Unit 3: Discussion

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Directions

1. Locate a current article (within the last 2 years) from a professional journal (such as Harvard Business Review, Wall Street Journal, etc) that deals with a topic from this unit’s chapters.
2. Brief the article and attach it to the post (do not copy and paste the entire article into discussion).

 

• Textbook Readings

  Jennings: Chapter 7 – International Law
  Jennings: Chapter 8 – Business Crime

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CHAPTER 7

INTERNATIONAL LAW

LECTURE OUTLINE

7-1 Sources of International Law

7-1a International Law Systems

• Common law systems (See PowerPoint Slide 7-1)

▪ England
▪ United States

• Civil or code law

▪ Statutes or codes are very detailed; little reliance on precedent
▪ France, Germany, Spain

• Islamic law (See PowerPoint Slide 7-2)

▪ Religious tenets integrated
▪ Combination of Islamic law and colonizers’ laws

• Communism (prior to collapse)

▪ Non-precedential
▪ Non-religious

7-1b Nonstatutory Sources of International Law (See PowerPoint Slide 7-3)

• Language – some areas require certain language

• Environment and technology

▪ How good are phone wires?
▪ Means of communication
▪ Reliability of communication

• Authority: role of lawyers and negotiators

• Nonverbal behavior

▪ Silence and its role
▪ Gestures

• Time concept

▪ Monochronic nations: time is everything (U.S., Great Britain)
▪ Polychronic – rest of the world

7-1c Statutory Sources of International Law

• Contracts for the International Sale of Goods (CISG) (See PowerPoint Slide 7-4)

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▪ 1980 Vienna Convention is another name
▪ Adopted by 60 countries
▪ Designed to provide an international UCC and its convenience
▪ Voluntary use by parties to a contract, even in adopting countries

• Tax law: international business structures that reduce rates (See PowerPoint Slide 7-5)

7-1d Treaties, Trade Organizations, and Controls on International Trade

• Tariffs: costs of goods between countries (See PowerPoint Slide 7-6)

• Nontariff controls over trade

• The European Union (See PowerPoint Slide 7-7)

▪ 15-member group and correspondent members
▪ One currency in 1999 (Euro)
▪ Created by the Maastricht Treaty
▪ Established European Parliament and European Court of Justice (ECJ)
▪ 300 directives in place for governance
▪ Britain voted to exit in 2016 (Brexit)

FOR THE MANAGER’S DESK − FIGHTING AND WINNING: THE INTERNATIONAL THREAT OF

PIRATES: Discuss the problems with pirates and their activities in international waters. Explain the difficulties

in taking legal action against them. Discuss also the increasing number of pirate attacks and what shipping

companies, cruise lines, and even private yachts should do. “Just pay the ransom.” Terribly morally sycophantic,

eh?

I hope after you read what appears below that you will understand there really is very little subjectivity in what

is expected from you. You are developing a practical set of skills for analyzing tough questions.

Here are some ideas on answering the question which was to offer a list of advice, issues, and concerns. I offer

the following, all within the framework of what you have studied so far. Remember McNamara’s thoughts on

Vietnam, “We didn’t ask enough questions.”

1. Those Numbers

a. $25 mil – not a great deal of scratch for an international shipping company to lay down – we don’t know
how this relates to the actual financial picture for Transnational and that is one of the questions. Sounds

callous – can we afford to pay the ransom? But, there is method in this madness of asking these

questions (see below).

b. Numbers require you to go up and down and across the chain, so you have some numbers effects that
are not easily quantifiable. You can also do stakeholders here if you want and analyze cost and

stakeholders together:

✓ Impact on Transnational’s costs going forward.
✓ You can always pay, but there is always the next set of pirates and a new demand.
✓ Once pirates know you pay, your negotiation power is somewhat reduced.
✓ How long can Transnational continue to follow the “Just pay the ransom” approach to resolving

these pirate attacks? This is where the big numbers picture comes in. And your Donaldson comes

in here. With certain moral absolutes, where are you as a company? Given the reality of pirates,

does the company need a new business model? Does the company need new security measures?

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Different routes? Different ways of training crews? Maybe new routes that avoid high-risk pirate

areas? Maybe revisiting the whole international business transport model?

✓ Not paying and employee death (think Kelly aristocracy) is bound to have a negative impact on
recruiting new employees and wages will increase because international barge work just got a much

higher risk, and risk demands increased pay.

✓ Families of employees – going to get some lawsuits on this one.
✓ Customers – higher price issues depending on which way you go as well as the risk of a boycott

(Nestlé case gives us background for this); let 25 employees bite the dust because you don’t

negotiate with pirates and there might be some backlash.

✓ Insurance costs go up – maybe uninsurable depending upon what Transnational does and the results.
✓ Classic sunk cost pressures here.
✓ Other companies that do shipping are affected because pirates are emboldened when they get what

they want.

✓ Transnational’s shareholders will be affected by the decision no matter which way you turn on this
one – there can be bad reaction either way (payment or no payment).

✓ Davis’s early warning and a previous industry accident put you in the position of being aware of a
risk and having done nothing – this coming out is problematic, especially if you opt not to pay.

✓ This is a low probability (maybe medium probability, depending upon where the ship is sailing and
off the coast of Africa carries higher probability than other areas)/high risk event.

✓ If you pay, costs will increase; the pirates live to play another day (from the movie “Speed,” with
an ex-cop demanding a ransom.

✓ If you don’t pay, you have the employees and their families as stakeholders and the fact that Davis
alerted management to the issue but no one took any steps – this is classic Nash – how did you get

in this situation in the first place? You are here largely because the Davis issue was unresolved.

c. Transnational undertook its business model without thinking through the real costs of this type of
business, costs that include this ultimate confrontation between human life and continuing existence and

profits.

2. The Law

a. International waters mean a certain degree of lawlessness.
b. If you call it a “ransom,” then there is no illegality.
c. If you call it a “bribe,” then Transnational may have issues as a US company (something we will cover

next time in class).

d. You have one of the areas in which no country has jurisdiction.
e. The US does have the right to protect its citizens in international waters, so there is the thought of

involving the U.S. government (something that was indeed done in the previous pirate attack that Davis

referred to).

3. Examine Categories

a. This is a classic “condoning unethical conduct” if you pay the pirates.
b. If you don’t pay the pirates, it is organizational abuse, because we probably all can agree that letting

employees get bumped off may not be a good morale booster or HR policy.

c. Underlying this will be hiding information – like Merck, Manville, Dow, company was aware of an
issue but took no action or steps to develop policies, processes, procedures, resolution prior to the time

the pressure of this situation hit.

d. Were we saving money by not having necessary precautions and security on board? Organizational
abuse.

e. There is also a classic balancing of ethical dilemmas here – 25 human lives at stake, but the implications
of payment are significant for so many others who will be affected.

4. Checks for Rationalization, Perception, Bias, Language

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a. “Bribes” vs. “ransom”.
b. Davis sees his perspective.
c. Do we really understand the pirates and their motivation? Is there something in our ethnocentrism that

might provide some insights and answers about their behavior, choices, and willingness to negotiate?

d. Employees believe the company credo on bribes is paramount.
e. Is it a “cut your losses” situation (i.e., loss aversion)?
f. Diagnosis bias – is the problem the pirates or was it the lack of training; lack of security procedures;

lack of security plan in place? If the cause is something other than just “bad pirates, evil pirates,” there

may be an effect on the decision.

g. The outcome is presumed—going both ways.
h. Is it possible that the rules of the high sea are different (Sadhu) and that everyone in shipping buys into

these risks?

i. “It’s a gray area.”
j. “Everybody else just pays the bribes.”
k. “This is the way we have been doing it.”
l. “If we don’t do it, another company will and we will have suffered because of our stance.”
m. Time pressure because of pirates’ deadline.
n. Sunk costs and the draw to recover them.
o. We can fix this; we always have in the past.

