A central mandate of the U.S. Commodity Futures Trading Commission (CFTC) has always been to protect the public and preserve the integrity of commodity and commodity derivative markets. The CFTC's Division of Enforcement supports this mission by detecting, investigating and prosecuting violations of the Commodity Exchange Act (CEA). To achieve this mission, the enforcement division often coordinates its activities with other branches of the government, notably the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC). To date, much of this coordination has focused on targeting fraud, manipulation and other forms of market misconduct.
In March 2019, the division took this inter-agency coordination in a wholly new and unprecedented direction. The division issued an advisory providing guidance encouraging self-reporting and voluntary cooperation for CEA violations involving bribery and other corrupt practices taking place outside of the U.S. The advisory specifically applies to companies that are not required to be registered with the CFTC, such as commercial end-users in energy or agricultural markets, and has significant implications for those entities doing business in commodity and commodity derivative markets outside of the U.S.
The policing of misconduct involving foreign corrupt practices historically has been the exclusive domain of the DOJ and SEC, which were granted this authority by Congress through the Foreign Corrupt Practices Act (FCPA). To this end, DOJ has pursued criminal violations of the FCPA, and the SEC has handled civil enforcement of this law. DOJ has also been granted clear authority to bring civil enforcement actions against companies not subject to SEC jurisdiction for violations of the FCPA.
As a practical matter, the advisory is more than supplemental guidance extending the division’s self-reporting and voluntary cooperation policy to CEA violations involving illicit activities centering on bribery and other corrupt practices taking place outside of the U.S. Rather, it signals the commencement of a new and prioritized enforcement initiative that seeks to, in the words of the division, close “gaps between the policing of foreign corruption and the CFTC's investigative and regulatory framework under the CEA.”
The division’s formal entry into multi-jurisdictional efforts to police misconduct involving foreign corruption has serious policy and legal implications that both CFTC leadership and federal courts must confront. First, this initiative is based on an expansive and unprecedented view of the division’s authority to pursue violations of the CEA outside the U.S., particularly in light of recent court rulings upholding a presumption against the extraterritorial application of the statute. Second, the decision to police misconduct involving bribery and other foreign illicit practices represents an inappropriate allocation of the division’s limited enforcement resources that should be weighed against the resources already committed by the DOJ and SEC to policing foreign corruption, as well as the existing and future demands that the division faces in meeting its mission-critical enforcement priorities.
Until these legal and policy implications can be squarely addressed, non-registrants transacting in global commodity and commodity derivative markets should recognize that the issuance of the advisory materially changes the regulatory environment in which they operate and their exposure to enforcement risk.
Legal Uncertainty
Interestingly, the advisory does not articulate the jurisdictional grounds supporting the application of the CEA to extraterritorial violations involving bribery and other corrupt practices. Given the DOJ’s broad mandate under the FCPA and the lack of any regulatory gap in the DOJ’s jurisdiction over FCPA-related matters, it is hard to identify a policy rationale for expanding the division’s enforcement focus to this area.
For instance, other than CEA Section 2(i), which requires a “direct and significant connection with activities in, or effect on, commerce of the United States” and is strictly limited to swap markets, the CEA does not express any form of Congressional intent about the statute’s application on an extraterritorial basis with respect to other markets. Notwithstanding this point, amicus curiae briefs filed by the CFTC in private rights of action brought under CEA Section 22 provide insight into the division’s apparent view of its authority to pursue CEA violations taking place outside the U.S. By way of background, amicus curiae briefs are documents filed with a court by entities or persons who, while not parties to the litigation, have a strong interest in the subject matter or outcome of the litigation. The briefs are filed to advise the court about issues connected with the outcome of the litigation, such as possible policy implications or other relevant information or arguments the court might wish to consider.
The CFTC’s amicus curiae briefs create a public record advocating an expansive application of the CEA to alleged extraterritorial misconduct. The CFTC has argued that (i) the purpose of the CEA is to, among other things, protect the public interest in transactions that are regularly executed in interstate and international commerce, and (ii) it is necessary for the agency to target manipulation outside the U.S. to protect U.S. market participants. In support of its expansive interpretation of the CEA, when addressing fungible energy commodities transacted on a multinational basis (i.e., crude oil), the CFTC has argued that wrongdoing may originate anywhere and affect the U.S., causing harms Congress intended to prevent.
