23 June 202011 minute read

US v. Napout: Second Circuit affirms convictions in FIFA foreign corruption case

Decision underscores risk of investigation and prosecution for foreign commercial bribery under honest services fraud statute

On Monday, June 22, 2020, the Second Circuit affirmed the “honest services wire fraud” convictions of two former officials of the global soccer (or “football”) organization Fédération Internationale de Football Association (FIFA). United States v. Napout, Nos. 18-2750, 18-2820, 2020 WL 3406620 (June 22, 2020). The closely watched case underscores important questions about the source of the fiduciary duty in the context of honest services fraud, 18 U.S.C. § 1346, and reflects the relentlessly aggressive approach of the US Department of Justice to policing overseas corruption, even conduct that on its face has little or no direct impact on the United States or its citizens.

Like the recent Foreign Corrupt Practices Act prosecution of an executive of Alstom S.A who never set foot in the United States (discussed in a prior DLA Piper alert here), the case highlights the risks of US prosecutions for organizations and individuals operating abroad. Notably, the so-called FIFA prosecutions were not brought under the FCPA, as the conduct at issue was not corrupt payments to government officials, but rather private commercial bribery.

The case grew out of the wider prosecution of over 30 individuals involved with international soccer. As press reports around the world were quick to observe, virtually all of the conduct and events at issue occurred outside the United States; the concept of the United States as the world’s policeman is rarely illustrated so clearly.  The appellants’ brief on appeal put the question nicely:

[B]y what authority does the United States purport to police the relationship between a Paraguayan employee and his Paraguayan employer and an alleged scheme involving South Americans that took place almost entirely in South America.

However, when the indictment is examined more closely, the case is properly understood as a rather commonplace application of jurisdictional theories that DOJ has been aggressively pursuing for some time. Far from being an outlier, in fact, the case is a mainstream example of how US prosecutors and US courts can exercise jurisdiction over foreign citizens who may never have set foot in the United States before their arrest.

By DOJ’s lights − and as the Second Circuit agreed here − the prosecution does not involve an “extraterritorial” application of federal criminal statutes at all, notwithstanding the fact that it involves foreign defendants, who used their position as executives in foreign organizations to scheme to receive bribes largely from other foreigners, in connection with soccer tournaments that occurred in foreign countries. To understand how that can be so, the Second Circuit first turned to a general discussion of the concepts and case law behind what is commonly referred to as the extraterritorial application of US law and then addressed the significant wrinkle that this was a commercial bribery case not brought under the FCPA (which at least has “foreign” in its title).

Section 1346 defines the term “scheme or artifice to defraud,” as used in the general statutes prohibiting use of the mails or wires to commit fraud, to include “a scheme or artifice to deprive another of the intangible right of honest services.” This provision was enacted in 1988 in response to McNally v. United States, where the US Supreme Court held that the mail fraud statute was limited in scope to only the protection of tangible property rights. The Court subsequently cabined the reach of § 1346 in Skilling v. United States (2010), limiting mail and wire fraud prosecutions under an honest services theory to only those defendants who, in violation of a fiduciary duty, participate in bribery or kickback schemes.

In Napout, the Second Circuit affirmed the convictions of Juan Ángel Napout, the former president of the South American soccer confederation CONMEBOL, and José Maria Marin, the former president of the Brazilian soccer federation CBF, which arose out of the broader crackdown discussed above. They were accused of accepting millions of dollars in bribes from sports media and marketing companies in return for arranging for those companies to receive broadcasting and marketing rights in connection with tournaments under their control. This conduct was alleged to be in breach of the duties these soccer executives owed their respective organizations under the internal codes of ethics of FIFA and CONMEBOL, not in violation of any local law in Brazil or Paraguay.

After a six-week trial in the Eastern District of New York, Napout and Marin were each convicted of, inter alia, multiple counts of conspiracy to commit honest services wire fraud. Napout and Marin appealed and challenged their convictions on the ground that they were based on impermissible extraterritorial applications of the wire fraud conspiracy statute. They argued that the honest services wire fraud statute criminalizes only fraudulent conduct that occurs on US soil and, thus, it does not encompass conduct, such as theirs, that occurred overseas. They also contended that the honest services wire fraud statute is unconstitutionally vague as applied to them because it is unclear whether the statute criminalizes a breach of the fiduciary duty that a foreign employee owes to his foreign employer.

The Second Circuit rejected both arguments. Reviewing the challenge based on extraterritorial application de novo, the court noted that the primary focus of the statute is not the scheme but “more precisely the use of the . . . wires in furtherance of a scheme to defraud,” rejecting the appellants’ argument that the statute’s focus is merely on the “scheme . . . to defraud” and that the schemes in question were principally foreign (which they plainly were). (Opinion at 34 (citing Bascuñán v. Elsaca, 927 F.3d 108, 122 (2d Cir. 2019)). Given the ubiquity of electronic communications in the modern world, and the near certainty that US dollar-denominated transactions will touch a US financial institution (if only through a correspondent banking relationship that may be opaque to an individual banking client), that this is the law plainly risks enabling prosecutors “to haul essentially foreign allegedly fraudulent behavior into American courts” based on “incidental domestic wire transmissions.” To limit that risk, the Second Circuit reiterated its prior holdings that “‘the use of the . . . wires must be essential, rather than merely incidental, to the scheme to defraud.’” (Opinion at 32 (quoting Bascuñán, 927 F.3d at 122)). The court opined that “[t]his ensures that the domestic tail not wag, as it were, the foreign dog.” (Opinion at 32). It ultimately found that the government presented ample evidence that the appellants used US wire facilities and financial institutions to carry out the fraudulent schemes, and that the use of the wires was integral to the scheme. (Opinion at 35-36). Notably, some of the bribe money ultimately was paid into an account maintained by Marin in New York, whereas “Napout was often bribed with American banknotes from US bank accounts that had been wired to a cambista (money changer) in Argentina … and then given to Napout by hand.” (Opinion at 35).