5. List Those Affected by Your Decision

a. Did a fairly good job as part of numbers (see above).
b. Transnational’s reputation.
c. Transnational’s shareholders.
d. Creditors for Transnational and the ability to raise capital.
e. Transnational’s employees – both those on the boat and otherwise.
f. Other shipping companies because decision here affects their ability to stop piracy, depending on what

Transnational does.

g. Employees who work international shipping company boats.
h. U.S. government’s foreign policy and diplomacy.
i. Military forces as decisions are made about deployment and use of force.
j. Insurers for company, cargo, and

employees.

k. Effect on insurance industry.

6. Decide Your Role and the Role of Business

a. Utilitarians – do the most good for the most people – losing 25 lives now could save million.
b. Natural law – human life is paramount and policies on bribes take a back seat to preserving human life.
c. Rights – there are the rights of the employees, but there are also the rights that exist in commerce.
d. Rand and self-interest – in whose self-interest is the death of the employees? In whose self-interest is

the preservation of their lives? There is great depth to be found in just exploring this issue.

e. Everybody knows the high seas are tough territory – all part of the game – and we bought into it,
employees, companies, etc. (Albert Carr).

7. Apply Questions

a. There is a slip into the either/or conundrum here – either we pay the bribe or we lose the lives.
b. Is there “wiggle room” here?
c. How does Transnational define itself? Is the no-bribes policy part of its credo? What about human life?
d. The issue is framed only one way, “To pay or not to pay,” and that framing costs us the perspective of

options.

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e. Flaws in the “to pay or not to pay” are that you can’t really trust the people you cheat with; they will
throw you under the bus. These are pirates – even with payment you may not attain the release of the

employees.

f. Reframe to think of country assistance, military options, possibility of the release of some in exchange
for partial payment, a way to reduce the likelihood of employee injury if you do fire upon.

g. The headline test is awful no matter what (and the fact that you knew does not help either way).
h. You could discuss consequences here (WSJ).
i. Blanchard and Peale – The element of conscience – even with logic on your side, the loss of employees

will be tough to live with – see our discussion of Andrew Carnegie and his response to the Homestead

rebellion when the suppression of union activities cost employees their lives.

j. If I were one of the employees, how would I want this issue resolved?
k. Can I see alternatives or have I fallen into the either/or conundrum?
l. Classic Laura Nash – how did we get in this situation in the first place?

8. Rely on Cases and History

a. Facts give you information that this type of piracy has happened before – how was it resolved? What
strategies did that company use? Can we use

them?

b. What do we risk if we do not see all of these issues?
c. Seems to be a failure to get input here.
d. What other companies have faced similar life-and-death dilemmas and how have they responded to

them?

e. Can we get help?
f. Have others developed a strategy?
g. The likelihood of all of our lack of ground work on this issue coming out is 100%.
h. If we assume our inaction will become public, how should we resolve this stand-off?
i. Explore alternative resolutions.
j. Recall Merck, Dow, Manville and the costs of their lack of candor – Transnational knew of issue but

took no action – problematic position no matter which way they turn.

k. Maybe this is an inherently dangerous activity that cannot be controlled, in which case, do they need to
reformulate where they are headed?

9. Incorporate Strategy

a. Thinking long term, what effect will this decision (regardless of what it is) have on the company?
b. Is this an isolated incident or is it part of an evolving problem that requires involvement of the

international community?

c. If I am working to resolve the problem internationally, can I proceed on a case-by-case basis until the
international community has a resolution, help, etc.?

d. Where do my individual positions and postures fit when there is movement in a different direction that
will eventually solve the issues?

e. Whose is in charge here? Is this Transnational’s responsibility, and if it isn’t can they be excused from
their “no bribes” policy?

• The WTO (See PowerPoint Slide 7-8)

▪ GATT
▪ 159 member nations
▪ Trying to work through this approved concept of free trade
▪ Establishes World Trade Organization (WTO)

 Has Dispute Settlement Body (DSB) – arbitration

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 Most-favored nation (MFN) status gets more favorable trade treatment
 Can impose fines

• The North American Free Trade Agreement (NAFTA) (See PowerPoint Slide 7-9)

▪ Implemented over 15-year period
▪ Canada, U.S., and Mexico: seamless trade

• Prohibitions on trade: individual nation sanctions (See PowerPoint Slide 7-10)

▪ International tensions politically spill over into trade, e.g., U.S. and Iraq
▪ Primary trade sanctions: can’t do business with countries

 Can be limited in scope; e.g., during war
 Can be limited to items; e.g., all but food and medications

▪ MFN, or “most favored nation”, has no trade restrictions
▪ Secondary boycott

 Original country is boycotted
 U.S. will not do business with any company that works with government of that

nation; e.g., military contractors can’t use U.S. banks or get federal contracts

 Generally not retroactive
 Applies prospectively to new business

• The International Monetary Fund (IMF) and the World Bank (See PowerPoint Slide 7-11)

▪ Currency stability – created at Bretton Woods with this goal
▪ Special drawing rights – using line of credit to stabilize a country’s currency
▪ Issues of buying currency

• The Hague Convention: civil litigation cooperation across borders

• The climate agreements and treaties

▪ The Kyoto Protocol or global-warming treaty – could not gain approval
▪ Following Copenhagen climate summit, late in 2009, treaty is basically dead; U.S. will

not approve; other countries have doubts

▪ Paris agreement signed in 2015 by 200 countries (non-binding)

• The Organization of Petroleum Exporting Countries (OPEC)

▪ Organization of Petroleum Exporting Countries
▪ Cartel that controls supplies, production, prices and taxes

Use Exhibit 7.1 to review treaties.

7-2 Trust, Corruption, Trade, and Economics (See PowerPoint Slides 7-12, 7-13, 7-14, 17-15, and 7-16)

Focus in Recent Years on Reducing Bribes and Corruption

7-2a Foreign Corrupt Practices Act (FCPA)

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• History, purpose, and application of the FCPA

▪ Applies to businesses with principal offices in the United States
▪ Requires establishment of internal accounting controls so that bribes are not permitted to

flow through easily

▪ Prohibits making, authorizing, or promising a gift to a foreign official with the intent to
corrupt; has five elements:

 Instrumentality of interstate commerce must have been used

Example: Phones or mail

• What constitutes a payment under the FCPA?

▪ Payment or something of value must have been given
▪ Money or item of value is given to foreign official with discretionary authority or NGO

official – a political candidate or political party

▪ Purpose of the payment was to get official to act or to keep from acting
▪ Payment was made with the idea of assisting the giver’s business
▪ Resource Guide for the Foreign Corrupt Practices published by the Justice Department

(see list on p. 227-228)

BUSINESS STRATEGY − THE COSTS OF SLIPPING ON THE FCPA: Students often argue that the

company may have to pay an FCPA fine, but they made a great deal of money as they were engaged in bribery,

so it was worth it. There are other factors to consider:

1. Sometimes the company is banished from doing business in that country, forever or for a certain period of
time.

2. Sometimes other countries refuse to do business with the company because the government does not want
to be perceived as corrupt.

3. The company’s infrastructure may have suffered. Sales people got used to offering bribes and, as a result,
have lost the skill sets for negotiating a deal, putting together a deal, and really competing for business.

• What is “obtaining, retaining, or directing business”?

▪ Winning contracts
▪ Circumventing rules
▪ Outcomes of lawsuits
▪ Exceptions to customs, etc.

• Who is covered under FCPA?

▪ Political parties
▪ Party officials
▪ Candidates for office
▪ NGOs

BUSINESS PLANNING TIP (How Companies Stay Out of FCPA Trouble): Go through the checklist that

includes tips on audits and knowing what the country is like. The importance of self-reporting under the FCPA.

