Since enactment of the Bank Secrecy Act of 1970, the US government has had tools at its disposal to prevent money laundering through US financial institutions. Congress significantly expanded this authority in the USA PATRIOT Act of 2001 by incorporating new provisions to combat the use of correspondent bank accounts of US financial institutions to engage in money laundering and finance terrorist activities. Recently, on January 1, 2021, Congress enacted the National Defense Authorization Act (NDAA) for Fiscal Year 2021, which incorporates parts of the Combating Money Laundering, Terrorist Financing, and Counterfeiting Act of 2019 introduced by Senators Chuck Grassley and Dianne Feinstein.1 Most notably, the new law permits the Department of Justice (DOJ) and Department of Treasury (Treasury) to subpoena foreign-located bank records if the foreign bank maintains a US correspondent account and without regard to whether the correspondent account was used as part of the potential violation of US law. This new authority may be exercised in any investigation of a violation of federal criminal law, in civil asset forfeiture proceedings, and in any investigation conducted under the Bank Secrecy Act/anti-money laundering laws and regulations.
PATRIOT Act Background
In the USA PATRIOT Act of 2001, following the Senate Permanent Subcommittee on Investigations' year-long investigation of correspondent banking and its use as a tool for laundering money, and in the wake of the 9/11 attacks, Congress enacted new provisions subjecting foreign financial institutions to special scrutiny, particularly where they pose risks of criminal abuse such as money laundering or terrorist financing.2 One major area of concern for Congress was "correspondent bank accounts," which Congress found had been "one of the banking mechanisms susceptible in some circumstances to manipulation by foreign banks to permit the laundering of funds by hiding the identity of real parties in interest to financial transactions."3 Correspondent bank accounts are accounts established for foreign financial institutions to receive deposits from, or to make payments or other disbursements on behalf of, foreign financial institutions, or to handle other financial transactions related to such foreign financial institutions.4 Criminal enterprises may utilize correspondent bank accounts to conceal the illicit origin of funds by depositing an illicitly obtained foreign currency into a foreign bank and then facilitating a payment in US dollars through the US correspondent bank account of that foreign bank.
Because of that risk, the PATRIOT Act imposed special due diligence and enhanced due diligence requirements on US financial institutions that maintain correspondent accounts for foreign financial institutions or private banking accounts for non-US persons, and prohibited covered financial institutions from maintaining a correspondent account for a shell foreign bank.5 The PATRIOT Act also authorized the Attorney General or the Treasury Secretary to issue a "subpoena to any foreign bank that maintains a correspondent account in the United States" and to "request records related to such correspondent account, including records maintained outside of the United States relating to the deposit of funds into the foreign bank."6
In August 2019, the DC Circuit in In re Sealed Case interpreted these provisions expansively, affirming a district court order compelling three Chinese banks to produce records for correspondent banking transactions associated with a Chinese company purportedly acting as a front to finance North Korea's nuclear weapons program in violation of US sanctions.7 The DC Circuit first rejected the Chinese banks' challenge that the order exceeded the statutory authority under the PATRIOT Act; it concluded that the Act subjected to disclosure records of all transactions that were connected to a company's use of US correspondent accounts, not merely records of transactions that themselves passed through US correspondent accounts.8 The court then rejected the banks' international comity challenge that the banks would be subject to significant penalties under a Chinese secrecy law if they complied with the order.9 The court reasoned that the unique nature of and the appropriate tailoring of the records requested, as well as the fact that they related to an important national security interest, weighed for enforcing the subpoena despite China's interest in safeguarding its secrecy laws.10Notably, the court disregarded the US government's failure to resort to the traditional mutual legal assistance agreement between the US and China, accepting its declaration that the Chinese government had not satisfactorily engaged in that process regarding past investigations involving North Korea.11
Enactment of NDAA Foreign Bank Evidence Provision
In In re Sealed Case, the court agreed with the government's argument that the correspondent accounts and the access they provided to US dollar transactions were key to enabling the Korean entity and Chinese front company to evade US sanctions. For that reason, the conduct under investigation clearly was related to the correspondent accounts. A critical distinction between that case and the new law is that DOJ and Treasury may now subpoena foreign bank records that are unrelated to the correspondent account.12
The NDAA would amend the statute to authorize the Attorney General or Secretary of the Treasury to issue a subpoena to "any foreign bank that maintains a correspondent account in the United States" and to request "any records relating to the correspondent account or any account at the foreign bank."13 The NDAA expands the substantive basis for a request to include not only records relating to potential financial crimes, but also records that are the subject of "any investigation of a violation of a criminal law of the United States; any investigation of a violation of this subchapter; a civil forfeiture action; or an investigation pursuant to section 5318A."14 The NDAA also specifically provides that "[a]n assertion that compliance with" such a subpoena "would conflict with a provision of foreign secrecy or confidentiality law shall not be a sole basis for quashing or modifying the subpoena."15
