Threat of US litigation: time to wake up

Threat of US litigation: time to wake up

The extradition and arrest of UK executives by US authorities has raised the stakes for doing transatlantic business. Jeremy Cole sounds the alarm about US law

The ‘special relationship’ between the US and the UK has been somewhat tested
of late. The sight of British businessmen being extradited and then manacled on
arrival in the US has given many executives in the UK reason to fear ‘good old’
Uncle Sam.

It began earlier this summer, with the extradition of the ‘NatWest Three’ to
the US to face fraud charges following the collapse of Enron. They were British
bankers, whose alleged criminal acts had been committed in the UK, with the
losses being suffered by a British company. There then followed the arrest of
several British executives of online gaming companies, for breaching
anti-gambling laws in the US, even though their companies had no physical
presence there.

The message that British business must pay heed to is that US law is
extending its reach. British executives must wake up to the reality of the risk
of litigation in the US and manage its potential effect on their businesses

Human rights

The extra-territorial jurisdiction of US courts is not a new phenomenon.
Washington has always been willing to empower its courts to look beyond its
national borders to protect US interests.

One of the oldest and best known examples is the Alien Torts Statute (ATS).
This statute consisted of one sentence in the Judiciary Act, which dates back to
1789. This has enabled corporations to be sued in US courts by non-US citizens,
alleging torts in violation of international law. As a result, the US courts
have been called upon to determine human rights claims against a range of
industries as diverse as mining, banking and computing.


An even more topical focus for the US extra-territorial jurisdiction is
contained in its anti-terrorism laws.

Much of the legislation is concerned not with the actual perpetrators of
terrorist atrocities, but with those who support and assist them.

The Anti-Terrorism Act (ATA) enables a US national who has been a victim of
international terrorism to sue in the US federal district court, even where that
act occurred outside the US. Obviously, the ATA permits victims to sue for the
direct commission of terrorist acts, but it also permits suit on the basis of
aiding and abetting or conspiracy.

An example of one such action was recently filed in the US against Arab Bank
– a Jordanian bank with a New York branch office.

The claim was brought under the ATA by the families of victims of terrorist
attacks committed during the second Intifada, the wave of Israeli-Palestinian
violence, which began in September 2000. They accused Arab Bank of assisting
terrorists by providing financial services to charitable organisations, which
were said to be ‘fronts’ for Hamas, the militant Palestinian Islamic movement.

Arab Bank filed for a motion to dismiss, but this was rejected at the end of
2005. Arab Bank is now facing the prospect of expensive discovery proceedings in
the US.

Online gaming

Another victim of the increased reach of the US courts is the online gambling
sector. Online gambling is illegal in eight states in the US. However, the key
players in the industry derive the majority of their revenues from the US – with
PartyGaming deriving around three-quarters of its revenue and SportingBet
earning around two-thirds from the US.

The problems for this fledgling industry first became apparent in July, when
David Carruthers, the chief executive of Betonsports was arrested under
anti-gambling laws, as he changed planes at Dallas Forth Worth airport.

Share prices immediately began to plummet across the sector, as many
investors were alerted to the determination of the US authorities to enforce the
anti-gambling laws. Other arrests followed, including Peter Dicks, the former
chairman of SportingBet, who was arrested in New York in September on a
Louisiana warrant.

And then, a potential death knell for online gaming in the US was sounded,
when Congress passed the Unlawful Internet Gambling Enforcement Act earlier this
month. Once signed by US president George Bush, this law will make it illegal
for financial institutions, such as banks and credit card companies, to
facilitate payments to online gambling sites. The effect on the sector – causing
£4bn to be wiped off its value amid spectacular crashes in share prices – was
compared to the bursting of the dotcom bubble.

A political dimension?

It is clear that this increasingly aggressive stance with respect to
extra-territorial jurisdiction has been driven largely by US politics.