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Discuss the importance of frequent audits, screening agents, monitoring payments, and getting employees to ask

questions.

• Use of agents and the FCPA

▪ Cannot cleanse company from FCPA penalties by using an agent and claiming no
knowledge

▪ Knowledge is attributed from large amount for expenses claimed by agents
▪ Knowledge is attributed by the failure to check out the agent prior to using that agent

• The FCPA and “grease” or facilitation payments

▪ Payments to get officials to do their jobs, not to influence outcome, and are not prohibited
▪ Examples: Payment to get a license, payment to get a phone, payment for paper

processing, or payment for other utilities

▪ Go over the examples listed here to help students understand the Justice Department’s
take on what is and what is not an FCPA violation

• Penalties for violation of the FCPA

▪ Criminal violations of FCPA carry penalties of up to $25,000 and 5 years imprisonment
for individuals; corporate fines are up to $2,000,000

▪ Civil fines under Alternative Fines Act (not FCPA) are tied to benefits received
▪ Justice Department has stepped up enforcement

7-3 Resolution of International Disputes

✓ London Commercial Court is a popular resource
✓ International Court of Justice as well

7-4 Principles of International Law (See PowerPoint Slide 7-17)

7-4a Act of State Doctrine

• Courts of one country do not undertake the responsibilities of providing citizens of another
country with rights in their own country

• Leaves these decisions to executive and legislative branches and away from judiciary

• For example, the Union Carbide case had to stay in India

7-4b Sovereign Immunity

• Each nation is sovereign

• Other nations do not take jurisdiction over a country’s internal operations, laws, and people

• Does not apply to contractual relations

See PowerPoint Slide 7-18.

CASE BRIEF 7.1

In re Yukos Oil Company Securities Litigation

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2006 WL 3026024 (S.D.N.Y.)

FACTS: Yukos is a Moscow-based joint-stock company whose shares trade on the Russian stock exchange.

Yukos shares also trade indirectly on multiple European exchanges and over-the-counter in the United States.

Allegedly, Khodorkovsky was part of a select group of Russian business leaders known as “oligarchs” who

supported former Russian President Boris N. Yeltsin, but were politically opposed to current Russian President

Vladimir V. Putin.

The Tax Code of the Russian Federation prescribed a maximum income tax rate that incorporated two

components: a tax payable to the federal budget and a tax payable to the budget of the taxpayer’s local region.

For example, in 2004, the statutory maximum rate was 24%, of which up to 6.5% could be collected by the

federal government and up to 17.5% by regional governments. The Tax Code also prescribed a minimum rate

for taxes payable to regional governments. In 2004, that rate was 13.5%. However, the regional governments

could offer tax benefits to reduce or even eliminate the regional budget liability of certain categories of

taxpayers. As a result of this regional variance in the effective income tax rate, taxpayers in the metropolitan

regions of the Russian Federation, such as Moscow, paid higher taxes than taxpayers in remote regions, or

“ZATOs.”

The complaint alleges that from 2000 through 2003, Yukos grossly underpaid its taxes to the Russian Federation

by illegally taking advantage of the ZATOs’ preferential tax treatment. According to the complaint, Yukos

booked oil sales at “well below” market prices to seventeen trading companies, all of which were registered

within ZATOs. Without taking physical possession, the trading companies sold the oil to customers at market

prices and claimed the tax benefits of their ZATOs. However, the profits were “funneled … back to Yukos and

Yukos paid taxes only on the initial below-market sales while reaping substantial profits from the low-tax

market-price sales.

The complaint alleges that the regional trading companies received the benefits of ZATO registration

illegitimately because “[n]o business was actually conducted by the sham companies in the ZATOs.” This Yukos

tax strategy presented enormous risk because it violated Russian law and because the Russian Federation had

prosecuted other companies that had acted similarly. Nonetheless, the risk was not disclosed in any of the Yuko’s

filings with the SEC. Also, what was filed with the SEC was allegedly not prepared in conformity with U.S.

GAAP or other standards of financial reporting.

At a secret meeting with Khodorkovsky and other oligarchs in 2000, Putin promised not to investigate potential

wrongdoing at their companies if the oligarchs refrained from opposing Putin. Nearly three years later, at another

such meeting, Khodorkovsky allegedly voiced his opinion that high-level officials in Putin’s government should

be ousted. According to the plaintiffs, Putin reacted negatively and intimated to Khodorkovsky that the Russian

Federation might investigate Yukos’ methods of acquiring oil reserves. Despite Putin’s warnings, Khodorkovsky

publicly criticized Putin and financed opposition parties.

On October 25, 2003, Russian Federation authorities arrested Khodorkovsky and charged him with fraud,

embezzlement and evasion of personal income taxes. Days later, the Russian Government seized control of

Khodorkovsky’s 44% interest in Yukos as security against the approximately $1 billion he owed in taxes.

Concurrently, the Tax Ministry revealed that it had been investigating Yukos’ tax strategies. The Department of

Information and Public Relations of the General Prosecutors Office then announced charges that accused

Khodorkovsky and others of fraudulently operating an illegal scheme at Yukos to avoid tax liability through

shell company transactions.

On December 29, 2003, the Tax Ministry concluded its audit of Yukos for tax year 2000 and issued a report that

Yukos had illegally obtained the benefit of the ZATOs’ preferential tax treatment and owed $3.4 billion to the

Russian Federation in back taxes, interest, and penalties for tax year 2000.

As a result, Yukos defaulted on a $1 billion loan from private lenders and the Russian Government confiscated

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Yukos’ assets, including its main production facility and billions of dollars from its bank accounts. The price of

Yukos securities “plummeted” in response to these events.

Shareholders in Yukos (Plaintiffs) filed consolidated class actions against Khodorkovsky and others (defendants)

on July 2, 2004. The U.S. plaintiffs had purchased Yukos securities between January 22, 2003, and October 25,

2003. They allege that Yukos, its outside auditor, and certain of its executives and controlling shareholders

knowingly concealed the risk that the Russian Federation would take action against Yukos by failing to disclose:

(1) that Yukos had employed an illegal tax evasion scheme since 2000; and (2) that Khodorkovsky’s political

activity exposed the Company to retribution from the current Russian government. The plaintiffs based their

claims on the fraud provision, Section 10(b), of the Securities Exchange Act.

ISSUE: Does the act of state doctrine prohibit the court from taking the case?

DECISION: No. The court dismissed the case on other grounds, but found that the act of state doctrine did not

prohibit the court from hearing the case. The case was not one that involved invalidating Russian actions; it was

a case to decide whether the company should have been more transparent and forthcoming about the risk of its

strategy as well as the political risk in Russia.

7-4c Protections for U.S. Property and Investment Abroad (See PowerPoint Slide 7-19)

• Expropriation

▪ Nationalization of a company’s property by another country
▪ Protected by act of state doctrine – U.S. cannot intervene to protect companies
▪ Does set bad precedent for business development
▪ Hickenlooper Amendment allowed president to cut off aid to those countries that take

the property of U.S. companies and citizens

7-4d Repatriation (See PowerPoint Slide 7-20)

• Limits on removal of profits from country where they are earned

• Considered acts of state; cannot be litigated

• Check limits before deciding to do business

7-4e Forum Non Conveniens, or “You Have the Wrong Court”

• Dismiss cases brought in wrong court

• Example: Union Carbide and Bhopal, India; proper forum was India

See PowerPoint Slide 7-21 to discuss the issues a company should examine before doing business in a country.

7-4f Conflicts of Law (See PowerPoint Slide 7-22)

• No two countries have the exact same commercial laws

• Some countries have no commercial codes

• Uniform Commercial Code is widely used

• Party autonomy controls

• If parties have not agreed, law of country where the contract is performed will apply

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7-5 Protections in International Competition

7-5a The International Marketplace and Monetary Issues: The Disclosure Role of Banks

• Protections for banks and international customers: taxes and shelters

▪ Taxation issues lead to companies holding funds off-shore – asset parking

• Protections for bank customers: information

▪ Hague Convention and requirements on disclosure of information on bank accounts

See PowerPoint Slide 7-23.

