S.D.N.Y. District Court Rules Foreign Sovereigns Are Not Immune from Criminal Jurisdiction in U.S. Court

ALERT MEMORANDUM S.D.N.Y. District Court Rules Foreign Sovereigns Are Not Immune From Criminal Jurisdiction In U.S. Court.

October 9, 2020 On October 1, 2020, the U.S. District Court for the If you have any questions concerning this memorandum, please reach out to Southern District of New York (“SDNY”) issued an your regular firm contact or the important ruling in U.S. v. Halkbank, holding that following authors foreign state-owned entities (“SOEs”) can be subject to WASHINGTON D.C. 1 criminal jurisdiction in the United States. The Court Matthew D. Slater denied the defendant Turkish state-owned bank’s +1 202 974 1930 motion to dismiss an indictment charging it with [email protected] conspiracy, bank fraud, and money laundering in N E W YO R K connection with allegedly processing $20 billion in Carmine D. Boccuzzi, Jr. +1 212 225 2508 Iranian oil and gas proceeds through the U.S. and [email protected] international financial systems in violation of U.S. Jonathan S. Kolodner sanctions against Iran. +1 212 225 2690 [email protected]

With this decision, the SDNY joins three Circuit courts Rahul Mukhi that have addressed the unsettled issue by ruling that +1 212 225 291 the Foreign Sovereign Immunities Act (“FSIA”) does [email protected] not preclude a U.S. court from exercising criminal Boaz S. Morag +1 212 225 2894 jurisdiction over a foreign sovereign instrumentality. [email protected] The Halkbank Court went a step further, rejecting Rathna J. Ramamurthi Halkbank’s defenses related to common-law sovereign +1 212 225 2794 immunity, constitutional due process, and [email protected] extraterritoriality. In addition to expanding the scope Hyatt Mustefa of liability that foreign SOEs may face in U.S. court, +1 212 225 2628 the decision is also notable for its strengthening of [email protected] prosecutorial discretion on questions of foreign sovereign immunity.

1 United States v. Halkbank, No. 15 CR 867 (RMB), 2020 WL 5849512 (S.D.N.Y. Oct. 1, 2020) (“Halkbank”).

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Background jurisdiction in “any nonjury civil action In October 2019, the U.S. Attorney’s against a foreign state . . . with respect to which the foreign state is not entitled to Office for the Southern District of New 4 York (the “USAO”) indicted Halkbank, one immunity.” One commonly invoked of Turkey’s largest state-owned banks, on exception allows suits against a foreign six counts of conspiracy, bank fraud, and sovereign entity based on commercial activity carried out within the United money laundering, alleging that Halkbank 5 laundered over $1 billion of Iranian oil and States. In addition to foreign states gas proceeds through the U.S. financial themselves, foreign sovereign agencies, system, and approximately $20 billion instrumentalities, and organs—including through the international financial system, in SOEs such as Halkbank—can qualify for violation of U.S. and other sanctions. immunity under the FSIA. Two of Halkbank’s alleged co- In civil cases, the U.S. Supreme Court conspirators, Turkish and Iranian citizen has affirmed that the FSIA is “the sole basis for obtaining jurisdiction over a foreign Reza Zarrab and Halkbank employee 6 Mehmet Hakan Atilla, were indicted on state.” But the Supreme Court has never similar charges. After unsuccessfully ruled on whether or how the FSIA applies to moving to dismiss their respective criminal proceedings, and lower courts have indictments, Zarrab pled guilty to designing reached varying conclusions. the sanctions evasion scheme and Atilla was The Decision convicted by a jury and sentenced to a 32- In Halkbank, U.S. District Judge Richard month term of incarceration, which was M. Berman of the SDNY rejected all of affirmed by the Second Circuit in July Halkbank’s arguments: 2020.2 First, with respect to sovereign Halkbank moved to dismiss the charges immunity, the Court held that, although against it, claiming that (i) as a majority Halkbank would qualify for the FSIA’s state-owned Turkish bank, it is immune protections since it is majority-owned by the from criminal prosecution under the FSIA Turkish government, the FSIA does not and common law; (ii) the Court lacked apply in criminal cases. According to the personal jurisdiction over it; and (iii) the Court, the FSIA’s purpose is to create presumption against extraterritoriality barred jurisdiction over certain civil claims, and the charges since the criminal statutes at 3 nothing in its text or legislative history issue do not apply extraterritorially. suggests that it applies to criminal The FSIA provides that a “foreign state proceedings. Even if the FSIA did apply to shall be immune from the jurisdiction of the criminal proceedings—and in the Court’s courts of the United States” unless a view it clearly did not—the Court held that specified exception to immunity applies and the FSIA’s exception to immunity for that U.S. district courts shall have commercial activity in the United States

