The Long Arm of U.S. Regulatory Enforcement and the Cross-Border Reach of U.S. Laws

The Long Arm of U.S. Regulatory Enforcement and the Cross-Border Reach of U.S. Laws

 One of the most distinctive aspects of the current global regulatory environment has been the increasing willingness of U.S. regulators to try to project U.S. enforcement authority outside the U.S. The cross-border assertion of U.S. regulatory authority has taken place across a broad range of regulatory and compliance issues, including, for example, antitrust, trade sanction, and taxation enforcement as discussed here.

One area where the U.S. regulators’ cross-border reach has been most pronounced has been with respect to anti-bribery enforcement.  A July 30, 2014 memorandum by Demme Doufekias and Adam J. Fleisher of the Morrison & Foerster law firm entitled “The Long-Arm of the FCPA: Former BizJet CEO Arrested in Amsterdam, Pleads Guilty in Oklahoma” (here) takes a look at a recent instance where U.S. prosecutors projected their reach outside of the country in order to enforce U.S. antibribery laws. The memo also reviews the many recent instances where the U.S. authorities have reached across the country’s borders to enforce the Foreign Corrupt Practices Act (FCPA). The memo highlights the fact that this cross-border reach is not limited just to FCPA enforcement.

The primary focus of the law firm memo is the recent prosecution of Bernd Kowalewski, the former president and CEO of BizJet International Sales and Support, Inc., a U.S.-based subsidiary of Lufthansa Technik AG. The company had its headquarters in Tulsa, Oklahoma. As discussed in the U.S. Department of Justice’s July 24, 2014 press release (here), the DOJ alleged that Kowalewski and three other BizJet officials had engaged in a conspiracy to violate the FCPA by paying bribes to government officials Mexico and Panama, in order to obtain aircraft maintenance contracts in those countries.

In 2012, two of the four BizJet officials who were under indictment for the alleged bribery pled guilty to FCPA violations. However, the charges and the guilty pleas were all kept under seal at the DOJ’s request, because, as it was later revealed, the DOJ was trying to locate and arrest Kowalewski and one other BizJet official, who were by then living outside of the U.S. According to the DOJ press release, Kowalewski ultimately was arrested by authorities in Amsterdam on March 13, 2014 on a provisional arrest warrant. He waived extradition on June 20, 2014, and on July 24, 2014, he entered a guilty plea in the Northern District of Oklahoma to conspiracy to violate the FCPA and to one substantive violation in connection with a scheme to pay bribes. The fourth BizJet official remains as a fugitive and is believed to be living abroad.

The press release quotes a DOJ official as saying that “though he was living abroad when the charges were unsealed, the reach of the law extends across U.S. borders, resulting in Kowalewski’s arrest in Amsterdam and his appearance in court today in the United States.”  (Emphasis added). Another official is quoted as saying that Kowalewski’s arrest was the result of “investigators and prosecutors …work[ing] together across borders and jurisdictions to vigorously enforce” the FCPA.

As the law firm memo states, the government’s approach in the BizJet case shows “the lengths to which the DOJ is willing to go to track, arrest and extradite U.S. and foreign nationals abroad to face FCPA charges in the United States.”’ International businesspeople that depend on their ability to travel “should not be lulled into a false sense of security as a result of their status as foreign nationals or the fact that they live outside the United States.” The memo notes further than individuals involved in FCPA investigations “must be aware that silence from the government may simply be the result of the DOJ striving to keep its enforcement efforts under wraps.”

The U.S. government, the memo notes, has a number of means to use to try to apprehend foreign nationals residing outside the U.S. The U.S. can seek to have the individual arrested by going through INTERPOL. The U.S. can try to lure the individual back to the U.S. or simply establish a border watch to alert law enforcement officials if the individual presents himself or herself at the U.S. border. The DOJ can also seek provisional arrest warrants and pursue extradition of individuals from other countries pursuant to extradition treaties.

Given the “growing cooperation between U.S. and foreign authorities” on anti-bribery enforcement , the likelihood is that the DOJ’s efforts will be successful, “ensuring that individuals being investigated or charged with FCPA violations or other crimes will not be able to evade the long arm of the U.S. government simply by remaining abroad.”

The law firm memo notes that the Kowalewski case is “only one of a growing list of examples where the DOJ has been able to bring individuals living abroad back to the U.S. to face criminal charges.” The memo cites the example of Frederic Pierucci, a French citizen and former official of the French company Alstom SA, who was arrested when his plane landed at JFK Airport in New York, in connection with alleged bribing of Indonesian government officials. The memo cites other examples where foreign nationals were arrested outside of the U.S. and extradited to the U.S. by the governments of the countries where the individuals had been arrested. To be sure, the DOJ is not always successful in apprehending fugitives in FCPA cases. The memo cites to a lengthy list of FCPA fugitives who remain at large. However, the recent events “nevertheless display DOJ’s resolve in pursuing foreign fugitives.”