CASE BRIEF 7.2

Tiffany and Company v. Andrew
2012 WL 5451259 (S.D.N.Y.)

FACTS: Tiffany (plaintiffs) allege that Andrew and others (defendants) sold counterfeit Tiffany products
through several websites hosted in the United States. Andrew accepted payment in U.S. dollars, used PayPal,

Inc. to process customers’ credit card transactions, then transferred the sales proceeds to accounts held by the

Bank of China (“BOC”), Industrial and Commercial Bank of China (“ICBC”), and China Merchants Bank

(“CMB”) (“Banks”).

Andrew defaulted on the suit, and Tiffany sought discovery from the Banks by serving subpoenas seeking the

identities of the holders of the accounts into which the proceeds of the counterfeit sales were transferred and the

subsequent disposition of those proceeds. The Banks involved all maintained branch offices in the Southern

District of New York, and the subpoenas were served on those branch offices.

The Banks responded to the subpoenas by explaining that the information sought was all maintained in China

and that the New York branches of the Banks lacked the ability to access the requested information. China’s

internal laws prohibited the disclosure of the information except under certain conditions. The Banks proposed

that the plaintiffs pursue the requested discovery pursuant to the Hague Convention.

The court concluded that Tiffany should pursue discovery through the Hague Convention. Tiffany submitted its

Hague Convention application to China’s Central Authority in November 2010, and on August 7, 2011, the

Ministry of Justice of the People’s Republic of China (“MOJ”) responded by producing some of the documents

requested. For each of the Banks, the MOJ produced account opening documents (including the government

identification card of the account holder), written confirmation of certain transfers into the accounts and a list of

transfers out of the accounts. With respect to CMB, the records indicate that all funds in the account were

withdrawn through cash transactions at either an ATM or through a teller. BOC and CMB each produced

documents concerning a single account; ICBC produced documents for three accounts.

In its cover letter, the MOJ noted that it was not producing all documents requested. Specifically, the letter stated,

“Concerning your request for taking of evidence for the Tiffany case, the Chinese competent authority holds that

some evidence required lacks direct and close connections with the litigation. As the Chinese government has
declared at its accession to the Hague Evidence Convention that for the request issued for the purpose of the pre-

trial discovery of documents only the request for obtaining discovery of the documents clearly enumerated in

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the Letters of Request and of direct and close connection with the subject matter of the litigation will be executed,

the Chinese competent authority has partly executed the requests which it deems conform to the provisions of

the Convention.”

On the grounds that the MOJ’s production is deficient, Tiffany moved to enforce the subpoenas previously served

on the New York branches of the Banks. The deficiencies Tiffany claims are (1) whether any of the defendants

have any additional accounts at the Banks; (2) detailed wire transfer records concerning the deposits into and

withdrawals from the CMB and ICBC accounts.

ISSUE: Could the court issue subpoenas in order to obtain more information about the bank accounts to help
Tiffany identify the perpetrators of the counterfeit goods?

DECISION: No, the court will not issue the subpoenas. The Banks, through the MOJ, have unquestionably
produced relevant, responsive documents. Second, the scope of the Banks’ production has not been so narrow

that resort to the Convention can fairly be described as futile. The account holders’ identities and addresses have

been identified as well as transaction histories. Plaintiffs’ argument that additional documents concerning

transfers into and out of the accounts will lead to a fuller understanding of the trademark counterfeiting operation

is extremely speculative. Finally, the fact that the MOJ China takes a narrower view concerning the appropriate

scope of pretrial discovery does not render the Hague Convention process futile. The high cost of discovery in

federal litigation is well known, and the fact that another sovereign chooses to take a more restrictive view of

the appropriate scope of pretrial discovery is not unreasonable. In addition, as noted above, China is not unique

in reserving its right to limit production in response to a Hague Convention request to documents that it considers

to bear a direct and close connection with the litigation; many other countries have made the same reservation.

7-5b Antitrust Laws in the International Marketplace (See PowerPoint Slide 7-24)

• All firms doing business here are subject to antitrust jurisdiction

• All U.S. firms are also subject to EU antitrust laws, which have tended to be more stringent
than U.S. antitrust laws currently

• Export Trading Company Act

▪ Allows joint ventures among competitors
▪ For business in other countries
▪ Use summary of laws in Exhibit 7.1

7-5c Protections for Intellectual Property – see Chapter 15 (See PowerPoint Slide 7-25)

7-5d Criminal Law Protections (See PowerPoint Slide 7-26)

• All those present in a country are subject to that country’s criminal law

• Subject to all regulations as well

BIOGRAPHY – SIEMENS: THE COMPANY THAT PAID THE LARGEST FINE EVER FOR FCPA

VIOLATIONS

The bribery process began with the simple act of setting up off-shore accounts. Who doesn’t have an off-shore

account? Once the managers had the off-shore accounts, they gained the additional benefit of removing

themselves from the actual bribes. They also employed foreign agents who were given the descriptive and more

palatable term of BCAs (business consulting arrangements). The executives involved never referred to any of

Chapter 7 International Law 132

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the money paid to foreign agents as “bribes,” rather they were called “useful expenditures.” With the right terms

and the appropriate distance, the Siemens executives could convince themselves that they had never paid a bribe

and that they were merely involved in winning business for the company.

The simple questions would have been, “Why do we need off-shore accounts for paying expenses?” “Why are

we developing new terms for what we do?” It is also clear from the extensive documentation in the case, as

compiled by government agencies from several countries, that those at Siemens who were involved in the

accounts and working with BCAs were acutely aware of reality. At one point, Siemens executives involved with

“useful expenditures” met together in a restaurant, fully cognizant that they had crossed well over the line into

bribery territory. In fact, Siemens’ ubiquitous presence in government contracts around the world indicated it

had conquered the territory. As those executives sat at the restaurant that night, they concluded that they could

at least get a good game of cards going in prison because there would be so many of them. Yet it would be two

more years before the executives and their complex network was even partially uncovered as the subpoenas and

regulators arrived. There were so many points along the way when they themselves could have stopped their

tools, labels, and accounts, but they all continued to grow because there were no longer any clear lines. One

executive said in response to a reporter’s question about culpability, “I was not the man responsible for the

bribery. I organized the cash.”

BUSINESS PLANNING TIP (Siemens): Siemens did follow the “four eyes” principle – all payments required

two signatures. However, it had made so many exceptions that this form of internal controls was lost.

SUPPLEMENTAL READINGS (Not Required)

Collingsworth, Terry, “’Corporate Social Responsibility,’ Unmasked,” 16 ST. THOMAS L. REV. 669 (2004).

Duong, Wendy N., “Partnerships With Monarchs – Two Case Studies,” 25 U. PA. J. INT’L ECON. L. 1171

(Winter 2004).

Duval-Major, Jacqueline, “One-Way Ticket Home: The Federal Doctrine of Forum Non Conveniens and the

International Plaintiff,” 77 CORNELL L. REV. 650 (1992).

“Editor’s Page,” 35 GEO. J. INT’L L. 1 (Fall

2003).

Figueroa, Miguel Antonio, “The GATT and Agriculture: Past, Present and Future,” 5 KAN. J. OF LAW &

PUBLIC POLICY 93 (1995).

Fled, Stacy Amity, “Language and the Globalization of the Economic Market,” 31 VANDERBILT J. OF

TRANSNATIONAL LAW 153 (1998).

Gyllenhammar, Pehr, “The Global Economy: Who Will Lead Next?,” 175 J. OF ACCOUNTANCY 61

(1993).

