White Collar Crime: Court borders

With a number of countries breaking down barriers on cross-border white-collar crime, UK nationals who breach their codes could find themselves facing foreign justice. By Robert Goldspink, Thierry Dalmasso and Mark Bravin

UK-based international businesses and businesspeople are increasingly exposed to prosecution abroad if they fall foul of other states’ rules on corporate governance. Industrialised states are passing laws with wider extra-territorial jurisdiction and are applying those laws with greater international vigour, while the UK’s Extradition Act 2003 has removed or limited traditional defences to extradition.

US legislation
The risks of prosecution in the US are the greatest because the US has very wide extra-territorial laws and pursues them with vigour.

Take for example bribery of foreign officials: under the US Foreign Corrupt Practices Act (FCPA), the US takes jurisdiction over, among others, companies whose securities are quoted on the New York Stock Exchange, as well as executives and subsidiaries of the groups as a whole, including those based outside the US.

In 2006 the US government fined Norway’s Statoil for alleged bribery in connection with an oil and gas contract in Iran. Statoil was fined $10.5m (£5.34m), forced to disgorge $10.5m of profit and was subjected to an independent compliance audit. In 2004 it fined Swiss-based ABB for alleged bribery in connection to a $180m (£91.52m) project in Nigeria. ABB was fined $10.5m and disgorged $5.9m (£3m). In 2006 three ABB UK executives were fined: one was sales director of a subsidiary responsible for West Africa, while the other two were vice-presidents of a UK subsidiary.

In antitrust cases the US has jailed more than 30 non-US executives since 1999, including several UK nationals and residents. Ian Norris, former chief executive of Morgan Crucible, is currently subject to proceedings for extradition from the UK to the US. The High Court ordered his extradition. Norris is appealing to the House of Lords, which may help clarify the limits (if any) to the ease with which the court is ordering his extradition.

Laws on foreign jurisdictions
The risks are not only from the US. France and Germany, for instance, take jurisdiction over persons outside their jurisdictions involved in foreign bribery. Both countries may prosecute their own nationals for foreign bribery wherever the person may be based; and they may prosecute anyone anywhere where the victim is French or German. This could include a foreign company that wins a foreign contract through bribery when a local company would otherwise have had a better offer.

As of now, no fines or imprisonment have been imposed by either country, but several investigations and prosecutions are underway including (in France) against foreign entities. The Organisation for Economic Co-operation and Development (OECD) monitors the progress of the 36 signatories to its anti-foreign bribery convention: France and Germany received commendations for the vigour with which they are applying their anti-bribery laws, unlike the UK, whose failings were criticised strongly in March 2007.

UK-based businesses and businesspeople involved in money laundering are also exposed. An example of French extra-territorial criminal jurisdiction concerned aluminium company Pechiney’s bid for a US company, Triangle Industries. Certain French residents, thanks to a Lebanese businessman, obtained insider information in France and engaged US residents to buy shares in Triangle just before Pechiney launched its bid. France fined the French residents and the Lebanese businessman who committed the offence in France.

The French courts deemed the offence to have been committed within France because one of the constituent elements of the crime occurred within France. The US also took jurisdiction over the case and fined those who were involved.

France takes a wide jurisdiction over those who perpetrate a felony or misdemeanours outside France where the victim is French (Article 113-7 of the French Penal Code). Thus, anyone taking part in anticompetitive practices and cartels outside France may be prosecuted in France.

An unusual feature of French law is its criminal jurisdiction over ‘managers’ of companies doing business there. French law demands managers know all the regulations that apply to their business in France and to be responsible for compliance. Thus, managers are responsible for complying with pollution controls, planning issues, health and safety regulations and financial regulations. Managers can escape from liability only if they have properly delegated the powers and obligations to another.

Accordingly, a UK company manager found himself, to his great astonishment, before a French court to account for problems of illegal labour committed on French territory. A manager of a US company was prosecuted for breaching the French Consumer Code because packets of Tropicana fruit juice did not include the word ‘pasteurised’.

A UK-based manager of a firm involved in transportation in France, where there is a crash arising, say, from of lack of health and safety regulations applicable to their trucks, boats or planes, risks personal prosecution in France even though they have never set foot in France.

German courts and public authorities, such as the Federal Financial Supervisory Authority (BaFin) and the Federal Cartel Authority, also apply German law on an extra-territorial basis.

A business or businessperson that, outside Germany, offers internet or telephone banking in Germany without a licence will be subject to administrative and criminal sanctions, including possible imprisonment of managers.

In most of these cases the foreign business is not physically present in Germany, but offers its services (often credit business, which is not considered a banking business in many jurisdictions) through the internet, or contacts German customers by email, fax or telephone.

The BaFin’s position is that Section 32 of the German Banking Act applies to all offerings of banking and financial services targeted at the German market. ‘Targeting the German market’ is construed very broadly and even includes offers made by foreign institutions through licensed German brokers or banks.

The attitude of German law was also recently evidenced in a merger case. Neither the target companies nor the buyer had its corporate headquarters in Germany. The target companies had only one German subsidiary with insignificant activities. Most of the German turnover of the parties to the proposed merger resulted from sales of foreign entities into Germany.

The merger was cleared by cartel authorities in all countries where the parties had corporate activities. The parties argued that the main focus of the merger was outside Germany and that the Federal Cartel Office had no jurisdiction in this case.

However, the cartel office prohibited the merger: Germany had a legitimate interest in controlling the potential effects of the merger on the domestic market, since the German market was one of the largest markets for the products of the parties; and a significant portion of their European turnover was in Germany. German merger control regulation did not depend on the parties’ choice of the location of their corporate headquarters; otherwise, companies could effectively evade national merger control regulations by locating their businesses outside areas of European merger control laws.

UK repercussions
The above cases are just a few examples of the long arm of foreign law applicable to UK-based businesses and businesspeople who operate internationally.

There is no doubt that the long arms of foreign law will become longer as pressure increases for proper governance of international businesses. In the end we all depend on the rule of law for our prosperity and on proper corporate governance. There are difficult dilemmas for those who operate in jurisdictions where the rule of law is not strong and bribery (for instance) is rife: if executives do not indulge in bribery, they may not get important projects for their business; but if they do, the risks are potentially career defining.

Robert Goldspink is managing partner at Morgan Lewis & Bockius.