
(4) See, for example, Cardona v Chiquita Brands International Inc, 760 F 3d 1185 (11th Cir 2014).
(5) Norex Petroleum Ltd v Access Industries Inc, 631 F 3d 29 (2d Cir 2010).
(6) 764 F 3d 129 (2d Cir 2014).
(7) 729 F 3d 62, 72 (2d Cir 2013).
(8) Id at 67.
(9) Id at 73 (citation omitted).
(10) 260 US 94 (1922).
(11) See, for example, United States v Siddiqui, 699 F 3d 690, 700 (2d Cir 2012) ("The ordinary presumption that laws do not apply extraterritorially has no application to criminal statutes").
(12) Id at 74.
(13) Id at 75.
(14) Id.
(15) One court has rejected the government's argument that there is a presumption that RICO should apply extraterritorially in civil and criminal cases because the statute's purpose is to criminalise conduct against private individuals. United States v Philip Morris, 783 F Supp2d 23, 28 n6 (DDC 2011).
(16) 706 F 3d 965 (9th Cir 2012).
(17) United States v McVicker, 979 F Supp 2d 1154 (D Or 2013).
(18) 574 F App'x 541 (6th Cir 2014).
(19) Pasquantino v United States, 544 US 349, 373 (Ginsburg dissenting) (citation and quotation marks omitted).

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