Israeloff, Robert L., “Positioning a Firm for International Opportunities,” 175 J. OF ACCOUNTANCY 46

(1993).

Ivanova, Pelagia, “Forum Non Conveniens and Personal Jurisdiction: Procedural Limitations on the

Enforcement of Foreign Arbitral Awards Under the New York Convention,” 83 B.U. L. REV. 899 (October,

2003).

Kahn, Jordan C., “Investment Protection Under the Proposed Asean-United States Free Trade Agreement,” 33

SUFFOLK TRANSNAT’L L. REV. 225 (Summer 2010).

Liebeler, Susan W., “Keeping the U.S. Market Open to Foreign Investment,” 36 ST. LOUIS UNIV. L. J. 1

(1991).

Low, Lucinda A., “The Anti-Corruption Laws of the United States and Mexico,” 11 U.S.-MEX. L.J. 149 (Spring,

2003).

Malloy, Michael P., “Bumper Cars: Themes of Convergence in International Regulation,” 60 FORDHAM L.

REV. 1 (1992).

Morkin, Michael L., Ethan A. Berghoff and Richard S. Pike, “Doing Business With Foreign Sovereign Entities,”

17-DEC BUS. L. TODAY 43 (2007).

Ouzounov, Nikolay A., “Facing the Challenge: Corruption, State Capture and the Role of Multinational
Business,” 37 J. MARSHALL L. REV. 1181 (Summer 2004).

Chapter 7 International Law 133

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use as
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system for classroom use.

Paulsen, Erik, “Imposing Limits on Prosecutorial Discretion in Corporate Prosecution Agreements,” 82 N.Y.U.

L. REV. 1434 (2007).

Picciotto, Sol., “Rights, Responsibilities and Regulation of International Business,” 42 COLUM. J.

TRANSNAT’L L. 131 (2003).

Posin, Daniel Q., “Mediating International Business Disputes,” 9 FORDHAM J. CORP. & FIN. L. 449 (2004).

Routh, E. Charles, “Around the World in 60 Websites,” SJ078 ALI-ABA 41 (May 13-15, 2004).

Ruda, Jose Maria, “Some Contributions of the International Court of Justice to the Development of

International Law,” 24 NEW YORK UNIV. J. OF INT’L LAW 35 (1991).

Schill, Stephan W., “Glamis Gold, Ltd. v. United States,” 104 AMER. J. OF INTL. LAW 253 (April 2010).

Serafini, Justin, “Foreign Corrupt Practices Act,” 41 AM. CRIM. L. REV. 721 (Spring, 2004).

Snider, Thomas R., “Combating Corruption Through International Law in Africa: A Comparative Analysis,”

40 CORNELL INT’L L.J. 691 (2007).

Stolowitz, Micah D., “GATT Implementation in the United States,” 6 J. OF LAW & INFORMATION

SCIENCE 70 (1995).

Stoltenberg, Clyde D., “Law, Regulation and International Business,” 40 AM. BUS. L.J. 445 (Spring, 2003).

Tarlock, A. Dan., “Four Challenges for International Water Law,” 23 TUL. ENVTL. L. J. 369 (Summer 2010).

Wilske, Stephan, “The Impact of the Financial Crisis on International Arbitration,” 65 DISP. RESOL. J. 82

(February-April 2010).

Winship, Peter, “International Commercial Transactions,” 52 BUS. LAWYER 1643 (1997).

Chapter8

Business Crime 1

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CHAPTER 8

BUSINESS CRIME

LECTURE OUTLINE

8-1 What is Business Crime? The Crimes Within a Corporation (See PowerPoint Slides 8-1, 8-2, and

8-3)

8-1a Financial Fraud: Employees Manipulating Earnings Numbers

• Andrew Fastow: Manipulating the numbers to save jobs

8-1b Marketing Missteps: Sales Zeal and Crimes

• Marketing products by making statements that are not permitted or are not true:
pharmaceuticals

8-1c Friendly Fire: Employee Theft

• Embezzlement

• See Exhibit 8.1 – “A Roster of Wrongdoing”

8-2 What is Business Crime? The Crimes Against a Corporation (See PowerPoint Slide 8-4)

✓ Stealing From Competitors
✓ Acting Illegally to Gain a Competitive Advantage – Antitrust

Example: Archer Daniels Midland and price fixing

✓ Electronic Eavesdropping
✓ Federal Violations – Securities, Campaign Laws, Antitrust

8-3 Who is Liable for Business Crime? (See PowerPoint Slide 8-5)

✓ Corporation is Liable
✓ Officers and Directors are Liable If:

➢ They authorized the conduct
➢ They knew about the conduct and did nothing
➢ They failed to act reasonably in their supervisory positions

✓ Employees Can Also Be Liable If They Participated With the Company and Its Management in
Illegal Acts

Chapter 8 Business Crime 2

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8-4 Federal Laws Targeting Officers and Directors for Criminal Accountability

8-4a White-Collar Crime’s Origins and History (See PowerPoint Slides 8-6 and 8-7)

• Society and the changes that have been made following the scandals

▪ Boesky-Milken and junk bonds and insider trading: the Insider Trading and Securities
Fraud Enforcement Act of 1988 (ITSFEA)

▪ Savings and loan and change: White-Collar Kingpin Act – Federal Law imposes
minimum federal mandatory sentences on corporate officers

▪ Post-Enron and Sox
▪ Post-subprime and Financial Reform Bill

8-4b Sarbanes-Oxley (SOX)

• White-Collar Criminal Penalty Enhancement Act of 2002

▪ Increases penalties
▪ Creates new crimes for certification of false financial statements
▪ Increased penalties for obstruction, mail, and wire fraud
▪ Scrushy first CEO tried, but not convicted

8-4c Honest Services Fraud (See PowerPoint Slide 8-8)

• Amendment to mail and wire fraud laws

• Added as a charge in the post-Enron era

• U.S. Supreme Court has held in an appeal by Jeffrey Skilling (Skilling v. U.S., 561 U.S. 358
(2010)) that honest service fraud requires some kind of bribery or conflict for the

corporation to be deprived of the executive’s honest services

8-4d Financial Services Crimes and Reform (See PowerPoint Slide 8-9)

• Followed the subprime crisis

• Financial Services Reform Act, also known as the Dodd-Frank Wall Street Reform and
Consumer Protection Act

• The act creates a Bureau of Consumer Financial Services (CFSB)

• Carries civil and criminal penalties

8-4e Other Business Crimes and White-Collar Liability (See PowerPoint Slide 8-10)

• OSHA rules

• Failure to comply with safety laws

8-5 The Penalties for Business Crime

Given for Each Crime (See Exhibit 8.2 and PowerPoint Slides 8-11, 8-12, and 8-13)

8-5a New Penalties and New Processes

8-5b Corporate Integrity Agreements (CIAs) (See PowerPoint Slide 8-14)

• Postpones criminal charges

Chapter 8 Business Crime 3

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• Monitors are often on-site as part of the agreement

8-5c Criminal Indictments of Corporations on Common Law Crimes

• Murder or manslaughter for safety deaths

• Workplace safety deaths

8-5d Shame Punishment

• Public disclosure

• Public advertisements

• Increased use of shame punishment: public disclosure of wrongdoing

• Community service

• Officer and executive banishment: the designated felon

▪ Part of sentence is banishment from a profession
▪ Not able to serve as officer or board member of a publicly traded company

• Deferred Prosecution Agreements (DPAs) (See PowerPoint Slide 8-15)

8-5e New and Higher Penalties for Corporate Crime

• Concern is that they are directed at “natural” persons and not “corporate” persons

Examples: Fines are small; imprisonment

• Placing penalties as a percentage of company profits is an alternative

• Prison sentences for officers and directors

8-5f Corporate Sentencing Guidelines: An Ounce of Prevention Means a Reduced Sentence (See

PowerPoint Slides 8-16, 8-17, and 8-18)

• Federal commission on sentencing put through the Corporate Sentencing Guidelines, which
include fines that are a percentage of profit, and are used by all federal courts in

determining sentences

• Increased fines for corporations to make them feel the pinch of money

• Developed by U.S. Sentencing Commission

• Sentences for officers increase if the following crime prevention methods are not in place at
the corporation and decrease if companies do certain things

▪ Written crime prevention program
▪ Officer-level employees assigned responsibility for enforcement
▪ Screen employees
▪ Training programs and written materials
▪ Prevention and detection of crime processes

• Formula of corporate sentencing guidelines

▪ Uses a culpability multiplier
▪ Begin with a score of “5” and add or subtract based on factors such as

Chapter 8 Business Crime 4

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 Code of conduct
 Ombudsmen
 Hot line
 Mandatory training

• Guidelines reformed by Sarbanes-Oxley mandate

BUSINESS STRATEGY − MUCH MORE THAN COMPLIANCE: Consider these basic principles of the

sentencing guidelines.