Applying this line of argument in the enforcement context, among other things, it would appear that the division believes it has authority to investigate and prosecute alleged violations of the anti-manipulation and anti-fraud provisions of Sections 6(c) and 9(a) of the CEA, regardless of whether the misconduct impacts U.S. futures and other CFTC-jurisdictional commodity derivative markets. In other words, this means the division likely takes the view that it can pursue alleged manipulation or fraud in physical commodity markets located entirely outside of the U.S., so long as the commodity at issue is transacted in interstate commerce.
The following illustrates how the division may apply the CEA under such circumstances. Assume a foreign oil company produces a grade of crude oil from reserves located outside of the U.S. This grade of crude oil prices against the daily settlement of a published benchmark price index. Transacted on a multinational basis, it is routinely imported to, refined, and consumed in the U.S. However, there is no futures contract or other commodity derivative listed on any CFTC-jurisdictional exchanges where this grade of foreign crude oil is (i) the actual underlying commodity, or (ii) is deliverable thereunder. Now further assume that a U.S. person, either an individual or a company, bribes an employee of the foreign oil company to artificially adjust the company’s production of oil and such action affects the daily settlement of the benchmark index. Because the grade of foreign crude oil is a commodity transacted in interstate commerce, the division would likely take the position that it has authority to investigate such conduct for alleged violations of the anti-manipulation and anti-fraud provisions of CEA Sections 6(c) and 9(a). The fact that the alleged misconduct does not have a direct impact CFTC-jurisdictional markets for futures or other commodity derivatives would be viewed as not material.
Despite this expansive view of the division’s authority, the precise extent to which the CEA may be applied to extraterritorial misconduct in the enforcement context is not clear. To date, federal courts only have addressed the extraterritorial application of the CEA in private rights of action brought under CEA Section 22. In these cases, courts consistently have ruled that the CEA did not apply to alleged violations based on conduct taking place outside of the U.S.
Specifically, against this background of legal uncertainty, federal courts applied a “presumption against extraterritoriality” based on well-established Supreme Court precedent. Simply put, if a statute does not provide a clear Congressional intention of extraterritorial application, there is a presumption that it has none. This presumption can be rebutted if it is established that the extraterritorial misconduct is sufficiently related to activity that makes such misconduct “domestic in nature.” In the private rights of action brought under Section 22, the courts have ruled that the alleged violations of the CEA were too attenuated—or too far removed—from commodity and commodity derivative markets subject to the CFTC's jurisdiction to be considered domestic in nature.
This judicial view very recently was reaffirmed when a federal court of appeals dismissed yet another private right of action brought under CEA Section 22. This proceeding involved alleged manipulation of a benchmark price index for Brent crude oil produced in the North Sea. The plaintiffs in this proceeding argued that the manipulative conduct taking place outside of the U.S. had a "ripple effect" that artificially impacted the pricing of Brent-related futures contracts and other derivatives contracts listed on U.S. exchanges in violation of CEA Section 6(c) and 9(a). The court dismissed this claim and ruled that these CEA provisions do not contain any clear indication by Congress of their extraterritorial application, and that the alleged misconduct was so predominately foreign in nature that the presumption against extraterritoriality applied.
However, at least one federal court addressing the CEA Section 22 private rights of action has left open the question of whether the CFTC may be accorded greater flexibility to apply the CEA to extraterritorial conduct in the enforcement context. Specifically, the court raised, without analyzing, whether there is distinction between the extraterritorial application of the CEA in private rights of action under CEA Section 22 and enforcement actions brought by the CFTC itself.
Unless and until this issue is clarified by federal courts or a specific legislative fix addressing the extraterritorial application of CEA Sections 6(c) and 9(a) is enacted, it is very likely that the division will continue to take a broad view of its authority to apply the CEA extraterritorially and be undeterred in pursuing alleged violations that involve foreign bribery and other corrupt practices. Consequently, companies receiving such requests will be forced to decide whether to voluntarily comply with such requests or challenge the legality and enforceability of the subpoenas.
Limited Resources
The division clearly has a good faith, legitimate interest in protecting the integrity of CFTC jurisdictional markets and cooperating with other law enforcement agencies within its jurisdictional mandate under the CEA. The protection of fair and equitable trading in such markets is a policy objective that is, and should be, shared by all market participants.
