Second Circuit Rejects Government’s Expansive Theory in Ruling that FCPA Does Not Extend to Foreign Nationals Without U.S. Ties

The Second Circuit ruled on August 24 in United States v. Hoskins that the Foreign Corrupt Practices Act (FCPA) does not apply to foreign nationals who do not have ties to United States entities for bribery crimes that take place outside of U.S. borders. In doing so, the court rejected the government’s broadened theory of prosecution against Lawrence Hoskins, a U.K. citizen and former executive of the U.K.-based subsidiary of Alstom S.A., a global company headquartered in France that provides power and transportation services. United States v. Hoskins, No. 16-1010-CR, 2018 WL 4038192, at *1 (2d Cir. Aug. 24, 2018).

The alleged bribery scheme centers on Alstom S.A.’s American subsidiary, Alstom Power, Inc. (Alstom U.S.), headquartered in Connecticut. Hoskins was one of four Alstom executives charged with facilitating bribes to Indonesian officials in order to help the company win a $118 million power plant contract in Indonesia between 2002 and 2009. In 2014, Alstom S.A. pled guilty to the charge and paid a then record-setting $772 million fine.

The FCPA prohibits American companies and American persons, as well as their agents, from using interstate commerce in connection with the certain payments, or bribes, of foreign officials. 15 U.S.C. § 78dd-2. The FCPA likewise prohibits foreign persons or businesses from taking acts to further certain corrupt schemes, including ones causing the payment of bribes, while present in the United States. 15 U.S.C. § 78dd-3. Hoskins never worked directly for Alstom U.S. or traveled to the U.S. while the alleged scheme was ongoing. However, he was a former executive of the U.K subsidiary of the Alstom S.A., the parent company of Alstom U.S. that allegedly paid bribes to Indonesian officials. Based on his position, the government indicted Hoskins as an agent of Alstom U.S. under multiple theories of liability including conspiring to violate the FCPA.

The Second Circuit was faced with deciding the issue of whether a foreign person who does not reside in the United States can be liable for conspiring or aiding and abetting a U.S. company to violate the FCPA if that individual is not in the categories of principal persons covered in the statute. As the court phrased it, “[i]n other words, can a person be guilty as an accomplice or a co-conspirator for an FCPA crime that he or she is incapable of committing as a principal?” The Second Circuit held that such a person could not be liable.

In their analysis, the court noted that the FCPA defined precisely the categories of persons who may be charged and the statute clearly states the extent of its extraterritorial application. “The statute includes specific provisions covering every other possible combination of nationality, location, and agency relation, leaving excluded only nonresident foreign nationals outside American territory without an agency relationship with a U.S. person, and who are not officers, directors, employees, or stockholders of American companies.”

While the government argued that U.S. law has historically allowed for individual liability of a crime even if that person was incapable of committing the substantive offense, the Second Circuit noted that FCPA legislation clearly did not intend that accomplice liability extend to persons known as the “affirmative-legislative-policy exception.” The court explained that there is no specific provision in the FCPA which assigns liability to persons who are “nonresident foreign nationals, acting outside American territory, who lack an agency relationship with a U.S. person, and who are not officers, directors, employees, or stockholders of American companies.” The court also noted that the legislative intent behind the language of the FCPA was to protect foreign nationals who may not know American law.

The impact of the Second Circuit’s decision not to extend FCPA liability to Hoskins will have ongoing consequences, as recognized in the case’s concurring opinion by Judge Gerard E. Lynch. “It is for Congress to decide whether there are sound policy reasons for limiting the punishment of foreign nationals abroad to those who are agents of American companies, rather than to those who make American companies their agents. Our only task is to enforce the laws as Congress has written them.” But the impact of the decision in light of the current FCPA statute, as Judge Lynch notes, creates a pervasive result: “It makes little sense permit the prosecution of foreign affiliates of United States entities who are minor cogs in the crime, while immunizing foreign affiliates who control or induce such violations from a high perch in a foreign parent company. That is the equivalent of punishing the get-away driver who is paid a small sum to facilitate the bank robber’s escape, but exempting the mastermind who plans the heist.”

While the Second Circuit’s decision in Hoskins may have limited the scope of foreign individuals in FCPA cases for now, it is likely that the DOJ will continue to prosecute similar cases that test the jurisdictional reach of the FCPA.

President–Elect Trump Nominates Jay Clayton For SEC Chair

On January 4, 2017, President-Elect Donald Trump announced that he intends to nominate Walter “Jay” Clayton for Chairman of the Securities and Exchange Commission (SEC). In response, Mr. Clayton stated that, “If confirmed, we are going to work together with key stakeholders in the financial system to make sure we provide investors and our companies with the confidence to invest together in America. We will carefully monitor our financial sector, as we set policy that encourages American companies to do what they do best: create jobs.”