2 United States v. Zarrab, 2016 WL 6820737 4 28 U.S.C. § 1604; 28 U.S.C. § 1330(a). (S.D.N.Y. Oct. 17, 2016); United States v. Atilla, 966 5 28 U.S.C. § 1605(a)(2). F.3d 118 (2d Cir. 2020). 6 See, e.g., Argentine Republic v. Amerada Hess 3 Halkbank also unsuccessfully argued that the Shipping Corp., 488 U.S. 428, 434 (1989). charges failed on the merits and/or were duplicative.

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would deprive Halkbank of immunity here, Halkbank emphasized that it was a foreign based on Halkbank’s interactions and party engaged in foreign conduct that was communications with the U.S. Department legal under foreign law, and less than five of Treasury in and outside the United States percent of the allegedly illicit transfers in connection with its use of the U.S. passed through U.S. accounts. The Court financial system to carry out its scheme. nevertheless held that extraterritoriality was The Court also denied Halkbank’s claim no bar to the prosecution since the gravamen of common-law immunity, which the Court of the conduct, and the alleged scheme’s described as a “case-by-case prerogative of very purpose, was to launder funds through the Executive Branch.”7 The Court agreed U.S. financial institutions, perpetrated by with the USAO’s argument that a decision numerous misrepresentations to U.S. by the USAO to prosecute manifests a “clear Department of Treasury officials. sentiment” of the Executive Branch that no Takeaways 8 such immunity should be recognized. As the Halkbank Court acknowledged in Second, the Court held that because it a footnote, “not all Circuits agree” on had subject matter jurisdiction over the whether and under what circumstances U.S. statutory offenses charged, it necessarily had courts can exercise criminal jurisdiction personal jurisdiction over Halkbank for the over foreign sovereign entities—and the charges.9 The Court disagreed with Second Circuit may now have a chance to Halkbank that personal jurisdiction weigh in.10 The Sixth Circuit has held that separately required Halkbank to have the FSIA “grants immunity to foreign relevant “minimum contacts” with the sovereigns from criminal prosecution, United States, but held that the minimum absent an international agreement stating contacts test in any event would be satisfied otherwise.”11 In contrast to the Sixth in light of the relevant conduct’s strong Circuit, but consistent with the SDNY in nexus to the United States. Halkbank, the Tenth, Eleventh, and D.C. Third, based on this U.S. nexus, the Circuits have held that the FSIA does not preclude jurisdiction over foreign sovereign Court also ruled that the presumption against 12 extraterritoriality, which seeks to limit the entities in criminal cases. In the geographical reach of U.S. statutes where international context, South Africa, Canada, there is ambiguity, did not require dismissal. Pakistan, Singapore, and the United

