US imposed $60 billion in penalties against companies for actions outside the US violating US administrative and substantive law including AML, antitrust, combating the financing of terrorism, criminal, Dodd-Frank, FATCA, FCPA, regulatory, RICO, sanctions, Sarbanes – Oxley, securities and others. Implementing effective compliance, remediation, mitigation, risk management and whistleblower policies for companies transacting outside the US.

1. $60 Billion in US Extraterritorial Enforcement
Penalties in 2013-15, Viable Company Responses.
Hong Kong
Paul Backer, J.D., LL.M.
Member NYS Bar
Fall 2015
backerpaul@gmail.com
1

2. Company Takeaway
• Extraterritorial enforcement will increasingly impact
companies as well as financial institutions.
• Shift from substantive law (court) to administrative
law (agency) enforcement key driver of ongoing
expansion of size and scope of US enforcement
penalties.
• Effective internal policies mitigate impacts.
• External programs can impact regulatory drafting,
administrative procedures and application.
2

3. Extraterritorial Enforcement
• WSJ: 2013-15, $60 billion in non-US enforcement penalties. Per
World Bank: GNP of half of the world’s nations is less.
• Shift to agency enforcement from court proceedings: rapid
growth of size, number and scope of penalties. US enforcers
much more rapidly and predictably impose larger penalties.
• Raises issues of sovereignty and respect for local law.
• Dramatically impacts global transacting, yet a lack of agreed terms:
extraterritoriality, extraterritorial enforcement, long arm, cross border
jurisdiction. Imagine contract or real estate law if no settled terms.
• Discussing extraterritorial enforcement: what is it, why it is relevant,
importance of legal ideas, your views, effective policies.
3

4. Enforcement Overview
• Defined: enforcement of own laws and regulations
outside own borders. Ability to impose own will, control
others’ conduct, promote policy interests and extract
penalties.
• Enforced by US against non-US actors for non-US
conduct, often without substantive US jurisdiction nexus,
increasing reliance on agency not court enforcement.
• FATCA made non-US financial institutions agents of and
therefore, regulated by the US Internal Revenue Service.
HSBC, Bank of China now effectively agents of US IRS.
4

5. Enforcement Overview (2)
• Blockbuster penalties, hundreds of millions, cumulatively
tens of billions of dollars annually against companies, to
a much lesser extent physical persons registered and
residing, HQ and primary operations, shareholders,
clients and transactions outside the US.
• Commentators: US extraterritorial enforcement, one
of history’s greatest wealth transfers.
• Targets (non-US financial institutions (banks) and
companies, US nationals abroad) seen as wealthy,
unpopular, overprivileged and largely defenseless.
5

6. Enforcement Overview (3)
• Legal and compliance departments of non-US
companies failed to anticipate shift to agency led
enforcement. Erroneously applied old paradigms
(litigation) to a new reality (agency enforcement).
• Brought a knife to a gun fight.
• Implementation of effective company policies mitigates
impacts, reduce penalties by tens of millions of dollars.
• Implement prevention policies to protect company.
6

7. Legal Ideas Powerful
• Legal ideas shape the world.
• Collateralized debt securities (CDS) - bundle, strip and
securitize mortgages. Raised RE prices worldwide.
Invent and implement CDS impacted everyone.
• Theories and application of US extraterritorial
enforcement now being shaped, companies’ external
policies can play important role.
• Are legal ideas heroic? Expertise protects HK.
7

8. Global impact of US
Extraterritorial Enforcement
July 2014, BNP Paribas pled guilty to criminal charges, to pay
almost $9 billion to resolve accusations that it violated US
sanctions against Sudan, Cuba and Iran.
“Unprecedented” move - regulators ban BNP for a year from
conducting some dollar transactions. An international bank
unable to transact in dollars, immediately noncompetitive.
BNP agreed to pay $9 billion rather than litigate. $60 billion in
penalties in two years. Decoupling of penalties from actual
risks to US policy or systems?
8

9. The Russian Kerfuffle
• US Sanctions led to a rapidly declining Russian economy, fall
in trade except raw resources, capital flight, brain drain, failing
financial institutions, unemployment, falling real estate prices.
• US systems indispensable. 2014, Russian Embassy in
Kazakhstan paid for insurance to a Russian government
controlled insurer in Moscow. Payment frozen in JP Morgan
Chase NY.
• Your view of Extraterritorial Enforcement? Protects against
abuse by overprivileged bad actors or undermines legitimate
sovereignty and local law? UnionPay and CIPS as pushback?
9

