The War on Corruption or the Building of a Pax Americana? (I)
The Extraterritoriality of American Laws
In the article”The Dollar Racket” I wrote about the passage of a large number of laws in the U.S. in recent years which are extraterritorial in nature. These laws provide for the punishment of individuals and legal entities for engaging in various illegal activities. Under these laws, not only U.S. residents could be subject to such penalties, but nonresidents – companies, banks, and foreign citizens – as well.
The U.S. has more capability to punish nonresidents, or to keep a tight rein on them, than any other country.
First, foreign citizens and legal entities have trillions of dollars in American bank accounts. For example, according to Zbigniew Brzezinski, Russian citizens alone keep about 500 billion dollars in American banks.
Second, the lion’s share of all international transactions are conducted in American currency; these transactions go through correspondent accounts opened in American banks by banks in various other countries.
Third, many foreign companies and banks are registered on the New York Stock Exchange (NYSE); their stocks, bonds and American depository receipts (ADRs) are traded on the American securities market. The NYSE is a leading world trading venue.
Before the most recent financial crisis, its total capitalization was 21 trillion dollars; the securities of 447 foreign companies from 47 countries with a total market capitalization of 7.5 trillion dollars were being traded.
Fourth, many foreign companies and banks acquire shares in the capital of American corporations, open representative offices or branches, and create subsidiaries. In other words, foreign business owns significant assets in the American economy. For example, 20% of assets in the U.S. banking sector belong to foreign banks.
Thus the American government has the capability to fine foreign lawbreakers, block their international dollar transactions, seize various assets, freeze funds in bank accounts, etc., to say nothing of such capabilities of the U.S. authorities as pressuring other governments through the International Monetary Fund, the World Bank, the Bank for International Settlements, and other international financial and economic organizations in which the U.S. has “controlling interest”.
Legal experts have identified the following areas in which the extraterritoriality of U.S. laws is most pronounced: fighting corruption; fighting terrorism; fighting money laundering; human rights violations; protecting competition (fighting monopolies); protecting intellectual property rights; regulating securities markets; fighting tax evasion; and preventing nuclear weapons proliferation. Extraterritorial laws essentially allow the United States to interfere in the internal affairs of other countries and gradually bring them under its control. Such laws are also used to intimidate citizens, politicians, company executives and banks from other countries. One recent example of this type of law is the “Magnitsky Act“.
The laws passed by the U.S. in various years establishing sanctions against Cuba, North Korea and Iran are markedly extraterritorial in nature.
As of today the U.S. has declared sanctions against a total of 14 countries… And it must be emphasized that U.S. laws on sanctions against certain states were perhaps the only category of laws which were extraterritorial in nature for decades.
For example, in the 1970s the U.S. tried to scuttle the “gas for pipes” deal (the “deal of the century”) between the Soviet Union and Western European companies. At that time contracts were made for the delivery of pipes, compressors and special pipe fittings to the USSR.
Washington used various kinds of leverage on the European suppliers; however, in the end the “deal of the century” went through.
Today the U.S. has gotten so carried away with sanctions against countries and companies which have earned its displeasure by collaborating with “outlaw” states that extraterritorial laws in this area are being passed not only on the federal level, but an the level of individual states.
State laws contain bans on the purchase of goods and services from foreign companies which collaborate with countries on the American government’s “black lists”.
The extraterritorial character of American laws abruptly grew stronger after the events of September 11, 2001.
At that time the U.S. passed the law commonly called the Patriot Act, which under the guise of fighting international terrorism gave American government agencies, intelligence and courts more authority to interfere in the affairs of other countries.
Some American laws which were passed a fairly long time ago are just now beginning to demonstrate their extraterritorial potential.
The U.S. Foreign Corrupt Practices Act
One such law is the U.S. Foreign Corrupt Practices Act (FCPA), which came into effect in 1977. It is considered the world’s first law prohibiting the bribing of foreign officials, but until the middle of the last decade it was applied fairly rarely.
The impetus for the passage of this law came from a scandal which broke in 1977. At the center of the scandal was the American aircraft company Lockheed and the Japanese government. It came out that in order to obtain orders in the “land of the rising sun” Lockheed had been systematically bribing high-ranking Japanese officials.
