Second Circuit Says Turkish Halkbank Must Face Criminal Charges In Money Laundering and Iran Sanctions Case

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The Second U.S. Circuit Court of Appeals, in a recent 27-page decision, held that Halkbank, the state-owned Turkish lender, cannot claim sovereign immunity under the Foreign Sovereign Immunities Act (“FSIA”) in a money laundering and sanctions-related prosecution.  Upholding a decision by U.S. District Judge Richard M. Berman, the court ruled that even if the FSIA could shield the bank in a criminal case, the charges against Halkbank fall under the “commercial activity” exception to FSIA immunity.  This interpretation of the commercial activity exception significantly limits the immunity bestowed under the FSIA in criminal cases and furthers American deterrence against foreign financial institutions that allegedly facilitate evasion of U.S. sanctions or launder funds through the U.S. financial system.  Halkbank now faces potential trial for an alleged $20 billion money laundering scheme, bank fraud, and conspiracy charges.

As we blogged, a six-count indictment returned in October 2019 charged Halkbank with money laundering, bank fraud, and sanctions offenses under the International Emergency Economic Powers Act, or IEEPA, arising from Halkbank’s alleged involvement in a multibillion-dollar scheme to evade U.S. sanctions regarding Iran.  Halkbank is accused of helping Iran evade U.S. sanctions by laundering billions of dollars of Iranian oil and natural gas revenue, and then permitting Iran to use the proceeds to purchase gold and convert it to cash.  Prosecutors further accuse Halkbank of covering up these transactions by lying to U.S. Treasury Department officials and disguising the movement of funds as purchases of food and medicine so they would qualify for a “humanitarian exception” to U.S. sanctions.

Halkbank moved to dismiss the indictment, claiming that the FSIA shielded the bank from criminal prosecution because it is majority owned by the Turkish Government.  As we discussed here, the district court disagreed and ruled in a 16-page opinion issued in October 2020 that the FSIA does not bestow immunity in U.S. criminal proceedings on financial institutions owned in whole or in part by foreign governments.  Further, even if it did, the conduct alleged in the indictment would fall under one of the commercial exemptions to the FSIA to permit Halkbank’s prosecution.

In its October 22, 2021 ruling, the Second Circuit, after finding that it had jurisdiction to hear the bank’s appeal, side-stepped the contested issue of whether the FSIA confers immunity in the criminal context.  Instead, the court decided the case under the FSIA’s commercial activity exception.  Under the exception, the FSIA does not provide immunity to foreign states for actions failing into one of three categories: (1) “a commercial activity carried on in the United States by the foreign state;” (2) “upon an act performed in the United States in connection with a commercial activity of the foreign state elsewhere;” or (3) “upon an act outside the territory of the United States in connection with the commercial activity of the foreign state elsewhere and that act causes a direct effect in the United States.”

The Second Circuit explained that Halkbank’s alleged participation in money laundering and other fraudulent schemes designed to evade U.S. sanctions falls within all three categories of the exception.  First, Halkbank’s communications – meetings and conference calls with Treasury officials in the U.S. – are the type of activity in which banks routinely engage and therefore satisfy the first category.  Alternatively, these communications also satisfied the second category.  Further, Halkbank’s participation in banking activities performed through non-U.S. transactions on behalf of the government of Iran nonetheless caused a “direct effect” in the United States, thereby satisfying the third category, because they ultimately caused U.S. financial institutions to participate in laundering over $1 billion through the U.S. financial system.

The court rejected Halkbank’s argument that its activities outside the U.S. were “sovereign, not commercial” because, according to the bank, the government of Turkey designated the bank as its sole repository for the proceeds from the sale of Iranian gas and oil.  The court reasoned that to categorize its activities as sovereign, Halkbank “conflates the act with its purpose.”  In other words, although the bank’s purpose was a repository for the Turkish government’s Iranian oil and gas proceeds, its actions were to facilitate a scheme to launder money, which constituted “an activity that could be, and in fact regularly is, performed by private-sector businesses.”

The court similarly rejected Halkbank’s argument that even if the FSIA did not confer foreign-sovereign immunity in criminal cases, Halkbank was nevertheless immune from criminal prosecution under common law.  Even if the FSIA conferred sovereign immunity in criminal cases, then its enactment displaced pre-existing common law practice.  Alternatively, common law also had an exception for foreign state’s commercial activity, or sovereign immunity determinations were the prerogative of the Executive Branch, under which no sovereign immunity existed.

Under the Second Circuit’s ruling, foreign financial institutions accused of economic crime will be unlikely to find much protection under the FSIA.  Even if foreign financial institutions do not engage in discussions with U.S. officials, as Halkbank did, foreign financial dealings of any scale will almost invariably touch the U.S. financial system and correspondent accounts held in the U.S., thereby satisfying the third category.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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