​Domestic Laws with Effect in Foreign Jurisdictions

In October 2020 a case was brought in a US federal court in Washington DC against Crown Prince Mohammed bin Salman of Saudi Arabia in respect of the Crown Prince’s alleged involvement in the murder of the journalist Jamal Kashoggi in Turkey in 2018. The case was brought in part under the Alien Torts Statute (ATS) that dates from 1789. ATS enables action in US courts against civil wrongs inflicted on non-US citizens outside the US. The ATS is a rare example of a law that specifically provides for effect outside the borders of the country making the law. In general, there is a very long-established presumption on both sides of the Atlantic against ‘extraterritoriality’. This blog looks at that presumption and what is changing it.

The presumption against extraterritoriality
 
The presumption that laws only have domestic effect in the country where they were made reflects the natural limits of the authority of legislators and law makers. They owe their position to a domestic electorate and the scope of their authority is concomitant with that electorate. Other countries have their own electorates and their own rulemaking. Each is answerable to their own. In the case of the US, the ATS remained little used for about 200 years when it started to be used by human rights groups, mainly against business corporations. In this new instance the case has been brought by Kashoggi’s fiancée and the advocacy organisation he had set up to promote democracy in the Arab world. ​The general presumption against extraterritoriality was reaffirmed by the US Supreme Court as recently as 2010.
 
Domestic jurisdictions reaching out
 
The first factor that is changing this presumption is the awareness that in an ever more interconnected world it is increasingly possible for domestic actors and acts to have an impact on the outside world. For example, an NGO concerned with labour standards may threaten the reputation of a multinational if it does not observe acceptable employment standards throughout its international supply chain. Although NGOs and advocacy organisations are particularly visible in trying to export standards, there are many professional actors such as accountants and lawyers who also have an interest in exporting ‘best practice’ and in developing common standards.
 
The outside world reaching in
 
In addition to actors motivated to reach out, there is increasing awareness of the other side of the coin, the impact of outside actors reaching in and having an impact on areas of concern or interest to the domestic jurisdiction. This does not have to be accompanied by an actual physical presence. A bank or investment firm operating in a foreign territory can offer products or services not available from domestic entities; a foreign based manufacturer may be able to offer lower prices because it does not have to observe rigorous environmental standards; a foreign based internet platform provider may offer an attractive payments system without the same privacy standards. Each can have an impact on domestic standards from an offshore location.
 
The examples of the EU and US
 
The same forces apply to governments. They may want to reach out in order to have influence in the outside world. They may also want to act against the outside world reaching in so as to protect their own standards. There is a motive both to project and to protect. Both motivations are expressed in the EU’s GDPR that aims to protect privacy standards in the EU and to encourage other countries to adopt the same standards. While the EU has taken the lead in respect of privacy, the US has long had the lead in respect of the financial probity of markets. The EU is also preparing action in relation to protecting its own environmental standards through the design of a carbon border tax.
 
Supply effects and the means of influence
 
When the ability of governments to have external effect is assessed, the economist Albert Hirschman made a distinction between ‘supply’ effects and the means of influence. Supply effects are those such as the size of a market. Thus, the US can have an impact on outside jurisdictions because it provides the largest financial market in the world and foreign financial entities want to make use of it. The means of influence are mainly regulatory. Regulations can be framed in such a way as to have external effect.
 
Regulatory influence: net costs and benefits
 
When governments choose a regulatory approach as their means of influence, they make three types of decision. First, they have to frame the menu – the range of options they will consider  and choose from. The menu includes positive incentives for outside jurisdictions to adopt compatible practices and standards; it also can include penalties such as fines and exclusion from the market. Secondly, they will have to make their choice from the menu. If differences with outside jurisdictions are not too far apart then positive incentives, such as monitoring performance, may be sufficient to bring about convergence. If differences are deeply embedded, then penalties may be called for in order to induce change or to deny market access. Thirdly, their choices from the menu are not cost free. A border tax will raise costs to their own consumers. The calculation thus is about weighing the benefits net of any costs and unacceptable adverse effects. 
 
Extraterritorial effect: the new normal
 
We are moving from a world where extraterritorial effect is the exception to one where it is becoming the new normal. The Chinese government passes laws to control what their citizens say and do outside China’s borders. The EU wants to influence environmental standards down the supply chain. The US has traditionally taken a lead against foreign corrupt practices. 
 
The concern around the growth of legislation with external effect is that it embodies and encourages unilateralism at the expense of internationally agreed approaches. This is not always the case. Some of the legislation is enacted in order to reflect international agreements. However, some of the unilateralism is unnecessary. In principle, the EU and US could and should get together to adopt similar standards in such areas as environmental protection and privacy. In addition, other unilateral approaches might be avoided or mitigated by multilateral understandings reached for example in GATT. Nevertheless, as long as we live in a world where different countries hold and apply very different values we can expect countries to act in ways that continue to project and to protect their own.