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U.S. Federal Prosecutors May Now Target Foreign Sovereigns and Their Entities

April 20, 2023

On April 19, 2023, the United States Supreme Court decided for the first time that foreign sovereigns and foreign-owned entities are subject to criminal prosecution in United States courts, rejecting the contentions of a Turkish state-owned bank that it was immune from prosecution under the Foreign Sovereign Immunities Act (“FSIA”).  In a rare consensus, all nine justices agreed that Turkish-owned bank, Halkbank, could be prosecuted for evading economic sanctions against Iran. Seven justices held that the FSIA applied to civil cases only, and two justices dissented in part on the ground that the FSIA did apply in the criminal context, but concurred in the judgment on the ground that the criminal conduct at issue was within the commercial activities exception to the FSIA.[1]

The case, Turkiye Halk Bankasi A.S. v. United States (“Halkbank”), will have significant impact by raising the risk of prosecution for foreign sovereigns and state-owned enterprises, and sovereign-connected activities more generally.  In addition, it is likely to affect how the United States Government and its entities are treated by courts abroad, where immunity from criminal prosecution has been, until now, the general rule.  Because many United States statutes apply extraterritorially, the Department of Justice can charge foreign sovereigns even for conduct that occurred outside the United States.  Sovereigns, of course, are entities that, like corporations, cannot be put in prison, but they can be subject to large fines and further consequences of felony convictions, including limitations on their ability to take actions in the United States.

In Halkbank, a Turkish bank, with the assistance of high-ranking Turkish government officials, laundered billions of dollars of Iranian energy sector proceeds through the global financial system.  This was in violation of U.S. sanctions, but was not illegal in Turkey.  And neither the officials nor, of course, the Republic of Turkey or its instrumentalities are U.S. persons.  However, since virtually all dollars are cleared through New York, the Iranian funds allegedly laundered by Halkbank would have gone through New York correspondent banks. It was these momentary electronic transfers through New York which presumably provided a basis for criminal jurisdiction here under the statute.  The indictment also charged that Halkbank made false statements in reply to the U.S. Treasury Department in an effort to conceal the scheme.  Two officials were convicted at trial; other charged officials are not in the United States and have not been arraigned.

Both the U.S. District Court for the Southern District of New York and the U.S. Court of Appeals for the Second Circuit found that they could exercise jurisdiction over Halkbank under the general federal criminal jurisdictional statute, which gives federal courts jurisdiction over “all offenses against the laws of the United States.”  Halkbank argued that this broad grant was qualified by the FSIA, which the Supreme Court has previously stated in unqualified terms is “the sole basis for obtaining jurisdiction over a foreign state in federal court.”  All parties agreed that Halkbank was a sovereign entity; the only question presented was the intersection of the broad grant of criminal jurisdiction and the equally broad statement of immunity for foreign sovereigns.  The government asserted that the FSIA was structured with civil cases in mind and is silent on the specific issue of criminal jurisdiction.  Halkbank countered that the FSIA grew out of and codified a common law tradition of broad immunity for foreign sovereigns based on comity and an international consensus that the use of domestic courts against sovereigns was not conducive to global order.  It also pointed out that the mere omission in the FSIA of text referring specifically to criminal jurisdiction was not dispositive, as the Supreme Court found that the FSIA applied to admiralty and maritime jurisdiction, which is likewise not referenced in the FSIA.  It also cited Section 1604 of the FSIA, which states, in relevant part: “Subject to existing international agreements . . . [,] a foreign state shall be immune from the jurisdiction of the courts of the United States . . . except as provided in sections 1605 to 1607 of this chapter,” which are enumerated statutory exceptions.

The Court ignored the broad language of the FSIA and instead focused on other statutory language and case law that appeared to analyze the law in terms of civil jurisdiction.  But of course the Court had never been presented with the issue of criminal jurisdiction, and rather than read the FSIA as broadly effecting the purposes of foreign sovereign immunity, it purported to “read the statute as a whole,” and decided that the FSIA was not a “mangled statute” that “awkwardly flip-flops from civil to civil-and-criminal back to civil again in sequential provisions.”  Instead, the Court read the statute as operating “within a single universe of civil matters.”  The Court gave short shrift to the argument that its newly-minted limitation of the FSIA to civil matters and exposure of sovereigns to criminal prosecution would “negatively affect U.S. national security and foreign policy.”  The Court concluded curtly that “It is not our role to rewrite the FSIA based on purported policy concerns that Congress and the President have not seen fit to recognize.”

The Halkbank decision is far more than a restrictive neo-textualist construction of a technical statute.  The criminal courts of sovereign states (and even U.S. state courts) may now become an extension of foreign policy interests and initiatives.  All foreign sovereigns and sovereign-owned entities would be well advised to review their activities carefully, especially with respect to activities that might implicate United States sanctions, money laundering, or anti-corruption laws.  There is no doubt that today numerous banks in many jurisdictions are moving vast amounts of funds for the many sanctioned countries through the global financial system, and likely causing jurisdiction-establishing ripples in the United States.  This is likely to include funds from places like Russia, North Korea, Venezuela, Cuba and Syria moved in conjunction with friendly financial institutions in countries that can clear U.S. dollars.  Equally, American government-controlled entities like the Export-Import Bank, the Agency for International Development, and even such entities as the CIA, the Defense Department, and of course defense contractors conduct activities that could be subject to criminal prosecution for violations of foreign criminal laws allegedly committed abroad.  The ruling will no doubt lead to numerous diplomatic conflicts if nations use this decision to pursue foreign policy goals through the exercise of criminal jurisdiction, or respond to U.S. prosecutions with tit-for-tat criminal cases.  The net effect will be continued erosion of the protection of sovereign immunity worldwide.

[1] The majority held that common law immunities could apply, and remanded the case for further consideration on that point.

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