The long arm of the U.S. law is intimidating enough for corporations. Now the long arms of the law in other nations are getting in on the act.

The latest U.S. company tripped up by the global ambitions of overseas regulators in the Bank of New York, hit with a $22.5 million lawsuit by Russian authorities seeking to punish BONY for alleged illegal money transfers in that nation in the 1990s. Last month, the Russian Federal Customs Service accused BONY of ignoring the suit and failing to appear at a court hearing in Moscow.

BONY’s rationale for its Moscow no-show: It claims it neither has an office in Moscow nor conducts any business in the Russian Federation.

That hasn’t stopped Russian authorities. Another hearing in the BONY lawsuit is scheduled for November, and the Federal Customs Service asserted in a press release that the U.S. District Court for the Southern District of New York has already ruled that any award granted in Russia should be fully collectible in the United States. It also said that although the suit is being heard in a Russian court, it will be tried in accordance with U.S. law.

A BONY spokesman gave Compliance Week a terse, “We believe their claims are without merit,” when asked for comment. Still, the dispute underscores certain steps U.S. companies should take when doing business overseas to minimize their legal exposure.

The ultimate goal is to assure that the parent company’s “corporate veil” is not pierced by foreign subsidiaries. That is, all subsidiaries should be compliant with U.S. and native jurisdiction law, and properly maintained as separate, independent entities.

Richards

“If you follow proper compliance procedures and ensure that subsidiaries are complying with U.S. law and the foreign subsidiary is properly maintained, it is hard for the plaintiff to get to the parent,” says Bradley Richards, partner with Haynes and Boone.

Some exceptions arise. For example, U.S. law clearly prohibits bribery, so that cannot be done even through the operation of a local subsidiary. Nor can U.S. persons working at foreign subsidiaries boycott Israel.

But in broader terms, “Courts respect the separateness of subsidiaries,” says Steve Harris, a partner at the law firm Alston & Bird. “They will not automatically subject conduct of a subsidiary to the parent, unless they can prove direct unlawful conduct.”

Harris

This means carefully assuring the subsidiary acts independently and the parent is not involved in any business dealings in the overseas jurisdiction. The two must be separate legal entities, Harris stresses. “U.S. courts respect that,” he says. “The parent cannot be subject to a foreign jurisdiction because they are passive owners.”

Companies still, however, must carefully watch how they operate overseas. Companies can pierce the corporate veil if they commingle their funds with those of the subsidiaries, or the parent treats the subsidiary’s funds as its own. Also, there can be no interlocking directors, serving on both boards.

“If [litigants] can show the decisions are made by the parent, the courts may pierce the corporate veil,” Harris says. But, he adds, companies can provide funds to the subsidiary for their legal defense without piercing the veil.

Sometimes, a parent company makes the mistake of selling a product or service in a country where a separate subsidiary is conducting others types of business. That too can pierce the corporate veil if the subsidiary is sued, Harris warns. “The fact that business is being done may be enough to subject the parent to the jurisdiction,” he explains.

In the BONY case, Russian regulators are arguing that the parent bank should be liable for the judgment against its subsidiary. (As part of a deferred prosecution agreement with U.S. authorities, BONY did admit that its Russian affiliates participated in money laundering in the 1990s.) But what if the subsidiary refuses to pay or is unable to pay? Can the parent be held liable?

No, experts say. For a foreign plaintiff to reach the U.S. parent, it needs to get jurisdiction in a foreign court against the U.S. parent, according to Richards. The catch: If the foreign court claims jurisdiction, it may be challenged when it comes time to enforce the judgment in the United States. “Most of those are not recognized,” Richards says.

That hasn’t kept foreign plaintiffs from trying. Richards says foreigners frequently try to enforce judgment in the United States. How successful they are depends upon whether they undertook the proper procedure in the foreign courts, and upon the foreign court itself. For example, American courts don’t usually give easy recognition for their Russian counterparts, Richards says.

And while many countries have signed treaties that call on them to respect judgments in other countries, the United States has never signed a single convention on enforcement.

Bekker

“There is no universal treaty that provides for the recognition and enforcement of judgments,” says Pieter Bekker, a partner in the law firm of McDermott Will & Emery. “U.S. courts are not bound to enforce a Russian judgment.”

However, many companies may not realize that if the home country of the subsidiary has a treaty with a country where another subsidiary of the parent is located, litigants can go after the assets of that second subsidiary if the first fails to obey the judgment against it, says Zachary Rosenbaum, of the law firm Lowenstein Sandler.

And the United States is currently sitting at the table of the Hague Convention on the Recognition and Enforcement of Foreign Judgments in Civil and Commercial Matters. So far, however, U.S. officials have not participated directly.

Globally Binding Arbitration

Arbitration agreements are starkly different. The United States is a signatory for arbitration awards and will enforce those judgments even when the participant is a foreign subsidiary. “It surprises people to know that the U.S. courts are required to enforce arbitration decisions, but not foreign court decisions,” Richards says.

Rosenbaum

For that reason, companies should ensure they have competent counsel in the local jurisdiction, who are qualified to review the claims and assess the threat. “The best and most sophisticated counsel is needed,” Rosenbaum says. “You can’t just protect yourself from the United States.”

Whatever companies do, legal experts stress that they should not ignore it when a subsidiary is sued. “I get this question a lot,” Bekker says. “Should I stay away? Ignore it? My standard answer is, ‘stay away at your own risk.’”

He says not appearing in court could force a default judgment and perhaps even trigger contempt-of-court sanctions. Although such sanctions cannot be enforced outside Russia, companies should not ignore them, Bekker adds. “It’s important to address problems in foreign countries with subsidiaries with the same kind of immediacy as you would in the U.S.”

Bekker says the best way to get protection is to file a competing lawsuit in U.S. courts to seek an anti-suit injunction. Such a decision is not easy to get, he admits, but if the U.S. court has jurisdiction over the entity suing your foreign subsidiary and there is something extraordinarily bad happening, the anti-suit injunction prevents the plaintiff suing your subsidiary from suing you.

And even if your subsidiary has no money, Roberts warns that judgments can sit out there for years until it finally accumulates some assets. Says Roberts: “You are much more likely to defeat [a case] if you defend yourself.”

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