An $8.9 billion fine shows that foreign banks evade U.S. laws at their peril

June 30, 2014
The U.S. Justice Department announced on Monday that the French bank BNP Paribas has pleaded guilty to two criminal charges and agreed to pay $8.9 billion in fines for over charges that violated U.S. sanctions laws. (Reuters)

Tonya Putnam is an assistant professor at the Department of Political Science of Columbia University

French banking giant BNP Paribas was just hit with an $8.9 billion fine resulting from a combined settlement with federal and state government agencies. The reason? Extraterritorial violations of U.S. laws that prohibit private banks anywhere in the world from using U.S. dollars to transact with Iran, Sudan, Syria and other states under U.S. sanction. The unprecedented size of this penalty, which stems from transactions with Sudanese companies between 2002 and 2007, is raising eyebrows on both sides of the Atlantic—along with European hackles. Especially galling to many, including finance journalist Felix Salmon, is that the laws BNP Paribas violated have little or nothing to do with protecting the international banking system. Instead, they exist to serve U.S. foreign policy goals of isolating politically recalcitrant regimes. France, like the United States, wants to prevent Iran from acquiring nuclear weapons, and both countries condemn the Sudanese government’s brutal actions in Darfur. However, the U.S. and French governments differ on what to do about it. Consequently, U.S. efforts to force foreign banks to follow U.S. policies instead of those of their own governments are a source of foreign resentment … and not only in France.

So, who gets to decide which laws, if any, govern banks, corporations and other non-state entities whose activities affect multiple countries simultaneously? This is a question of growing importance as the world becomes more interdependent. The answer will not surprise you (spoiler alert: it’s the exceptionally powerful states), but the scope and character of the mechanism might.

Extraterritorial restrictions on dealings with political antagonists of the United States grab headlines. But they are far from the only examples of U.S. extraterritoriality. Other areas where the United States has a history of throwing its weight around using U.S. laws and institutions to regulate conduct outside U.S. borders include antitrust, securities, bankruptcy, trademark protection, anti-corruption efforts and human rights.

Only a few states have any real capacity to enforce their own laws extraterritorially on a wide scale. Extraterritorial capacity, in this view, means using ties to a state’s territory, markets and institutions to claim direct legal authority over conduct outside its borders. Because so many large enterprises have links to the United States, U.S. law has considerable reach. Banking is a prime example, since no large international bank can avoid dealing in U.S. currency. For private entities that fear becoming targets of U.S. extraterritorial regulation, the bite is this: The very ties that provide a basis (under U.S. law) for U.S. jurisdiction in the first place are often connected to assets that later can be seized to satisfy penalties for violations.

Transnational actors thus disregard U.S. law at their peril. For this reason, the strategic ones invest heavily in figuring out when, where, and against whom U.S. law might be brought to bear. The motivation is often to evade U.S. law. Even so, the threat of U.S. enforcement affects behavior, keeping it closer to the U.S. ideal than it would otherwise be. This is because selective market avoidance, complex corporate structures, and arms-length models of control provide only so much insulation against U.S. extraterritoriality. Even highly sophisticated entities at times fail to anticipate how U.S. authorities will interpret the scope of U.S. law, and what it requires. They can also miscalculate U.S. enforcement priorities, or the incentives of other private entities to sue in U.S. courts.

All of this, in turn, enables the U.S. government to maintain policies that may be quite unpopular internationally. Notable examples include long-standing U.S. trade sanctions against Cuba, and strict U.S. rules against horizontal market collusion among private firms.

Do options exist for countering unwelcome instances of U.S. extraterritoriality?

Foreign governments have long tried to find ways to restrain the United States with limited success. One emerging possibility for checking U.S. assertiveness is reciprocal actions from the European Union, which now rivals the United States in the size of its internal market. As David Bach and Abraham Newman show, Europe is already well aware that it can leverage trade access to incentivize outsiders to adopt European standards in areas ranging from product specifications to data privacy. However, Europeans have shown few signs of mirroring U.S. extraterritorial practices. The reasons why are complex, but significant.

First, Europeans have long been critical of U.S.-style jurisdictional unilateralism and often underscore its poor fit with international law. Second, regulatory enforcement in Europe is still largely the job of public officials, whereas in the United States private litigants can directly initiate extraterritorial enforcement of many U.S. public laws using domestic courts. Sometimes this entails simply doubling down on those already convicted of criminal violations with further suits for private damages. (Europe is only now beginning to experiment with this type of private enforcement in the competition law arena.) However, it is also common in the U.S. system for private litigants to independently select when, where, and against whom U.S. regulatory authority will be directed, even when this creates problems for U.S. foreign policy.

This is not to suggest that U.S. courts do the bidding of just any plaintiff, American or foreign, that seeks to have U.S. law enforced extraterritorially. Far from it. Figuring out when U.S. courts have applied U.S. laws extraterritorially, when not, and why it matters for international affairs is the subject of my book (nearing completion) as well as my 2009 article in International Organization.

The Department of Treasury’s Office of Foreign Assets Control (OFAC), has engaged in a recent fining frenzy. Coupled with the U.S. Supreme Court’s approval last week of broad extraterritorial discovery of Argentina’s foreign assets to enforce repayment of defaulted bonds, this might suggest a new wave of American legal aggressiveness. However, my research suggests it is actually becoming more difficult to get U.S. federal courts to interpret the extraterritorial reach of ambiguous U.S. laws expansively. This is evident in decisions handed down over the last decade in issues ranging from human rights to securities regulation. This reticence may be a sign of waning U.S. hegemony, or the product of dynamics internal to the U.S. judiciary — or both. What is clear is that a growing coterie of textual literalists on the Supreme Court is doing more to reel in U.S. extraterritoriality using a judicially constructed “presumption against extraterritoriality” than have decades of foreign criticism

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