To reach its legal conclusion, the court rejected the appellants’ argument that the court’s prior holdings − that the focus of the general wire fraud statute (18 U.S.C § 1343) was on the wires − did not apply to honest services wire fraud (18 U.S.C § 1346) because that statute focuses squarely on the “bad-faith breach of a fiduciary duty owed to the scheme’s victim.” The court held that honest services wire fraud “is not something different from wire fraud; it is a type of wire fraud” and hence that the crime charged was honest services wire fraud “has no bearing” on the extraterritoriality analysis. (Opinion at 32, 34).

As noted above, the rejection of the “extraterritorial” label was fairly predictable, given the court’s precedents, notwithstanding the colorable argument that the analysis should have been a different one, conducted under Section 1346 rather than under Section 1343. Somewhat more surprising is the Circuit’s rejection of the argument that the statute is unconstitutionally vague as applied here. The appellants contended that because a “violation of a fiduciary duty” is an element of honest services fraud, the statute did not provide them with “fair notice” that the fiduciary duty they as (foreign) employees owe to their (foreign) employers could qualify as a “source of the fiduciary obligation” the breach of which is criminalized under US law. (Opinion at 37-38). This argument had particular resonance in this case − where the appellants contended that “commercial bribery is not a crime in” the South American countries at issue. (Opinion at 40 (emphasis added)). Concluding that the appellants did not squarely raise a constitutional vagueness argument before the trial court, the Court of Appeals held that it would review the vagueness claim under “plain error” review. This proved crucial to the outcome of the appeal.

Reviewing the vagueness argument for plain error, the court found that “whether a foreign employee’s duty to his foreign employer qualifies as an actionable element under § 1346 is a question that remains unsettled, at best” and, thus, “the district court did not commit plain error in concluding that it did not.” (Opinion at 44-45). In reaching this somewhat startling conclusion, the court observed that there “are undoubtedly lingering ambiguities in § 1346 … including questions as to what may serve as the source of the fiduciary obligation that can sustain a conviction under the statute.” (Opinion at 42 (citations and internal quotation marks omitted)). It is these “lingering ambiguities,” which the court acknowledged exist, that formed the core of the defense, in which the appellants argued “that even assuming that they owed a fiduciary duty to FIFA and CONMEBOL under the organizations’ codes of ethics, any such duty – that is, a fiduciary duty a foreign employee owes to his foreign employer through the nature of their private employment relationship rather than a duty arising from specific law – cannot form the basis of an honest services conviction.” (Opinion at 43).

Key takeaways

One of the key takeaways from this case is the fact that the Second Circuit affirmed honest services fraud convictions premised on what duties Napout and Marin owed to their respective foreign organizations under the internal codes of those organizations, and not under the law of any state or country, notwithstanding the argument that the conduct was not criminal under the law of the appellants’ domiciles. This is hardly a new concept and will be familiar to executives ensnared in, for example, antitrust prosecutions.

But it is still somewhat eye-popping in the context of this case. Likewise, DOJ’s focus on commercial bribery, outside the bribery of government officials that is the focus of so much attention, given the many high-profile FCPA prosecutions and corporate settlements, is also not novel. For example, from time to time DOJ has prosecuted foreign corruption not involving government actors using the Travel Act, 18 U.S.C. § 1952, which prohibits international travel, or use of the mails or “any facility in interstate or foreign commerce,” to engage in specified unlawful activities including commercial bribery under state law.” See, eg, United States v. Nguyen, 08-CR-522 (E.D. Pa. 2010) (four individuals pleaded guilty to violations of the Travel Act in connection with commercial bribes and money laundering); United States v. Ott, 07-CR-608 (D.N.J. 2008) (conviction of three executives on parallel FCPA and Travel Act violations with the underlying predicate crime being New Jersey’s commercial bribery statute and the conduct in question being wire transfers of bribe money from New Jersey to Nigeria). And, of course, it has been widely noted that, unlike the FPCA, the UK Bribery Act 2010 is not limited to bribery of government officials, even if to date the UK authorities have focused their enforcement efforts under the Act on public sector corruption. But Napout is a timely reminder that the risk of investigation and prosecution for foreign commercial bribery is a very real one, that the FCPA is not the only game in town, and that the analysis from the perspective of corporate compliance should not begin and end with asking whether a government official is involved.

Find out more about the implications of this development by contacting any of the authors.