7 Halkbank, 2020 WL 5849512, at *5. 12 Southway v. Central Bank of Nigeria, 198 F.3d 8 Id. 1210, 1215 (10th Cir. 1999) (holding in the RICO 9 See also 18 U.S.C. § 3231 (“The district courts of context that if Congress intended for sovereign the United States shall have original jurisdiction . . . entities to be “immune from criminal indictment of all offenses against the laws of the United States”). under the FSIA,” it “should amend the FSIA to 10 Halkbank, 2020 WL 5849512 at *4 n.5. United expressly so state.”); United States v. Noriega, 117 States v. Biggs, No. 06-3196 (CR), 2008 WL F.3d 1206, 1212 (11th Cir. 1997) (The “FSIA 1741625, at *1 (2d Cir. Apr. 14, 2008) involved addresses neither head-of-state immunity, nor foreign related questions, but there the Second Circuit sovereign immunity in the criminal context[.]”); In re rejected FSIA immunity on multiple grounds, Grand Jury Subpoena, 912 F.3d 623, 634 (D.C. Cir. including that the defendant did not qualify as a 2019) (affirming criminal contempt order against “foreign state” under the FSIA. foreign state-owned entity for non-compliance with 11 Keller v. Central Bank of Nigeria, 277 F.3d 811, grand jury subpoena). 820 (6th Cir. 2002) (reaching this holding in context of the RICO indictable act requirement).

ALERT MEMORANDUM

Kingdom have enacted legislation that without requiring a formal statement from specifically prohibits exercise of criminal the government authorities with primacy jurisdiction over other sovereigns. over foreign relations. The Halkbank Court Even U.S. courts that agree that a also rejected the argument that due process foreign sovereign entity can be subject to principles may provide a foreign SOE with defenses related to the “minimum contacts” criminal jurisdiction do not necessarily 13 agree on the circumstances under which personal jurisdiction test. While this may be the norm in criminal prosecutions, it such jurisdiction may be exercised. The 14 D.C. Circuit—which in a case related to the would be controversial under the FSIA. Mueller investigation became the first to The U.S. government has only rarely affirm the actual exercise of criminal sought to pursue criminal charges against jurisdiction over a foreign sovereign entity foreign sovereign entities such as SOEs, and (see our previous alerts here and here)— such cases are often resolved without indicated that although the FSIA is not a expressly reaching the question of the source of jurisdiction or immunity in sovereign entity’s potential immunity from criminal matters, the FSIA’s exceptions to criminal liability. Criminal charges have immunity nevertheless apply in the criminal never been brought against a foreign state context. By contrast, the Halkbank Court itself. While Halkbank and other similar considered the FSIA’s exceptions only while cases so far have all involved foreign SOEs assuming arguendo that the FSIA provides rather than foreign states themselves, their immunity in criminal matters. reasoning could potentially be applied in The Halkbank decision also potentially either context. broadens the scope of liability by The Halkbank decision adds to the U.S. eliminating certain defenses that have so far government’s arsenal. In addition to been left open by the Circuit courts. In exerting diplomatic pressure or imposing particular, the Halkbank Court ruled that sanctions, the U.S. government can now common law immunity can never be a draw upon this decision, and the growing defense in criminal proceedings against chorus it joins, to institute (or threaten) foreign sovereign entities, since the criminal process against SOEs and other prosecutor’s decision to bring charges itself foreign sovereign entities, which would have manifests the position of the U.S. Executive only a restricted set of defenses available to Branch that no common law immunity them under Halkbank’s reasoning if it should apply. This potentially vests prevails in the courts. increased power in prosecutors, by further … committing questions of foreign sovereign criminal liability to prosecutorial discretion CLEARY GOTTLIEB

13 Cf. In re Grand Jury Subpoena, 912 F.3d at 635 Energy Ltd. v. State Prop. Fund of Ukr., 411 F.3d (Williams, J. concurring) (describing unasserted 296, 301 (D.C. Cir. 2005); Frontera Res. AzerCorp. jurisdictional defenses related to minimum contacts). v. State Oil Co. of Azer. Republic, 582 F.3d 393 (2d 14 The D.C. Circuit and Second Circuit have held that Cir. 2009). The Second Circuit will consider due process is not a constraint on the exercise of exceptions to this rule when the foreign sovereign personal jurisdiction over foreign states, but that instrumentality is alleged to be the alter ego of the foreign state-owned entities might be entitled to such foreign state. See Gater Assets Ltd. v. AO protections. See GSS Group v. Liberian Port Moldovagaz, No. 19-3550 (calendared for argument Authority, 680 F.3d 805 (D.C. Cir. 2012); TMR on October 20, 2020).