The result of this incident was that the Japanese government resigned and the American Congress drafted and passed the Foreign Corrupt Practices Act on an expedited basis. At that time the law was directed at American companies and provided for fairly harsh penalties for U.S. individuals and legal entities caught bribing foreign officials.
The law had complex consequences for the U.S. On the one hand, it elevated the reputation of America, which declared an uncompromising war on corruption both domestically and abroad.
On the other hand, the law put American business in an unfavorable position compared to foreign companies which practiced bribery to obtain profitable contracts. The laws of other countries could only prosecute those who gave bribes within their own countries, not outside them. Furthermore, the laws of some European countries even encouraged such practices.
For example,legislation in the FRG allows the inclusion of expenses for bribery abroad in operating costs; they are counted as “overhead” and are considered to be expenses for facilitating the promotion of German goods on the world market.
Attempts by U.S. leadership to force other countries to pass laws similar to the FCPA did not meet with success. In October 1995 the U.S. Department of Commerce, in association with the CIA and other intelligence agencies, prepared a classified report for Congress and a brief unclassified version for the public on the use of bribes by foreign competitors of American business.
The report’s authors estimated that in the period from January 1994 through September 1995 American firms had lost contracts abroad in the amount of around 45 billion dollars due to unfair competition from foreign companies which used illegal “stimulation” of the foreign officials responsible for making decisions.
It was only twenty years after the passage of the FCPA that Washington was able to make a breakthrough in getting other countries to join the fight against corruption abroad. In December 1997 in the framework of the OECD, the Convention on Combating Bribery of Foreign Public Officials in International Business Transactions was passed.
The convention obligates the signing countries to pass internal laws providing for criminal sanctions for bribing foreign officials. The OECD convention was ratified by the United States in the middle of 1998, and in February 1999 it came into force.
In January 1999 the Council of Europe adopted the Criminal Law Convention on Corruption. In November 1999 the Council of Europe adopted one more document – the Civil Law Convention on Corruption.
Finally, on October 31, 2003 the UN Convention against Corruption was passed. As of today it has been signed by 140 countries.
The U.S. and Russia have signed and ratified the convention. Countries which have signed and ratified this convention are obligated to provide in their legislation for criminal sanctions for all crimes recognized as such in accordance with the convention.
The convention created certain conditions for the application of the national anticorruption legislation of one country on the territory of other countries.
The problem of corruption has always been acute for any state, but today the external economic aspect of corruption is becoming more and more significant.
International competition for market outlets for high-tech products and services, concessions and licenses for the development of natural resources, the acquisition of assets in the framework of privatization programs, etc. are becoming fiercer.
According to the very conservative estimates of OECD experts, around 100 billion dollars are paid out in bribes every year, and 30% of that amount is from companies promoting their commercial projects abroad.
Many European countries have passed their own laws on fighting corruption (or amended those already in force) after joining the abovementioned conventions. They do not have such a pronounced extraterritorial character as America’s FCPA, with the exception, perhaps, of the UK Bribery Act (UKBA) passed by the British parliament in April 2010 and effective as of July 1, 2011.
The FCPA: A “Sleeping” Law is Set in Motion
In 2007-2008 an abrupt increase in the number of cases being investigated dealing with suspicion of corrupt practices under the FCPA was recorded in the U.S. While in the previous three decades the average number of simultaneous investigations was no more than ten, in 2008 the number of such cases exceeded 100.
It is worth noting that the number of nonresident companies connected with these cases already greatly exceeded the number of U.S. companies.
Such formal aspects as part of a foreign company’s assets and business being on the economic territory of the U.S., participation of American investors (individuals or legal entities) in the capital of a foreign company, or inclusion of a company in the listing of the New York Stock Exchange could serve as the basis for an investigation of a nonresident company.
Even such aspects as a foreign company’s funds passing through correspondent accounts in American banks were taken into consideration. That is, an investigation could be started even if the company had not made any commercial transactions on the territory of the U.S.
And the transfer of money (bribes) could have been made by a person who is not an American citizen or even a U.S. permanent resident. Investigations were conducted (and continue to be conducted) by the Department of Justice and the U.S Securities and Exchange Commission.
Daimler and Siemens (Germany), Statoil (Norway), DPC Tianjin (PRC) and Vetco Gray (Great Britain) – these are only a few examples of non-American companies which have been prosecuted under the FCPA for bribing non-American officials outside the U.S.