8-5g Corporate Board Criminal Responsibility (See PowerPoint Slide 8-19)

• Corporate boards could be held liable if the board fails to institute and monitor internal
controls

Example: In Re Caremark International, Inc., 698 A.2d 959 (Del. Ch. 1996)

▪ Can result for lack of follow-up
▪ Can result from lack of internal controls
▪ Can result in personal liability for directors

FOR THE MANAGER’S DESK − WHO REALLY ENDS UP GOING TO JAIL FOR CORPORATE

CRIME? Notice for students: (1) generally a first crime; (2) generally over 40; and (3) generally not

senior management. Note how many professionals and college-educated executives went to jail.

8-6 Elements of Business Crime (See PowerPoint Slide 8-20)

8-6a Mens Rea, Scienter, or Criminal Intent

• State of mind required to commit a crime

• For corporations – prove intention on behalf of directors

▪ Must also show individual intent to prosecute them
▪ Can establish by showing their knowledge of actions and failure to object

See PowerPoint Slide 8-21.

Chapter 8 Business Crime 5

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CASE BRIEF 8.2

People v. M & H Used Auto Parts & Cars, Inc.

22 A.D.3d 135, 799 N.Y.S.2d 784 (2005)

FACTS: Mordechay Sasy owns M & H Used Auto Parts & Cars, Inc. (defendants), a vehicle dismantling

business, located in Queens County, New York. Between January 1999 and January 2000, the New York City

Police Department conducted an undercover investigation of vehicle dismantling businesses. An undercover

detective posed as a scrap metal processor and purchased 166 “junked” vehicles from M & H.

At trial, the detective testified that, in the course of the investigation, he observed Sasy dismantle vehicles

without first draining the fluids, resulting in a discharge of liquids, such as motor oil, antifreeze, and

transmission fluid, onto the ground. He stated that he also observed “Speedy Dry”, a material used to soak up

oil spills, on the ground. The detective further testified that he observed Sasy and his employees empty

gasoline into five-gallon pails and, in the process, spill gasoline on the ground.

On September 27, 2000, the detective and other government officials executed a search warrant authorizing a

search of M & H’s yard and office. They found an eight by ten-foot puddle of oily soil at the entrance to the

yard, and “a lot” of oil and antifreeze covered with Speedy Dry in the yard. In the rear of the yard, located in a

pit in the ground was a sump pump that was plugged in with an electrical cord. An uncoiled hose ran from the

sump pump into a hole in the rear wall of an adjoining business, through a galvanized pipe mounted along the

interior wall of the adjoining business, and out onto 38th Avenue in Queens. The sump pump was not pumping

at the time. However, the detective noticed that there was fluid in the hose. The sump pit was about half filled

with water that had an oily sheen and smelled like oil, antifreeze, and gasoline, and water appeared to have

been pumped out because the interior of the sump pit was still wet. There were four catch basins at the

intersection of 38th Avenue and 126th Street, and when it rained, a “small pond” developed on 38th Avenue

and ran from M & H toward 126th Street into the catch basins. A videotape depicting the condition of the yard,

including the sump pit, purportedly taken on September 27, 2000, was played for the jury.

The supervisor of water and sewer systems for the New York City Department of Environmental Protection in

Queens (DEP) testified that in Queens County, storm sewers carry rainwater via underground pipes out into

the nearest waterway. Rainwater enters the storm sewer through catch basins located in the street. In the

location of M & H, the storm sewers emptied into Flushing Bay.

A sump pump is a point source and, therefore, anyone intending to operate one is required to obtain a State

Pollution Discharge Elimination System (SPDES) permit. A diligent search of all SPDES permits issued

disclosed that in 1999 and 2000, neither Mordechay nor M & H had been issued a SPDES permit.

Sasy testified that from May 1999 through January 2000, he used pans and 55-gallon drums to collect the

fluids from the vehicles that he dismantled. He also used carpets in case of leaks and Speedy Dry to absorb any

occasional spills. He discarded used carpets and used Speedy Dry with the garbage. Sasy claimed that he used

a company named Tri-City Waste Oil to collect waste oils every couple of months and a company named

Planet Recovery that collected anti-freeze and oil. Sasy produced copies of certain receipts that he claimed

were given by Tri-City and Planet Recovery. According to Sasy, the original Tri-City receipts were removed

from M & H during the execution of the search warrant. Sasy conceded that the inventory list for documents

seized from M & H, which was signed by Sasy, did not reflect any receipts.

The State had two witnesses who testified that, during the investigation, Sasy stated that Planet Recovery took

care of his waste oils and anti-freeze disposal and that he never mentioned a company named Tri-City Waste

Oil. Further, a search of M & H’s office did not reveal any receipts for the removal of waste oil or antifreeze.

The indictment charged the defendants with seven counts, including knowingly discharging pollutants into the

waters of the State of New York from an outlet or point source without a SPDES permit, in violation of

Chapter 8 Business Crime 6

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Environmental Conservation Law. The jury found the defendants guilty. They appealed.

ISSUE ON APPEAL: Was there sufficient evidence of intent (mens rea) for a conviction?

DECISION: Yes. The court held that there was enough evidence of chemicals on the ground and in the sump
pump to establish that he had been dumping fluids from cars onto the ground. In addition, it is common

knowledge that sewer water must go somewhere and could end up in lakes, bays, rivers, etc. Accordingly, the

judgment should be affirmed.

8-6b Mens Rea, Conscious Avoidance, and Corporate Officers (See PowerPoint Slide 8-22)

• Officers have tried to escape liability through conscious avoidance, “don’t tell me that”

• Cannot avoid liability by ignoring information

8-6c Actus Reus (See PowerPoint Slide 8-23)

• The act of the crime

• Intent alone is not a crime – the act must be committed

Example: The desire to trade on inside information is not a crime until you actually trade

on it

• Each crime has the required conduct described

8-7 Examples of Business Crimes (See PowerPoint Slide 8-24)

8-7a Theft and Embezzlement

• Intent to take property

• Actual taking of property for permanent use

• No authorization to take the property

8-7b Obstruction of Justice (See PowerPoint Slide 8-25)

• Intent to impede, obstruct, or influence investigation or administration of justice

• Auditors must retain work papers for five years

• Felony – 10 years

• Frank Quattrone and Andersen convicted

8-7c Computer Crime

• What is computer crime?

