Turkey’s Majority State-Owned Halkbank Is Not Immune from U.S. Prosecution in Iran Sanctions and Money Laundering Case

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Court Rejects Halkbank’s Claim That the Foreign Sovereign Immunities Act Shields the Bank From Prosecution

A motion to dismiss an indictment accusing Turkey’s majority state-owned Halkbank of money laundering, bank fraud and Iran-related sanctions offenses was denied by U.S. District Judge Richard M. Berman of the Southern District of New York in a recent 16-page decision. The Court ruled that the Foreign Sovereign Immunities Act (“FSIA”) does not bestow immunity in U.S. criminal proceedings on financial institutions owned in whole or in part by foreign governments. Even if it did, the FSIA’s commercial activity exemptions would apply and support Halkbank’s prosecution. This development is the latest in the ongoing, complex battle between Halkbank the U.S. Department of Justice – a prosecution involving potential political battles as well.

As we have blogged, the U.S. Attorney for the Southern District of New York charged Halkbank on October 15, 2019 with a six count indictment for bank fraud, money laundering and conspiracy to violate the International Emergency Economic Powers Act (“IEEPA”), stemming from the bank’s alleged involvement in a multi-billion dollar scheme to evade U.S. sanctions against Iran. The Court later rejected an attempt by Halkbank to enter a “special appearance” contesting jurisdiction, making it clear that international financial institutions must appear for arraignment in criminal actions. The decision served as a warning to foreign defendants brought into U.S. federal court: issues of jurisdiction in criminal cases must be litigated only after arraignment.

Judge Berman’s most recent ruling found that Halkbank is not immune from criminal prosecution in the United States under FSIA, and that the allegations in the indictment were plead sufficiently to avoid dismissal. This ruling of course has a potentially broader application to any foreign majority state-owned entities which allegedly scheme to violate U.S. criminal law: given sufficient nexus between the scheme and the United States, FSIA will not shield the foreign entities, because the Act only applies to civil matters that do not fall under its “commercial activities” exceptions.

The FSIA Analysis: No Safe Harbor in U.S. Criminal Actions

The Court began its analysis by discussing the Second Circuit’s recent decision in in United States v. Atilla, 99 F.3d 118 (2d Cir. 2020), to uphold former Halkbank deputy manager Mehmet Hakan Atilla’s convictions at trial. Atilla had made arguments similar to the bank’s arguments that there was an insufficient nexus between the alleged scheme at issue and the United States. Although both parties attempted to rely on the Atilla decision, the Court found that the Second Circuit decision assisted the government because it confirmed that Atilla had attempted to violate the IEEPA by exporting services from the United States to Iran, and that the necessary international payments “were likely to pass through the U.S. financial system.” Further, the decision reflected that “senior-level executives at Halkbank knew the particulars of the scheme, including the importance of the international payments and of U.S. dollar transactions[,]” and that Atilla had “repeatedly lied to [U.S.] Treasury officials to conceal the sanctions avoidance scheme,” and he knew that the scheme “involved international payments through U.S. banks that were violations of U.S. sanctions.” These findings set the stage for assessing Halkbank’s claims.

Halkbank argued that its majority government-owned status made it immune from prosecution because the bank was an “instrumentality” of the Turkish government and thus shielded by the FSIA, which sets limits on whether a foreign sovereign nation may be sued in U.S. courts. The Court concluded that the FSIA does not apply in criminal matters, because the intent of the FSIA is to give courts jurisdiction in civil matters over foreign states and their instrumentalities that had waived their immunity. According to the ruling, nothing in the text or the legislative history of the Act indicates that it even applies to criminal proceedings.

In addition to not being applicable in criminal matters, the FSIA also contains a number of commercial activities exemptions that preclude immunity for foreign states in three circumstances:

(1) [when] the action is based upon a commercial activity carried on in the United States by the foreign state; or

(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 a commercial activity of the foreign state elsewhere and that act causes a direct effect in the United States.

The Court ruled that even if the FSIA applied to criminal actions, the conduct alleged in the indictment still would fall under one of the commercial exemptions to the FSIA. Judge Berman found that “Halkbank’s business meetings, conference calls, and other interactions and communications at the U.S. Department of Treasury described in the indictment fall under the first commercial activity exception. . . . They amount to ‘commercial activity carried on in the United States.’” The Court went on to state that Halkbank’s activities also fell under the second commercial activity exemption, and that the bank’s interactions with the Department of the Treasury – coupled with its alleged money laundering of more than $1 billion through the U.S. financial system in violation of the embargo on Iran – fell under the third commercial activity exemption.

The Court Rejects Other Arguments to Dismiss

Halkbank’s motion to dismiss similarly failed on other grounds. The Court held that the presumption against the extraterritorial application of U.S. statutes was not even a question here because the government’s allegations of a scheme to deceive U.S. regulators combined with almost $1 billion in transactions flowing through correspondent bank accounts held at U.S. financial institutions were sufficient to prove a domestic nexus and obviate the issue. Similarly, the Court rejected Halkbank’s argument that the Government must establish “minimum-contacts” for jurisdictional purposes as irrelevant in a criminal case, holding that the Court had personal jurisdiction as “Halkbank purposely availed itself of the United States banking system as part of its alleged scheme[,]” and that such jurisdictional challenges do not apply to criminal matters.

Judge Berman also rejected the bank’s arguments that the indictment failed to allege adequately a conspiracy to defraud the United States, bank fraud, and conspiracy to commit bank fraud. The Court noted that for each count, the indictment sufficiently tracked the language of the statute to withstand dismissal. Finally, Judge Berman denied as premature Halkbank’s contention that Count Two, conspiracy to violate the IEEPA, and Count Six, conspiracy to commit money laundering, were multiplicitous (multiplicity refers to a problem of over-charging, when the prosecution cannot prove one criminal charge without simultaneously proving another criminal charge). Not only did the Court defer deciding the multiplicity argument until trial, but it further stated that “if the Court were to deal with the issue on the merits at this time, it would likely reject the motion” due to the fact that either crime could be proven independently from each other.

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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