First place for the size of fines imposed belongs to this day to the German concern Siemens (2008). Among major cases one could also mention an instance when in 2009 two American companies agreed to pay 579 million dollars in sanctions for various violations of the FCPA in Nigeria.
But the greater part of the investigations conducted by the Department of Justice and the U.S. Securities and Exchange Commission have dealt with nonresident companies. And since 2009 the practice of widespread prosecution of individuals for violations of American law began – not just U.S. citizens, but foreigners as well.
The War on Corruption or the Building of a Pax Americana? (II)
Examples of Actions under the FCPA: Siemens and Daimler
To this day the largest investigation under the FCPA was the case of the German concern Siemens. It was accused of paying bribes in various countries in the total amount of 1.3 billion euros during the period from 1999 through 2006.
In particular, instances were revealed of the concern’s complicity in corruption in Iraq during the implementation of the UN “Oil for Food” program, as well as in such countries as Venezuela, Bangladesh, Argentina, France, Nigeria, Turkey, Italy, China, Israel, Vietnam, Russia and Mexico.
In late 2008 the U.S. Department of Justice and the U.S. Securities and Exchange Commission fined the German concern 800 million dollars for giving bribes throughout the world. In addition, Siemens was obligated to provide an independent auditor with access to its documentation.
It must be noted that even with an amicable settlement and multimillion dollar compensations, non-American companies subject to legal action under the FCPA are monitored for several years by an appointed independent auditor, usually an American lawyer or judge.
This is yet another kind of leverage the U.S. can use on a foreign company.
The top managers of Siemens were subject to penalties as well. In August 2008 a verdict was pronounced against the first guilty party, a former director of the concern who was responsible for sales of medical equipment. He was given a suspended sentence of two years in prison and a fine of 108,000 euros.
There was no direct proof of his guilt; the defendant confessed on his own. Two former Siemens chairmen of the board, Heinrich von Pierer and Klaus Kleinfeld, denied knowing about the illegal payments.
The board members were dismissed, a total of eight people. Each of them had to partially compensate the concern’s losses (penalties of 0.5 to 4 million euros).
The scandal surrounding the German automotive concern Daimler, initiated by the U.S. Department of Justice under the FCPA, was no less sensational.
According to the American Justice Department, the concern created an entire system for bribing officials in 22 countries in order to obtain profitable contracts.
The total amount of bribes in the period of 1998-2008 was assessed at 51 million dollars. In order to avoid court proceedings, Daimler agreed to pay the American government a fine of 185 million dollars on an out-of-court basis.
Corporate monitoring of a comprehensive program for Daimler, particularly in regard to its compliance with the FCPA over the next three years, was entrusted to an American judge. The court also required the concern to take a number of other measures.
First, Daimler was to bring all of its branches into compliance with governing law and the company code.
Second, it was decided that the appointment of local directors and other Daimler branch employees should be made exclusively by the decision of and with the knowledge of the leadership of the company’s central office.
Third, the concern was required to implement an expanded international training program for Daimler employees, including regular conferences, seminars and trainings, as well as information exchange.
Fourth, Daimler was required to create a special department for supervising compliance with anticorruption legislation.
The U.S. Doctrine of “Minimum Contacts”. Americanophobia
It is worth noting that many foreign companies were “snagged” by the American authorities on the basis that the companies were listed on the New York Stock Exchange.
A number of nonresident companies reacted to the increased application of the FCPA by deciding to leave the American securities market.
For example, in May 2010 Daimler announced its intention to remove its securities from the New York Stock Exchange. Daimler financial director Bodo Uebber explained that this step was aimed at lowering administrative expenses and simplifying reporting.
Only a small part of the concern’s stock, approximately 5% of the total amount (the main venue where its securities are traded is still the stock market in Frankfurt-am-Main), is listed in New York.
The main reason for leaving the NYSE is apparently the fact that subsequently there is no need to report to the U.S. Securities and Exchange Commission.
In April 2010 another German concern, Deutsche Telekom, also decided to stop listing its securities on the New York Stock Exchange.
And in February 2011 the public prosecutor’s office in Stuttgart started an investigation on Deutsche Telekom and Volkswagen.
The investigators suspect their former managers, who were in charge of football sponsorship, of corruption. It looks like Deutsche Telekom took preventative measures so as not to pay fines to the U.S. authorities as well.
