Hong Kong companies, even where they have little connection with the US, may need to consider the long arm of US law in their compliance programmes, argue Kyle Wombolt, Global Head of Corporate Crime and Investigations, and Siyu Zhang, Associate, Herbert Smith Freehills.
Stories of record-breaking fines paid by non-US organisations accused of breaking US laws have been a regular occurrence in recent times.
Over the course of the last decade, the US authorities have opened multiple investigations of non-US companies for violations of its Foreign Corrupt Practices Act (FCPA), which have resulted in billions of dollars in fines and disgorgement. Most recently, in November 2013, Weatherford International, a Swiss organisation, agreed to pay over US$150 million to settle FCPA-related charges by US authorities. To date, eight of the 10 largest FCPA-related settlements were entered into with nonUS corporates.
But the FCPA has not been the only statute under which US authorities have sought to charge non-US organisations. Over the last five years, US authorities have brought multiple actions against non-US financial institutions for violations of various US economic sanctions programmes. The most recent, and most significant, example is the action taken against BNP Paribas, a French bank, which agreed to pay nearly US$9 billion to resolve various alleged sanctions violations.
These cases have increased awareness among Hong Kong organisations of the importance of recognising the risk of being implicated in investigations by US authorities and having to pay multimillion dollar fines in consequence. The starting point for addressing that risk is to understand the scope of US laws that have the potential to apply to Hong Kong organisations.
The Foreign Corrupt Practices Act
The FCPA is one of the most actively enforced anti-corruption statutes in the world. The US Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) are responsible for its enforcement and between them have initiated over 400 investigations against corporations and individuals for alleged violations of the statute since its inception. Many of those matters have lasted for years and cost the target companies tens of millions of dollars in penalties and disgorgement, not to mention legal fees and additional compliance costs.
The FCPA includes two key components. The first component is the anti-bribery provision, which, broadly speaking prohibits persons or organisations from providing anything of value to nonUS public officials, political parties or candidates for public office, in order to assist in obtaining or retaining business. The second component is the accounting provisions, which require those organisations that are issuers of securities on a US exchange to maintain:
1. books and records that accurately and fairly reflect the transactions and dispositions of the assets of the issuer, and
2. internal accounting controls that are sufficient to provide reasonable assurance that, among other things, the issuers transactions are executed as authorised and appropriately recorded.
The ‘anti-bribery’ provision may apply to a Hong Kong organisation where:
• it is a US ‘issuer’, that is, it issues securities, including American Depository Receipts, that are listed and traded on a US exchange, or its securities are traded on an over-thecounter market in the US and it is accordingly required to file reports with the SEC
• it is a US ‘domestic concern’, that is, it is incorporated in the US (for example a Delaware corporation) or has its principal place of business in the US
• it is an ‘agent’ of a US issuer or a US domestic concern – this is particularly relevant to a Hong Kong organisation that is a subsidiary of a US issuer or a US domestic concern, or
• it conducts a part of its business in the US, in which case the FCPA will apply to its conduct within US territory.
The accounting provisions apply only to US issuers and have frequently been relied upon by the US authorities in their investigations of corrupt conduct.
The Marubeni cases
The extent of the FCPA’s jurisdictional reach is illustrated by two recent FCPA-enforcement actions against Japan’s Marubeni Corporation.
Marubeni is a Japanese trading company headquartered in Tokyo. It does not have any securities traded in the US and, accordingly, is not a US issuer. Yet, in recent years, the company has paid more than US$140 million to resolve allegations that it had violated the FCPA.
The first such occasion was in 2012, when Marubeni entered into a deferred prosecution agreement with the DOJ and paid a US$54.6 million penalty to resolve allegations that it had violated the FCPA.
The resolution followed an investigation by the US authorities into the conduct of an organisation called TSKJ, a joint venture which was formed to bid for a US$6 billion project to construct a liquefied natural gas, or LNG, facility on Bonny Island in Nigeria. The members of the joint venture included, among others, Kellogg, Brown & Root, a US company, and Technip, a French company which had ADRs listed in the US and was, accordingly, a US issuer. The US authorities investigated an alleged decade-long scheme by the joint venture and its partners to bribe Nigerian officials in relation to the LNG project, and ultimately secured a payment of more than US$1.5 billion by the TSKJ partners to settle FCPA-related charges.
As part of the investigation, it was alleged that TSKJ had hired Marubeni to assist it in winning business related to the LNG project, and had paid Marubeni US$51 million, in part for use as a slush fund for payments to Nigerian officials. Marubeni did not carry out any activities inside the US. However, the US authorities asserted jurisdiction over Marubeni on the basis that it had acted as an agent of TSKJ and each of the joint venture partners. As such, it was considered to have acted as an ‘agent’ of a US ‘domestic concern’ (Kellogg, Brown & Root) and a US ‘issuer’ (Technip), thus bringing it within the scope of the FCPA.
The second case involving Marubeni arose out of an investigation of alleged corruption in Indonesia. Between 2002 and 2009, Marubeni partnered with a multinational organisation with shares that were at one time listed on the NYSE and which had a number of subsidiaries based in the US. Together the two organisations were tendering for a US$118 million contract to provide equipment and services for the Tarahan power project in South Sumatra.