However, the extension of the division’s statutory mission to coordinate with law enforcement partners for purposes of policing misconduct involving foreign corruption, as contemplated by the advisory, is not a judicious use of the division’s limited, but highly valuable resources. This is particularly true if the contemplated “law enforcement coordination,” as a practical matter, ends up involving nothing more than helping the DOJ and SEC enforce the FCPA. Given the breadth of its enforcement portfolio, this situation will only place a greater strain on the division’s ability to pursue its mission-critical enforcement priorities where the benefits to markets and consumers are significantly clearer.
Since its enactment in 2010, Dodd-Frank broadly expanded the scope of the CFTC's jurisdiction under the CEA over swap markets. This jurisdictional expansion brought a huge amount of new market activity into the enforcement purview of the division. Further, due to the rapid growth of innovative new products, practices and trading technologies, such as those involving cryptocurrencies and other virtual assets and high-frequency trading functionality, as well as a rapid increase in the amount of market data that must be analyzed to detect misconduct, investigations initiated by the division are increasingly complex and time- and resource-intensive.
The deployment of the division’s resources to address alleged extraterritorial violations of the CEA involving foreign corrupt practices also would effectively constitute a form of “piling on” with respect to FCPA investigations brought by the DOJ or SEC. The entrance of the CFTC as a new regulator in the fight against foreign corruption will unnecessarily add significant complexity and cost to resolving these matters. In certain jurisdictions, such action would be inconsistent with the CFTC’s longstanding approach of showing deference and comity to competent non-U.S. regulators.
These points are even more salient when considering the fact that the division’s ability to bring prosecutions for violations of the CEA involving bribery and other corrupt practices taking place outside of the U.S. is not at all clear, particularly where the alleged misconduct takes place exclusively in foreign markets for physical commodities. In addition to a growing body of federal case law declining to apply the CEA’s anti-manipulation and anti-fraud provisions to extraterritorial misconduct, legal questions persist regarding whether the division can successfully prosecute claims of manipulation when the alleged bribery or other forms of illicit foreign conduct do not involve a specific intent to effect a price or outright fraud.
Although the division’s good-faith intent to fulfill its statutory mission and protect the integrity of CFTC-jurisdictional markets is by no means in doubt, the policing of misconduct involving foreign corruption is an area pervasively regulated by the DOJ and SEC under the FCPA. In light of this fact as well as the division’s constrained resources and unfavorable federal precedent, the CFTC should assess whether the benefits, if any, of this initiative justify the diversion of resources required to prosecute successfully alleged CEA violations involving bribery and other forms of foreign corrupt practices. In the absence of a clear statutory directive, the better policy would be to reaffirm that the use of the division’s resources for purposes of coordinating with law enforcement partners is more properly dedicated to addressing CEA violations and misconduct that are clearly domestic in nature or have a direct and significant impact within the U.S.
A Proposed Legislative Fix
On Oct. 24, the U.S. House Committee on Agriculture published a discussion draft of legislation to reauthorize the CFTC. Notably, the discussion draft proposes to amend the CEA to provide the CFTC and DOJ with express extra-territorial enforcement authority. The proposed legislation would permit the provisions prohibiting fraud and manipulation in Section 6, and other provisions set forth in CEA Sections 4 and 9 that provide for enforcement by the CFTC or DOJ, to “apply to activities outside of the United States where such activities, independently or in conduction with activities in the United States, have or would have a reasonably foreseeable substantial effect within the United States.”
The proposal of this amendment to CEA Section 6 suggests that the CFTC views the federal court decisions involving Section 22 private claims as potentially limiting its ability to apply the current versions of CEA Sections 6(c) and 9(a) to alleged misconduct taking place outside of the U.S. The legislative amendment also raises substantial questions regarding the validity of the jurisdictional grounds for ongoing investigations of alleged CEA violations related to foreign bribery or other types of corruption brought by the division.
In conclusion, there are valid grounds for the division having the authority to reach extraterritorial misconduct as part of its overall mission to protect the integrity of U.S. commodity and commodity derivative markets. For both important policy and legal reasons, such authority should be appropriately tailored to ensure that any alleged misconduct has foreseeable, direct and significant effect within the U.S. Such an approach will provide regulatory certainty for market participants by avoiding a situation where the division is effectively conferred overly broad authority to investigate alleged misconduct in foreign markets.
In the end, however, such authority, even if appropriately tailored, does not change the fact there is no discernible regulatory gap with respect to the policing of bribery and other forms of foreign corruption by the DOJ and SEC under the FCPA that warrants or justifies the dedication of the division’s limited, but critical, resources in this area.
Editor's note: This article was revised on Oct. 29 to clarify the legislative implications.
