The New Financial Extraterritoriality

Since 2008, the US Department of Justice has brought numerous criminal actions against major foreign banks for tax evasion, benchmark manipulation, money laundering, sanctions violations, and corrupt payments that took place primarily outside the United States.  These cases, all of which were resolved before trial by non-prosecution agreements (NPAs), deferred prosecution agreements (DPAs), or plea agreements, resulted in unprecedented fines and other financial penalties: nearly $32 billion from 2008 to 2016, solely from non-US global systemically important banks (G-SIBs) in connection with the matters mentioned above.  In many cases, they also imposed structural remedies that compelled foreign banks to take steps such as reforming and expanding compliance programs, terminating employees, hiring external monitors, and exiting certain lines of business—not only in the United States but abroad.

In a new paper, I examine the law and policy of what I dub the ‘new financial extraterritoriality’.  First, I assess the legal theories under which US prosecutors have exercised their authority abroad in light of the US Supreme Court’s recent case law.  In cases such as Morrison v. National Australia Bank, Kiobel v. Royal Dutch Petroleum, and RJR Nabisco, Inc. v. European Community, the Court vigorously applied a presumption against extraterritoriality to curtail the reach of federal statutes, including some that had been widely assumed to apply beyond the country’s borders.  I argue that these decisions provide ample grounds to question DOJ’s broad claims of extraterritorial application of US criminal statutes such as mail fraud, wire fraud and conspiracy, as well as of criminal remedies such as probation.  If this argument is correct, extraterritorial financial prosecutions rest on vulnerable doctrinal foundations.  In the coming years, courts may increasingly face the question: should they be curtailed?

To answer it, I first assess extraterritorial bank prosecutions in light of the separation of powers rationale for the presumption against extraterritoriality, namely to ‘ensure that the Judiciary does not erroneously adopt an interpretation of U.S. law that carries foreign policy consequences not clearly intended by the political branches.’  While extraterritorial bank prosecutions indeed risk creating tensions with foreign governments, they are initiated by the executive branch, which possesses the primary responsibility for managing the nation’s foreign relations.  I note that potential clashes between foreign affairs and financial stability considerations, on the one hand, and criminal deterrence policy, on the other, create thorny problems of interagency cooperation and prosecutorial independence.  Nevertheless, these concerns are alleviated by the emergence of informal consultation mechanisms between DOJ prosecutors and other departments and agencies, through which DOJ can consider their views while avoiding direct Presidential involvement and retaining final decision-making authority.

Second, I look at the broader case for extraterritorial financial prosecutions as a tool of US policy.  Drawing on scholarship on corporate criminal prosecutions, I argue that criminal cases offer a combination of features—strong penalties, investigative capacity, and prosecutorial initiative—that complement civil and administrative sanctions by specialized agencies.  It also can bypass some of the institutional incentives that limit the effectiveness of specialized regulatory agencies as law enforcers.  While unilateral US action may risk international frictions, it is sometimes needed to address failures by foreign governments to regulate practices whose harms materialize in the United States, such as Swiss banks assisting US tax evasion or London-based traders manipulating LIBOR.  The current system of international financial regulation—which rests on voluntary cooperation by national regulators, non-binding standards, and limited monitoring and enforcement—often fails to address these spillovers and leaves gaps that can be ameliorated by unilateral action.  Indeed, I show that in several cases—such financial benchmarks and tax information exchange—US unilateral initiatives have led to beneficial multilateral reforms.

Pierre-Hugues Verdier is Professor of Law and Director of Graduate Legal Studies at the University of Virginia.