10. Explosive Growth of
Extraterritorial Enforcement
• From Pax Americana to Lex Americana. Achieves sound policy
by non-lethal means or undermines local authorities and law?
• Westphalian Peace Conference of 1648. Sovereignty principle.
• Companies support ANY single standard. Governments
seek to defend own authority and own standards, disunity.
Companies economically motivated and pass costs,
governments pursue policy, largely insensitive to costs.
• Regulatory blocs emerging, US/UK share penalty proceeds.
Current US/EC conflict on swaps, future conflict with China?
Emergence of China led bloc? AIIB, CIPS and UnionPay.
10

11. Your view of Extraterritorial
Enforcement?
• Transforms international transacting and financial markets.
Tens of billions in penalties and new legal risks. Distorts
markets, products, client base or punishes powerful political
and economic bad actors?
• Enforcement moving from substantive law to administrative
law. Erosion of territorial jurisdiction.
• Enforcement annually yields billions. Financially and politically
cheap means to impose state will. No delays or casualties.
• Enforcement will grow in scope and impact. Non-US
companies must implement programs to mitigate impact.
11

12. Proper Function of Law?
• Integrate for efficiency and to implement global best
practices. US law has longest successful track record of
cost effectively governing large markets, low cost large
transactions. Extraterritoriality is broadly positive.
• Protect local values, history, views. Extraterritoriality is
broadly negative, undermines sovereignty.
• Seek justice of every situation. Extraterritorial enforcement
but differently administered?
• Corporate finance and transacting strongly integrative.
12

13. Substantive Aspects
• Broad scope of covered activities.
• Subject companies.
• Enforcers.
• Benefits disputed.
• Jurisdiction, erosion of territorial principle.
• Enforcement standards.
• Drivers of increased enforcement and its likely evolution.
• Responding to extraterritoriality.
13

14. Broad Scope of Covered
Activities
• Civil litigation under the Alien Torts Act, anti-money
laundering (“AML”), anti-bribery (“FCPA”), anti-tax
evasion (“FATCA”), anti-terrorist financing, anti-
trust, criminal prosecution (“RICO”, drug trafficking,
sexual exploitation of children), privacy and data
protection, derivatives swaps under Dodd-Frank
Act, know your client (“KYC”), sanctions and the
Volcker Rule under Dodd-Frank Act and more.
14

15. Subject companies
• Primary impact on non-US financial institutions and
their executives: banks, broker/dealers, custodians,
transfer agents, insurance companies, investment
funds.
• Other targeted companies include trading
companies and active non-financial foreign entities.
15

16. Enforcers
• Courts no longer dominant players in setting and enforcing
blockbuster penalties.
• Federal enforcing agencies include Commodity Futures Trading
Commission, US Department of Justice, US Department of the
Treasury including OFAC and FinCen, Federal Deposit Insurance
Corporation and the Federal Reserve. Likely other agencies.
• State enforcing agencies include New York State Department of
Financial Services (“NYDFS”) as the primary player and others
such as the California Department of Business Oversight.
• Emerging international alliances driven by revenue sharing, such
as US and UK regulators.
16

17. Benefits Disputed
• May 20, 2015, US government: six banks agree to pay
$5.6 billion for FX manipulation and “breathtaking” anti-
trust violations.
• The Economist on the same matter: “no individuals
charged with any crimes and some confusion as to what
exactly the banks were admitting to and [to] what effect”.
• WSJ estimates that largest banks paid $60 billion in
penalties to settle allegations over past two years.
Administrative v. substantive law.
17

18. Benefits Disputed (2)
• May 20, 2015 Benjamin Lawsky, NY State’s first
Superintendent of Financial Services announced
Barclays to pay $2.4 billion and to fire employees
for a scheme to manipulate FX. Was NYS injured?
• Fine split: NYDFS $485 million, Commodities
Futures Trading Commission $400 million, US
Department of Justice $710 million, US Federal
Reserve $342 million, UK Financial Services
Conduct Authority (FCA) $441 million. Incentives.
18