The memo emphasizes that FCPA cases are not the only area where the DOJ has been successful in bringing foreign nationals and others residing outside the United States back to the country to face charges. The memo cites the example of the DOJ’s April 2014 success in extraditing a foreign national to the United States to stand trial for alleged violations of the criminal antitrust laws. The case involved an Italian national and former official of an Italian company who had been under indictment in the U.S. since 2010 for alleged violations of the Sherman Antitrust Act. The individual was extradited to the U.S. from Germany.

The law firm memo emphasizes the lengths to which the U.S. authorities will go to bring individuals charged with violations of U.S. laws back to the U.S. to fact prosecution. However, these efforts are just part of the larger U.S. effort to project the enforcement of its laws outside of the country. As discussed here, U.S. authorities are actively asserting their authority outside of the country in a number of different areas, including securities, trade sanctions, taxation, and drug safety. In that regard, it is probably worth noting that though the BizJet case involved alleged misconduct by a U.S. domiciled business operation, many of the examples cited in the law firm memo not only involved foreign nationals, but alleged misconduct that took place outside the U.S. and involving companies domiciled outside the U.S. As the DOJ official quoted in the press release linked above put it, “the reach of the law extends across U.S. border.”

One of the reasons the law reaches across borders is the increasing levels of cooperation among regulatory authorities. The willingness of foreign governments to arrest and extradite foreign individuals is one of the key components of the ability of U.S. authorities to bring these individuals to justice in the U.S.

It should be noted that the U.S. government is not the only one to extend the enforcement of its laws through cooperation with other governments. To cite but one recent example, on July 24, 2014, the UK Serious Fraud Office recently announced that it had brought corruption charges against the UK subsidiary of Alstom in connection with transportation projects in India, Poland and Tunisia. The UK investigation commenced because of information provided to the SFO by the Office of the Attorney General of Switzerland. The company has already been fined for related activities by the Swiss government. Other recent examples of extensive cross border cooperation include the recent investigation of the alleged manipulation of the Libor benchmark.

The increased activity of regulatory authorities around the world had important implications for companies and their officials. While this activity can mean that companies face a heightened risk of regulatory scrutiny, risks these companies face may also include the possibility of regulatory and enforcement action by U.S. authorities. As the law firm memo underscores, U.S. regulators are actively asserting their authority outside of the U.S. In an environment where there already is a growing perception of increasing regulatory risk, the U.S. authorities’ vigorous assertion of regulatory authority outside the U.S. represents a particularly hazardous part.

These developments not only have important compliance implications for many non-U.S. companies. They also raise important issues about the liability exposures of the potentially affected companies as well as for their directors and officers. The liability exposures include not only the potential regulatory and enforcement risk but also the possibility of follow on civil actions, brought by shareholders or others. The “others” that might bring claims include supervisory board members in those jurisdictions with the dual-board structure.

These issues in turn have important D&O insurance implications. The issues also present a particularly difficult challenge for D&O insurance underwriters involved in underwriting companies outside the U.S. as they must attempt to understand and anticipate these kinds of actions from U.S. regulators and how they may affect the companies under consideration. Emerging issues involving the enforcement of trade sanctions laws and the Foreign Account Tax Compliance Act (FATCA) highlight the potential significance of these challenges. Questions regarding the cross-border enforcement of regulatory authority are likely to remain both difficult important in the months ahead.

London PLUS Symposium on the Dangers of Cross-Border Enforcement: In light of the kinds of concerns I have noted above, an upcoming Professional Liability Underwriting Society regional symposium to be held in London is particularly topical and timely. The luncheon event, which is entitled “Dangers of Long Arm Enforcement in a World Without Borders” will take place on Monday, September 29, 2014, at Gibson Hall in London. I will be presenting at the event on the topic of “The Dangerous Cross-Border Regulatory Environment.” The event keynote speaker will be the author and consultant David Bermingham, who is best known as one of the NatWest three, and who will presenting his own personal perspective on cross-border enforcement based on his extradition to the U.S. on charges related to the Enron scandal. Following the keynote address, Bermingham and I will discuss the evolving challenges in an increasingly global regulatory environment.

Background regarding the event, including registration information, can be found here. I have participated on a panel with David Berminham in the past, and I can assure everyone that this will be a lively and interesting event. I hope all of my UK readers and friends will plan on attending.

 Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.

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