Of the three pillars of the SEC’s mission statement – 1) protect investors; 2) maintain fair, orderly, and efficient markets; and 3) facilitate capital formation – Mr. Clayton’s deep experience as a “dealmaker” most closely aligns with the facilitation of capital formation pillar.  Chair Mary Jo White’s primary prior experience as a federal prosecutor, in contrast, most closely aligned with the protection of investors. That said, while this announcement clearly indicates the incoming administration’s focus on that third pillar, with the latter part of this statement in his announcement, the President-Elect reminded the securities industry that the Chair and SEC will remain responsible for ensuring that the rules and regulations are followed, “Jay Clayton . . . will ensure our financial institutions can thrive and create jobs while playing by the rules at the same time.”

While Mr. Clayton has strong industry knowledge and experience, his lack of enforcement experience is comparable to Chair White’s lack of experience in the SEC’s regulatory and policy areas when she was appointed. Consequently, if his nomination is affirmed, Mr. Clayton’s choice for the next Director of the Division of Enforcement will reveal much about his enforcement objectives. In the meantime, one area that Mr. Clayton appears primed to de-emphasize is the SEC’s enforcement of the Foreign Corrupt Practices Act, based on this New York City Bar Association paper that he assisted in drafting. The President-Elect will also have more to say on the future direction of the SEC with his upcoming nominations to fill the two remaining open seats on the Commission.

SEC Affirms Commitment to FCPA Enforcement Actions

Andrew J. Ceresney, Director of the Division of Enforcement, reaffirmed the SEC’s focus on FCPA enforcement actions at the International Conference on the Foreign Corrupt Practices Act. Mr. Ceresney’s speech focused on companies’ need to self-report violations.

Mr. Ceresney stated that the SEC uses “a carrot and stick approach to encouraging cooperation,” where self-reporting companies can receive reduced charges and deferred prosecution and non-prosecution agreements, while companies that do no self-report do not receive any reduction in penalties. Mr. Ceresney warned that “companies are gambling if they fail to self-report FCPA misconduct.”

Mr. Ceresney gave examples of how this policy has benefited companies recently. Mr. Ceresney highlighted the SEC’s decision not to bring charges against the Harris Corporation after it self-reported violations and mentioned to examples where the SEC entered into non-prosecution agreements as a result of self-reporting.

Mr. Cerseney stated that the SEC’s “actions have sent a clear message to the defense bar and the C-Suite that there are significant benefits to self-reporting [to] and cooperation with the SEC” and that he expects “the Division of Enforcement will continue in the future to reinforce this message and reward companies that self-report and cooperate.”

Mr. Cerseney also spoke about recent cases that highlight “the Enforcement’s Division’s renewed emphasis on individual liability in FCPA cases[,]” noting that seven actions in the past year involved individuals. Mr. Cerseney stated that “pursuing individual accountability is a critical part of deterrence and . . . the Division of Enforcement will continue to do everything we can to hold individuals accountable.”

Mr. Cerseney’s remarks demonstrate that the Division of Enforcement does not expect to change its recent focus on FCPA violations and individual liability as it transitions to the new administration.

Update: IRS, SEC, and Courts Diverge on Nature of Disgorgement

We previously wrote about decisions in SEC v. Graham from the Eleventh Circuit,  __ F.3d __, No. 14-13562, 2016 WL 3033605 (11th Cir. May 26, 2016), and the U.S. District Court for the Southern District of Florida, 21 F. Supp. 3d 1300 (S.D. Fla. 2014), considering whether disgorgement claims and other remedies were subject to five-year statute of limitations on actions “for the enforcement of any civil fine, penalty, or forfeiture” codified in 28 U.S.C. § 2462. The Eleventh Circuit affirmed the decision of the lower court that the SEC’s disgorgement claims were time-barred, holding that “disgorgement” is synonymous with the plain meaning of “forfeiture” as it is used in the statute.

On May 6, 2016—shortly before the Eleventh Circuit issued its ruling in Graham—the IRS published non-precedential Chief Counsel Advice (“CCA”) on whether Internal Revenue Code Section 162(f) bars business expense deductions for disgorgement paid to the SEC of profits stemming from alleged violations of the Foreign Corrupt Practices Act (“FCPA”). The disgorgement payments were part of a consent agreement between the SEC and the taxpayer, whose subsidiary allegedly falsified accounting records in order to conceal gifts it made to officials of a foreign government in exchange for business benefits. The taxpayer paid additional penalties for which it specifically agreed it would not seek a tax deduction in a parallel agreement with the DOJ relating to the criminal case against taxpayer’s subsidiary. The IRS concluded that the taxpayer’s disgorgement payments were not deductible business expenses under § 162(f), which prohibits deduction of any “fine or similar penalty paid to a government for the violation of any law” as a business expense.