Individuals such as David Carruthers and industries such as the online gaming
sector have arguably been caught in a ‘perfect storm’ of political factors in
the US: terrorist attacks on 11 September; the US’ desire to protect its
citizens; the Department of Justice’s determination to pursue white collar crime
in the light of corporate collapses such as Enron; and the Republican
government’s increasingly conservative agenda, which seeks to export the US’
protectionist approach to issues such as gambling outside its national borders.

While there may be little that British business can do about these political
factors, it is clear that non-US executives must do all they can to guard their
businesses and themselves against the risk of litigation in the US.

Vital protection

In order to reduce the risk that your business will fall foul of the
extra-territorial reach of the US courts, ensure that you take some basic, but
vital, steps:

• Know the law: always take advice from local attorneys. Ensure that your
company’s policies and provisions comply with both UK and US law;

• Obey the law. Comply with the spirit, not just the letter, and do not seek
to cut corners. Ensure that officers and key employees are educated as to the
potential of exposure to US litigation risk;

• Be proactive about the risks which your business faces by undertaking a
legal risk audit. Ensure that it is clear how acts outside the US may still come
within the jurisdiction of the US courts;

• Always comply with relevant regulations and scrutiny procedures, for
example money laundering checks. Where advice or authorisations are necessary ­
both internal and external ­ ensure that these are clearly recorded and placed
on the file;

• Ensure that any US subsidiaries are effectively and proactively managed,
and are genuinely discrete corporate entities staffed with their own employees
and have authority to make their own decisions. Respect corporate formalities as
between the two entities;

• Know with whom you are doing business. Undertake thorough due diligence on
US business partners. Wherever possible, complete transactions and exchange
funds outside of the US; and

• Incorporate as much protection as possible into any contract. Prevention is
better than cure, so to keep disputes out of the US courts, include non-US
choice of law, non-US forum selection and arbitration clauses.

Exradition from the UK to the US

1. No need to have entered the US

A US court can exercise extraterritorial jurisdiction over individuals who
have never entered the US. US law enforcement authorities aggressively assert
extraterritorial jurisdiction over a number of categories of alleged criminal
activity. These offences may occur in the course of otherwise legitimate
commercial and financial activities:

• Competition/antitrust allegations (price fixing and cartel behaviour);

• Money laundering (when any part of the alleged conduct, including acts
committed by individuals other than the foreign defendant, occurs within the

• Internet gambling (including hosting servers or advertising for an internet
gambling site);

• Defective products causing death (entering a defective product or drug into
a US market with knowledge or reckless disregard as to a substantial risk that
it may cause death and it in fact causes death);

• Aiding terrorism (criminal liability for executives of financial
institutions that provide services such as opening bank accounts for terrorist
operations or ‘foreign terrorist organisations’ designated as such by the US
government);l White collar crime/fraud (bank fraud, wire fraud, mail fraud);

• Criminal securities fraud (fraudulent schemes affecting US investors can be
subject to US jurisdiction even if the shares are not issued on a US securities
exchange or are not traded as an American Depository Receipt (ADR) if they are
otherwise linked to or have an effect in US securities markets).

The fact that a potential defendant carried out their participation in the
enterprise or conspiracy exclusively from the UK without ever having entered the
US is not material. Once the crime or conspiracy substantially touches the US,
all participants/conspirators are liable to stand trial in US court proceedings.

Extraditable offences

The UK courts will permit extradition to the US if the alleged conduct would
have been illegal in the UK regardless of what the offence is called in either

Individuals can be extradited for aiding or abetting, conspiracy, or being an
accessory before or after the fact, as well as for primary participation. In the
US, aiding and abetting liability requires only that the defendant knowingly
provided assistance to the primary wrongdoers.

Circumstances in which extradition will not be granted

Extradition is barred when the individual has already been convicted or
acquitted of the offence for which the extradition was requested, either in the
US or the UK ­ this is known as double jeopardy. But if the UK courts have
chosen not to prosecute an individual for an alleged crime, they can still be
extradited to the US.

Other bars to extradition include an undue passage of time, or potential
prejudice for racial, religious, or other discriminatory reasons.

Jeremy Cole is a partner in the international dispute resolution team at

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