19. Jurisdiction
Historically,
becoming
subject
to
a
state’s
territorial
jurisdiction
required
a
voluntary
act
in
that
state:
entry
into,
incorporation,
acquiring
a
license
to
engage
in
a
regulated
business,
transacting,
targeting/impacting
residents,
otherwise
acting
to
create
a
jurisdictional
nexus
leading
to
being
regulated,
governed
and
punished
by
state
enforcement
authorities.
Now,
de
minimis
nexus
such
as
use
of
email,
payment
or
communication
systems
may
be
jurisdictionally
suf?icient
over
non-­‐US
companies
and
persons,
even
without
a
US
presence.
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20. Jurisdiction (2)
• The US dollar is the global payments currency, US
payments systems handle most of the world’s
transactions, currency trading and transfers. US
financial markets are a leading global funding
source. US telecom and internet infrastructure
dominant.
• Use of systems or actions posing a threat to their
stability or to US foreign policy or security interests
serve as basis for extraterritorial jurisdiction.
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21. Jurisdiction (3)
• Emerging arguments for “worldwide” application of
US criminal law. Bitcoin law review article.
• Courts consistently opposed extraterritoriality
absent statutory language or legislative history.
• No policy or national interest in a worldwide
substantive law jurisdiction. Scarce resources,
forces US to subsidize foreign controversies.
Agency enforcement, no cost disincentives.
21

22. Jurisdiction (4)
• US Supreme Court, “United States law governs
domestically, but does not rule the world.”
• 1985, the NY Southern District Court, “We start with
the proposition that the laws of any jurisdiction
apply only to activities within its borders unless
there is some indication to the contrary.”
• 2013, Second Circuit Court, “absent specific
authority from Congress, the federal government
cannot prosecute foreign activity.”
22

23. Enforcement Standards
• Enforcement standards vary broadly, from strict
liability of sanctions enforcement by the US
Department of the Treasury Office of Foreign Asset
Control and the US Department of Justice to
substantive due process rights in civil and criminal
(tort, anti-trust) litigation before the courts.
• Financial regulation enforcement, middle between
strict liability and substantive due process.
Effective company policies impact enforcement.
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24. Enforcement Standards (2)
• Administrative law and agencies materially differ
from courts and substantive law.
• Agency enforcement is destabilizing, limited due
process, limited instructional value. Court
enforcement: stabilizing, written record.
• Agency proceedings, documentation not
published. Different staff and skill sets.
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25. Drivers of Increased
Enforcement
• Bloodlessly achieves state policy objectives. Pax Americana v.
Lex Americana. No loss of soldiers. No political costs.
• Blockbuster penalties show justice done. Popular outcomes
against the unpopular, unprepared, politically defenseless.
• Increasing technological data storage and processing capacity.
• Tens of billions annually go to federal and state budgets.
Agencies unconcerned with compliance costs.
• Estimated $600-800 million annual FATCA revenue v. imposed
annual compliance costs estimated at $8 billion+. 1000%.
25

26. What is to Come?
• Expanded scope and impact of extraterritoriality.
• Material expansion of whistleblower status and programs.
Aug. 2015, broader SEC view.
• Accelerated shift from court to agency enforcement.
Agencies faster, more predictable, generate revenue. De
minimis jurisdiction and standing.
• More settlements rather than litigation.
• Regional pushback: adopt own extraterritorial regulations and
statutes, implement regional settlement and payment systems.
26

27. Responding to
Extraterritoriality
• Government - greater national agency cooperation
through IOSCO and other groups. Increased
mutual regulatory substitution recognition.
• Academic - HKU and other law, compliance and
policy programs, establish knowledge centers,
coordinate with other academic institutions.
• Company - lobby, influence drafting, definitions,
education, internal company programs.
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28. Extraterritorial Enforcement
Drivers
• Convergence:
• Laws and regulations
• Education, training, experience sharing
• Transacting language
• Transacting currency
• Payment and Settlement infrastructure
• Communication/Internet infrastructure
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29. Extraterritorial Enforcement
Drivers (2)
• Increased capacity, decreased cost of data:
• Gathering
• Storage
• Processing
• Mining and analysis
29

30. Conclusion
• Lex Americana, move from convergence to coercion.
• Former NYDFS leader, “Surprised how easy it was.”
• Agency staff quality, policies, procedures, penalty
setting, and incentives differ materially from the courts.
• Substantive legal arguments, appeals to international
law not effective in administrative law environment.
• Normative or cost arguments fail against multi billion
dollar revenue streams to federal and state budgets.
30