As explained in the CCA, § 162(f) has been interpreted to bar deductions of civil penalties where they are “imposed for purposes of enforcing the law and as punishment,” but to allow deduction of civil penalties if “imposed to encourage prompt compliance with a requirement of the law”—for example, “late filing charges or other interest charges”—or “as a remedial measure to compensate another party.”  Emphasizing that disgorgement in securities cases has deterrent aims, is a discretionary remedy, and might be required even if there is no injured party or in amounts exceeding actual losses, the IRS determined that whether disgorgement is primarily punitive or primarily compensatory for the purpose§ 162(f) is a fact-specific inquiry. Additionally, disgorgement imposed as a “discretionary equitable remedy” or where the proceeds are used to compensate victims might still be primarily punitive if it resembles forfeiture, which remains non-deductible even when used to compensate victims. With respect to the FCPA disgorgement the taxpayer had made to the SEC, the IRS concluded that its purpose was primarily punitive, and therefore it could not be deducted, because there was no evidence that it was meant to compensate the government or some other party for loss.

The SEC, the IRS, and the Eleventh Circuit have thus articulated three distinct characterizations of disgorgement. To avoid the limitations period of § 2462, the SEC’s position, adopted by the D.C. Circuit in Johnson v. SEC, 87 F.3d 484 (D.C. Cir. 1996), has been that disgorgement is a non-punitive equitable remedy. In the IRS’s view, disgorgement to the SEC may—but perhaps does not always—have a punitive purpose that bars tax deduction. The Eleventh Circuit has equated the statutory definitions of disgorgement and forfeiture, without commenting on whether disgorgement to the SEC is a “penalty.”

Made for the U.S.A Only: Second Circuit Holds That the Dodd-Frank Act’s Antiretaliation Provision Applies Only Domestically

According to the SEC, in fiscal year 2013, foreign whistleblowers accounted for 404 of the 3,238 whistleblower reports received by the SEC (nearly 12%). Recently, the Second Circuit Court of Appeals may have significantly undermined incentives for foreign tipsters to report potential violations to the SEC.

On August 14, 2014, the Second Circuit held that the Dodd-Frank Act’s whistleblower antiretaliation provision (15 U.S.C. § 78u-6(h)(1)) does not apply “extraterritorially” and thus did not cover a foreign tipster’s allegation that he had been terminated for reporting potential Foreign Corrupt Practices Act (FCPA) violations to his employer. Liu v. Siemens AG, Docket No. 13-cv-4385 (2d Cir. Aug. 14, 2014). The antiretaliation provision of the Dodd-Frank Act, which gives employees easy access to U.S. district courts, prohibits employers from retaliating against whistleblowers employees who make certain protected disclosures. The provision incentivizes reporting and facilitates the SEC’s enforcement of securities law violations.

The plaintiff Liu, a citizen and resident of Taiwan, alleged that he was fired from a Siemens Chinese subsidiary after he reported potential FCPA violations and other misconduct to his superiors. None of the alleged events related to Liu’s firing occurred in the United States. Nevertheless, Liu filed suit in the United States District Court of the Southern District of New York claiming that Siemens had violated the antiretaliation provision of the Dodd-Frank Act.

The Second Circuit affirmed the District Court’s order dismissing the complaint with prejudice and held that the Dodd-Frank Act’s whistleblower antiretaliation provision does not apply “extraterritorially.” The Second Circuit reasoned that the Dodd-Frank Act, like any statute, is presumed, in the “absence of clear congressional intent to the contrary, to apply only domestically.” Id., slip op. at 2. And the Second Circuit found “absolutely nothing in the text of the [antiretaliation] provision … or in the legislative history of the Dodd-Frank Act, that suggests that Congress intended the antiretaliation provision to regulate relationships between foreign employers and their foreign employees working outside the United States.” Id. at 12.

Because the antiretaliation provision did not extent extraterritorially, the court found that it did not cover Liu’s allegations since all events related to his termination¾the alleged misconduct, Liu’s discovery of the misconduct, and Liu’s termination¾occurred outside the United States. As such, the District Court correctly dismissed Liu’s complaint. The Second Circuit’s decision will likely impact the willingness of potential whistleblowers outside the United States to report misconduct to the SEC. Moreover, the lack of protection afforded to foreign-based whistleblower may adversely effect on the SEC’s FCPA investigations which usually involve misconduct that occurs outside of the United States. There is nothing in the Second Circuit’s decision, however, to indicate that foreign-based whistleblowers are prohibited from receiving payment under the Dodd-Frank bounty program.

While the ruling clarifies the Dodd-Frank Act’s geographical reach, it did not resolve another outstanding issue, namely whether or not Dodd-Frank applies to reports made internally, as opposed to reports made directly to the SEC.