8-7d Internet Crime

• The unauthorized access computer crimes

▪ Electronic Communications Privacy Act of 1986 (See PowerPoint Slide 8-26)

https://a.next.westlaw.com/Link/Document/FullText?findType=L&pubNum=1000075&cite=NYECS17-0701&originatingDoc=Iaf751478098f11dab91fc9d567cb48f0&refType=LQ&originationContext=document&transitionType=DocumentItem&contextData=(sc.Keycite)

Chapter 8 Business Crime 7

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 Prohibits unauthorized access of “live”

communications

 Question is whether e-mail would be stored communication and not live

communications

▪ Stored Communication Act

 Prohibits the unauthorized interception of electronic communications – generally
means stored information

 Does not cover ongoing communication – Tweeting, etc.
 Courts have consistently held that employees give consent to monitoring by their

employers

CASE BRIEF 8.3

New Jersey v. Riley

988 A.2d 1252 (N.J. 2009)

FACTS: Sergeant Kenneth Riley used videos of a fellow officer, not for training purposes, but for purposes of

getting a fellow officer disciplined. He showed the videos to those within the department who would not have

authorization to view them. Riley was indicted for unauthorized use of a computer and unauthorized access

and disclosure of computer data. Riley moved to have the indictment dismissed.

ISSUE ON APPEAL: Did Riley’s access and use of computer data constitute the crime of unauthorized use of

computers?

DECISION: No. The court held that what Riley did was a violation of workplace policies, but did not fit
within the criminal conduct intended to be covered by the statute. The judge was concerned about arbitrary

definitions and enforcement and a criminal statute being used for retaliatory purposes.

• Unauthorized use of computer resources (See PowerPoint Slide 8-27)

▪ Using computers to commit economic espionage

 Covered by Economic Espionage Act (EEA)
 Employees take files from old employer to new employer
 Felony to copy, duplicate, sketch, download, communicate such information
 $500,000 and up to 15 years

• Spamming

▪ CAN-SPAM – Controlling the Assault of Non-Solicited Pornography and Marketing
▪ FTC has “Do-Not-Call” list, but spam list is in progress
▪ Industry groups are working on it – Anti-Spam Technical Alliance Register of Known

Spam Operations (ROKSO)

• Using computers to commit fraud (See PowerPoint Slide 8-28)

▪ Counterfeit Access Device and Computer Fraud and Abuse Act (CADCFA)
▪ Covers new technologies such as scanners, handheld computers, laptops, and

smartphones

Chapter 8 Business Crime 8

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• The crime of cyberbullying (See PowerPoint Slide 8-29)

▪ Cyberbullying, cyberstalking, and privacy

 Criminal prosecution for these activities is now possible under a wide range of
state statutes

 Cyberbullying statutes have to balance First Amendment rights with the need for
protection of individuals against harassment

 Statutes now exist for prosecution of cyberstalking – the conduct required must be
specifically listed in the statute so that the definitions are clear

 Federal antistalking law has been upheld as constitutional and applies to interstate
activities with in-state issues being covered by state laws

• Copyright crimes online – See Chapter 15 (See PowerPoint Slide 8-30)

• Crimes online

▪ Silk Road example
▪ Child pornography (Jared Fogle)

8-7e Criminal Fraud (See PowerPoint Slide 8-31)

• Obtaining money, goods, services, or property through false statements and misleading the
other party

• Requires intent to defraud

8-7f Commercial Bribery

• Prohibited in most states

• Incentives for those who report corrupt purchasing agents

8-7g Racketeer Influenced and Corrupt Organization Act (RICO) (See PowerPoint Slide 8-32)

• Complex statute designed to curb organized crime activity

• Elements

▪ Acquiring an interest in any enterprise with income derived from racketeering
▪ Conducting affairs of company involved in racketeering activity
▪ Conspiring to do any of the above

• Pattern of racketeering activity

▪ Commission of two racketeering acts in a ten-year period
▪ Racketeering acts include murder, kidnapping, gambling, arson, robbery, bribery,

counterfeiting, pension embezzlement, mail or wire fraud, obstruction of justice,

securities fraud, white slavery, transportation of stolen goods, and violations of the

Currency Reporting Act

• Carries civil and criminal penalties with civil recovery including treble damages

• Most RICO suits are based on fraud

• Prosecutors can freeze a business’s assets under a RICO charge

• Many states have their own RICO statutes

• Ongoing proposals in Congress for reform of RICO; although definition of racketeering
may change, the treble damages rights will remain

Chapter 8 Business Crime 9

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8-7h Business Crime and the USA Patriot Act (See PowerPoint Slide 8-33)

• Money Laundering Control Act was predecessor

• Regulation of money laundering

▪ Expands controls on money laundering from banks to escrow companies, brokerage
firms, travel agents, etc.

▪ “Know thy customer”
▪ Required reports on $10,000 cash and above transactions

• Funneling money to terrorist groups: another provision makes it a federal crime for
individuals or companies to pay funds to terrorist groups; goal is to prevent funds from

flowing into terrorist activities

8-7i Additional Federal Crimes (See PowerPoint Slide 8-34)

• Violations of federal securities statutes

• Violations of the Sherman Act

• Violations of the Internal Revenue Code

• Violations of the Pure Food and Drug Act

• Violations of OSHA

• Violations of Consumer Product Safety laws

8-7j State Crimes

• Cover criminal fraud

• Bribes and kickbacks prohibited

8-8 Procedural Rights for Business Criminals (See PowerPoint Slides 8-35 and 8-36)

8-8a Fourth Amendment Rights for Businesses

• Privacy amendment

• Search warrant procedures controlled by Fourth Amendment

▪ Must be based on probable cause; i.e., good reason to believe that instruments or
evidence of a crime are present at the business location sought to be searched

▪ Must be issued by a disinterested magistrate
▪ If searches are done improperly, evidence is inadmissible at trial
▪ Cover Arizona v. Gant and the requirements for searching a car

8-8b Exceptions to the Warrant Requirement

• Emergencies and risk of loss of evidence

▪ Records are being destroyed (emergencies) – burning warehouse exception

• The plain view exception

Chapter 8 Business Crime 10

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▪ Can seize items because privacy was not protected – allowed the world access to the
items

• Warrants and technology: texts, e-mails, and ISPs

▪ Who can get access to what and why?

CASE BRIEF 8.4

U.S. v. King

509 F.3d 1338 (11th Cir. 2007)

FACTS: In February 2003, while serving as a civilian contractor, Michael D. King resided in a

dormitory at the Prince Sultan Air Base in Saudi Arabia. During his stay in the dormitory, King kept his

personal laptop computer in his room and connected it to the base network. All users of the base network

signed agreements indicating that they understood their communications over and use of the base network

were subject to monitoring.

An enlisted airman was searching the base network for music files when he came across King’s computer on

the network. The airman was able to access King’s hard drive because it was a “shared” drive. The airman

discovered a pornographic movie and text files “of a pornographic nature.” The airman reported his discovery

to a military investigator who in turn referred the matter to a computer specialist. This specialist located King’s

computer and hard drive on the base network and verified the presence of pornographic videos and explicit text

files on the computer. She also discovered a folder on the hard drive labeled “pedophilia.” Military officials

seized King’s computer and also found CDs containing child pornography.

Two years later, the government obtained an indictment charging King with possession of child pornography.

After his arrest, the government searched his residence pursuant to a search warrant and found additional CDs

and hard drives containing over 30,000 images of child pornography.

King entered a guilty plea and was sentenced to 108 months in prison. King then appealed his conviction on

the grounds that there had been an illegal search and seizure of his computer and files.

ISSUE: Was there an illegal search and seizure of King’s dormitory and computer?

DECISION: No. The court held that there was no Fourth Amendment violation because the investigators did

not search King’s files or computer initially to discover the pornographic materials. They merely had to access

the universally accessible files of the military base. King had no expectation of privacy in whatever was posted

on the shared drive. The search of his home computer and files in his room was with a warrant that was based

on probable cause obtained from public access to the files.

• Privileged documents and the Fourth Amendment (See PowerPoint Slides 8-37 and 8-38)

▪ Can recover them
▪ Third party cannot assert Fourth Amendment rights – must be record owners

8-8c Fifth Amendment Rights for Businesses (See PowerPoint Slide 8-39)

• Self-incrimination

Chapter 8 Business Crime 11

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management system for classroom use.