Marubeni and its partner were awarded the Tarahan project in 2005. However, it was alleged that they had engaged consultants to pay bribes to government officials in exchange for assistance in securing the contract, and that the payments were made from, among other locations, a Marubeni bank account in New York to a bank account held by one of the consultants at a Maryland bank. It was also alleged that Marubeni employees had discussed the payment of the bribes on a number of occasions, including at a face-to-face meeting in the US and via various electronic communications. Therefore, while Marubeni was neither a US ‘issuer’, nor a ‘domestic concern’, the US authorities asserted jurisdiction on the basis that Marubeni engaged in acts in furtherance of a corrupt payment in the territory of the US. In March 2014, Marubeni paid a penalty of US$88 million to settle the case.
For Hong Kong organisations the Marubeni cases illustrate the need to consider the potential impact of the FCPA, even where the Hong Kong organisation is not itself a US issuer, organised under US laws, or a subsidiary of the same. The FCPA may reach a Hong Kong organisation where it does business in partnership with a US company, or where some act incidental to its business – for example, a business meeting or a payment – occurs in the US.
The US sanctions regime consists of a number of separate sanctions programmes aimed at various foreign countries and regimes, non-governmental entities (such as terrorist organisations), narcotics traffickers and entities involved in weapons proliferation activities.
The scope of activities restricted by the sanctions regime varies with each sanctions programme and depends on the US foreign policy and national security objectives concerning the subject of the sanctions programme. For example, the US maintains very broad restrictions on trade and investment with Iran and Cuba, but applies more limited restrictions on dealing with Libya, where its restrictions are principally targeted at persons connected with the former Qadhafi regime. Moreover, the sanctions programmes are liable to change. This has been particularly evident in the contrasting developments of the sanctions programmes against Iran and Myanmar, which have, respectively, tightened and loosened over the last three years.
Where a Hong Kong-based organisation is incorporated under US law, it will be treated as a ‘US person’ for the purposes of the various sanctions regimes and thus generally will have to abide by the restrictions imposed by those regimes. For certain sanctions programmes, for example those involving Iran and Cuba, a Hong Kong organisation that is a subsidiary of a US company or is owned by US persons will be treated as a ‘US person’ and be subject to the same restrictions as are imposed on US companies, even though its nexus with the US is limited.
Of potentially more significance given Hong Kong’s importance as a trading centre and import/export hub, a Hong Kong organisation that exports US-origin goods or services to a country subject to US sanctions may violate that programme even if it has no other US connection. This risk is illustrated by a recent case involving Dutch aviation company Fokker Services which, in June 2014, agreed to pay over US$20 million to US authorities in order to resolve alleged violations of various US sanctions programmes stemming from Fokker’s export and re-export of US-origin aircraft parts, technology and services to customers in Iran, Myanmar and Sudan.
A Hong Kong organisation may also run afoul of a US sanctions programme where it seeks to make a US dollar payment to a country or person that is subject to US sanctions. US dollar payments are generally cleared through US-based banks, so US authorities may take the view that by instructing a payment of US dollars to a sanctioned country or person, a Hong Kong organisation is in effect seeking to procure the export of a US-origin service (that is, a banking service) to that country or person in breach of applicable sanctions. This theory is essentially what underpinned the various actions taken against BNP Paribas and a number of other non-US financial institutions for violations of US sanctions programmes.
Hong Kong organisations may become enmeshed in US sanctions even where they are not directly subject to a US sanctions programme if they do business with a country or organisation that is a target of the programme. Indeed, the US authorities have specially designated over 30 Hong Kong organisations because of such dealings, which means that their assets in the US are blocked and US persons are effectively prohibited from dealing with them.
Moreover, certain aspects of the US sanctions against Iran may apply to non-US persons who have little or no contact with the US. For example, non-US organisations may have certain restrictive measures imposed on them that may exclude them from dealing with the US economy if they invest in Iran’s energy sector or provide products or services to Iran.
Finally, the prominence of the US sanctions programmes in and around the Hong Kong marketplace has recently increased even more following a decision by the Hong Kong Stock Exchange which requires listing candidates to take measures to minimise their potential exposure under foreign (including US) sanctions regimes before they are admitted to listing. The mitigation measures required by the exchange may include terminating or transferring business in sanctioned countries, even in circumstances where the listing candidate might not otherwise be subject to US laws. As a result of this, it is now not uncommon to see listing prospectuses include extensive disclosures of business done in sanctioned countries and the measures taken to terminate that business.
The FCPA and the US sanctions programmes are two examples where the long arm of US law has the potential to reach Hong Kong organisations with potentially significant monetary and compliance consequences. Accordingly, those organisations will be well served to take note of the potential risk and plan their operations accordingly.
Kyle Wombolt, Global Head of Corporate Crime and Investigations, and Siyu Zhang, Associate, Herbert Smith Freehills.
Special thanks also to James Dalton, Senior Associate, for his help in the preparation of this article.