It goes without saying that many European companies are trying to get rid of American stockholders. After all, if the share of American individuals and legal entities in the company exceeds 10% of the capital, that company must bear full liability under the FCPA.
European banks are no less cautious with regard to their clients. If they are Americans, they may be refused the right to open an account. Of course, in this case the European bank may be wary of falling under the effect of another American law, FATCA (the Foreign Account Tax Compliance Act).
This is a law on the taxing of foreign accounts which was passed in 2010 and has all the marks of an extraterritorial act. In essence, the American Internal Revenue Service plans to turn all banks outside the U.S. into its tax agents and punish non-American banks if they don’t carry out their agent functions properly.
A non-American bank can end up in a situation where it must bear joint liability if an American client does not pay taxes to the U.S. Treasury. And at the same time it can end up in an unpleasant situation connected with corruption under the FCPA.
Legal experts call this the doctrine of minimum contacts. Its essence is that even the most insignificant contact of a non-American company with a U.S. legal entity or individual can lead to the non-American company acquiring the status of a person of the United States.
This is not yet a U.S. legal entity or individual, but it is already an entity which bears legal responsibility under American laws, such as FATCA or FCPA.
The FCPA: The Role of American Intelligence
The main organizations responsible for enforcing the FCPA are the U.S. Department of Justice and the Securities and Exchange Commission.
A condition for the successful implementation of the FCPA is the receipt by the abovementioned organizations of information confirming that bribery of foreign officials by American citizens and companies or nonresidents which are directly or indirectly related to American business and the U.S. has taken place.
Or at least the receipt of information arousing suspicion that corrupt relations have taken place. Or else information that the intention to engage in corrupt relations has taken place (the FCPA punishes intentions as well!).
Even the investigation of the German concern Siemens showed that sometimes there is clearly not enough direct evidence to accuse someone of corruption.
In part the U.S. tried to solve this problem in the beginning of this century, when the U.S. Department of Commerce announced the opening of an Internet hotline so that any private person or company could report corruption and FCPA violations.
After the most recent financial crisis in the U.S. the Dodd-Frank law was passed (signed by the president of the U.S. in 2010, came into force in 2011). Its full name is the Wall Street Reform and Consumer Protection Act.
This law is very extensive (over 2300 pages of text).We will examine only one innovation implemented in it: the institution of financial whistleblowing.
The law provides the employees of companies, both American companies and those non-American companies which have the status of a person of the United States, the opportunity to report violations of American laws to various U.S. organizations and agencies (the Internal Revenue Service, the Securities and Exchange Commission, the Department of the Treasury, the Department of Justice, etc.)
This includes violations of the FCPA. If the violation is confirmed and the violating company is fined, the volunteer informer has the right to receive an average of 10 to 30% of the amount of the fine as a reward.
Obviously, in order for the FCPA to function effectively, all of the above is necessary, but not sufficient. It is necessary to obtain information using special tools and methods.
To put it simply, intelligence agencies must be involved. From almost the very beginning of the law’s operation, the Federal Bureau of Investigations (FBI) has been involved in its implementation, and a special division responsible for the FCPA was even created.
However, from time to time other U.S. intelligence agencies are mentioned in the media in connection with the FCPA: the CIA, the NSA, the Office of Intelligence and Analysis of the U.S. Department of the Treasury and others.
When the Cold War ended and American intelligence agencies were left, as it were, with nothing to do, there arose the threat of their staffs and budgets being scaled down.
However, intelligence lobbyists were able to get their activities redefined in the new conditions. The main area of their activities outside the U.S. is now economic intelligence, and the highest priority task within economic intelligence is the collection of information about instances of corruption which are considered to be violations of the FCPA and a threat to U.S. interests in the world.
For example, the CIA and other American intelligence agencies participated in the preparation of a report from the U.S. Department of Commerce on corruption outside the U.S. which was presented to Congress in 1995.
This report was a request that American intelligence agencies receive a mandate to conduct reconnaissance on the topic of the FCPA in the U.S. and abroad.
The scandal surrounding the revelations of Edward Snowden have made the question of why American intelligence was so active in Europe, more pointed.
Without claiming to have a full answer, one can still assert that it is, in addition to everything else, in order to detect violations of American laws which are extraterritorial in nature.
Information on such violations is needed by the ruling elite of the U.S. in order to establish effective economic and political control over Europe and the world…
Valentin KATASONOV | Strategic Culture Foundation