▪ Protection against self-incrimination – “taking the Fifth”
▪ Given to natural persons – not to corporations
▪ Corporate officers can assert it to protect themselves but not corporate records

FOR THE MANAGER’S DESK − KNOWING WHEN TO HOLD AND WHEN TO FOLD: WHAT TO DO

WHEN YOUR COMPANY IS IN BIG TROUBLE

1. Leave when the indictments and/or arrests occur – don’t hang on.
2. Don’t lie on your résumé.
3. Describe your work at the company and others without names and wait until the interview to disclose

whom you worked for.

4. Don’t badmouth your former employer in your interview – this is often taken as a sign of guilt; rather
explain how difficult it is to be blindsided, something that most managers can identify with because it

happens to the best.

• Miranda rights (See PowerPoint Slide 8-40)

▪ Given when individual is in “custody”
▪ “Custody” means inability to leave – not necessarily jail
▪ Right to attorney; right to silence – notice of evidentiary use of statements

• Due process rights (See Exhibit 8.3 and PowerPoint Slides 8-41, 8-42, 8-43, and 8-44 to
show steps)

▪ Warrant or warrantless arrest begins process: Warrant – you have committed crime
and they look for you; warrantless – you are arrested at the scene

▪ Initial appearance

 Required within short period (24 hours)
 Charges explained
 Bail terms set; amount; or released on own recognizance

▪ Preliminary hearing or grand jury

 Hearing – information issued; defendant is present and can cross-examine
 Grand jury – indictment; secret proceedings

▪ Arraignment

 Plea is entered
 Trial date is set

▪ Discovery – mandatory disclosure of witnesses and evidence
▪ Pretrial conference – try to settle some issues if possible
▪ Omnibus hearing – challenge evidence admissibility
▪ Trial

8-9 Business Crime and International Business

✓ Countries now have cross-prosecution agreements and cooperation on investigations

Chapter 8 Business Crime 12

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as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
management system for classroom use.

✓ Allows for discovery of evidence in international transactions

STRATEGY, ETHICS, & THE LAW: CRIMINAL CHARGES FOR TAX

SHELTERS?

Lessons learned from KPMG case:

1. Instruct employees on whom counsel for firm represents.
2. Clarify that representation and privilege rules apply to both inside and outside counsel for the firm.
3. Develop a policy on reimbursement for attorneys’ fees for employees.
4. Explain when an employee is entitled to his or her own attorney.
5. Develop processes for negotiating settlements with the government.
6. Create a code of ethics and means for employees to raise concerns about company practices and policies.
7. Revisit compensation systems to see if employees are crossing ethical lines and pushing the envelope to

get results.

8. If programs for clients are in the gray area, continue to revisit them to see government changes in policy.
9. Go through a root-cause analysis to see how the situation occurred in the first place (Laura Nash types of

questions from Chapter 2).

U.S. v. KPMG, 316 F.Supp.2d 30 (D.D.C. 2004).

SUPPLEMENTAL READINGS (Not Required)

Allison, Bridget, et. al, “Racketeer Influenced and Corrupt Organizations,” 35 AM. CR. L. REV. 1103 (1998).

Andreoff, Christopher A., “A Primer on Federal Criminal Procedure,” 72 MICH B. J. 60 (1993).

“’Are We Really Getting Tough on White Collar Crime?’ (June 19, 2002), Part 2,” 15 FED. SENT. R. 237,

2003 WL 22016895 (April, 2003).

Constantin, Tiffany Britton, “Editor’s Note,” 40 AM. CRIM. L. REV. 217 (Spring, 2003).

Dickerson, Brian and Klodiana Basko, “Confusion in Defining ‘Proceeds’ Under the Money-Laundering

Statute: A Survey of Circuit Opinions,” 57 FED. LAW. 23 (June 2010).

Green, Stuart P., “Moral Ambiguity in White Collar Criminal Law,” 18 NOTRE DAME J.L. ETHICS & PUB.

POL’Y 501 (2004).

Grindler, Gary W., et al., “Practical Aspects of Representing a Corporation During the Early Stages of a
Criminal Investigation,” 29 GEORGIA STATE B. J. 99 (1992).

Harig, Lisa Ann, “Ignorance is Not Bliss,” 42 DUKE L. J. 145 (1992).

Hughes, Alexander, “Drawing Sensible Borders for the Definition of ‘Foreign Official’ Under the FCPA,” 40

AM. J. CRIM. L. 253 (Summer 2013).

Jara, Gabriela, “Following on the Foreign Corrupt Practices Act: The Dynamic Shareholder Derivative Suit,”

63 DUKE L.J. 199 (October, 2013).

Katz, Deborah M., “Constitutional Law – Fourth Amendment Protection for Homeless Person’s Closed

Containers in an Outdoor Home,” 26 SUFFOLK UNIV. L. REV. 279 (1992).

Kropp, Steven H., “Corporate Governance, Executive Compensation, Corporate Performance, and Worker

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Levi, Michael, “Combating the Financing of Terrorism: A History and Assessment of the Control of ‘Threat

Finance’,” 50 BRIT. J. CRIMINOLOGY 650 (July 2010).

Mark, Gideon, “RICO’s Extraterritoriality,” 50 AM. BUS. L.J. 543 (Fall, 2013).

McNulty, Shaela Ann, “Constitutional Law – Fourth Amendment Protection on the Wane,” 26 SUFFOLK

UNIV. L. REV. 248 (1992).

Chapter 8 Business Crime 13

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part, except for use
as permitted in a license distributed with a certain product or service or otherwise on a password-protected website or school-approved learning
management system for classroom use.

Moohr, Geraldine Scott, “An Enron Lesson: The Modest Role of Criminal Law in Preventing Corporate

Crime,” 55 FLA. L. REV. 937 (September, 2003).

Neiberger, Ellis, “Honest Services Fraud: Federal Prosecution of Public Corruption at the State and Local

Levels,” 84 FLA. B.J. 82 (June 2010).

Orland, Leonard and Charles Cachera, “Corporate Crime and Punishment in France,” 11 CONN. J. OF INT’L

L. 111 (1995).

Ostas, Daniel T., “When Fraud Pays: Executive Self-Dealing and the Failure of Self-Restraint,” 44 AM. BUS.

L.J. 571 (2007).

Palermo, Thomas N., “Going ‘Cocoanuts’: Looking at Modern Mortgage Fraud,” 57 FED. LAW. 38 (June

2010).

Paulsen, Erik, “Imposing Limits on Prosecutorial Discretion in Corporate Prosecution Agreements,” 82 N.Y.U.

L. REV. 1434 (2007).

Romero, Leo, “Procedures for Investigating and Prosecuting White Collar Crime,” 11 U.S.-MEX. L.J. 165

(Spring, 2003).

Silberfarb, Michael D., “Justifying Punishment for White-Collar Crime: A Utilitarian and Retributive Analysis

of the Sarbanes-Oxley Act,” 13 B.U. PUB. INT. L.J. 95 (Fall, 2003).

“Some Company Policies and Procedures Relating to the FCPA,” 9 INT’L QUARTERLY 120 (1996).

Swisher, Keith, “Pro-Prosecution Judges: ‘Tough on Crime,’ Soft on Strategy, Ripe for Disqualification,” 52

ARIZ. L. REV. 317 (Summer 2010).

Wen, Shuangge, “The Achilles Heel That Hobbles the Asian Giant: The Legal and Cultural Impediments to

Antibribery Initiatives in China,” 50 AM. BUS. L.J. 483 (Fall, 2013).

West, George E., II, “A Prosecutor’s Duty to Disclose: Beyond Brady,” 73 TEX. B.J. 546 (July 2010).