In addition to significantly expanding the reach of such subpoenas, the NDAA imposes more robust enforcement mechanisms. Failure to comply with a subpoena under 31 U.S.C. § 5318 is now subject to civil contempt and a civil penalty of up to $50,000 per day that the foreign bank fails to comply.16 Moreover, the NDAA preserves the authority of the Attorney General or Treasury Secretary to force a US correspondent bank holding accounts of a foreign bank to terminate any correspondent relationship with a foreign bank that fails to comply with a subpoena, but increases the potential civil penalties from $10,000 per day to up to $25,000 per day for non-compliance.17 The NDAA also amends that authority to include when any foreign bank has failed to prevail in proceedings before the appropriate district court or court of appeals, as opposed to the previous requirement of a foreign bank failing to initiate proceedings contesting a subpoena.18 The NDAA further provides that no officer, director, partner, employee, or shareholder of, or agent or attorney for, a foreign bank served with such a subpoena may notify the account holder involved or any person named in the subpoena about the existence or contents of the subpoena, with damages available for a violation of this nondisclosure requirement.19
These provisions are part of a years-long effort by law enforcement and legislators to crack down on money laundering and transnational crime. To justify its legislative proposal for these amendments, DOJ explained that attempts to obtain foreign bank records often result in protracted negotiation through the mutual legal assistance treaty (MLAT) or other international agreement process or litigation, and that DOJ sought to "enhance the ability of US investigators to obtain overseas records as a form of legally admissible evidence."20 Senators Grassley and Feinstein, who originally introduced these provisions in their 2019 bill, cited "numerous deficiencies" with the current law that law enforcement identified when it attempted to obtain bank records in the Kingdom of Saudi Arabia for a terrorism prosecution.21
These new provisions present significant implications for foreign banks that maintain correspondent bank accounts in the United States. While the PATRIOT Act's provisions regarding correspondent banks were targeted at financial crimes such as money laundering and terrorist financing, the NDAA's provisions expand the reach to all conduct that violates federal criminal law.22 In theory, prosecutors could use this subpoena authority to seek foreign bank records regarding tax evasion, drug trafficking, OFAC sanctions violations, bribery and public corruption, and other crimes, regardless of whether the targeted entity utilized the correspondent bank account for its criminal activity or even at all. Of course, even with this expansive authority, line prosecutors will still have to consult with DOJ's Office of International Affairs and the State Department before seeking subpoenas of foreign banks under 31 U.S.C. § 5318(k).23 Because of comity concerns regarding foreign sovereigns, DOJ and the State Department will likely continue to require that law enforcement and prosecutors pursue the MLAT or other international agreement process with a foreign government before issuing a subpoena to a foreign bank. That said, depending on the seriousness of the investigation and the substantial delay attendant to obtaining foreign-located documents through intergovernmental cooperation, the new law gives prosecutors, enforcement attorneys, and investigators increased leverage to assert that considerations of comity are outweighed by the need for evidence.
One significant question left unanswered by the new provisions is how courts will consider foreign banking secrecy or confidentiality laws that may trigger penalties for foreign banks that comply with a subpoena under 31 U.S.C. § 5318(k). The NDAA provides that compliance with a foreign secrecy or confidentiality law cannot be the "sole basis" for quashing or modifying a subpoena,24 but it does not specify what other bases might justify quashing or modifying a subpoena or how to consider the existence of a foreign secrecy law combined with other potential bases. Therefore, subpoenas may thrust foreign banks that are not themselves suspected of wrongdoing into the catch-22 of violating their own countries' bank, state secrets, or other confidentiality laws or seeing their critical US correspondent banking relationships terminated. In appropriate cases, US courts will probably take as a given that compliance with a subpoena may violate the law of the bank's home country. They will then weigh that factor against others, such as whether the subpoena is tailored to reach specific and identifiable evidence, the significance of the investigation, the centrality of the evidence to the investigation, and any US national interest in enforcement. Applying these considerations, including the clear national security interest in preventing development of a North Korean nuclear weapon, in In re Sealed Case, the DC Circuit held that the district court had not abused its discretion by compelling production of Chinese bank records in violation of China's secrecy laws.25 While we expect that the NDAA's new evidence gathering provisions will result in more attempts by US officials to secure foreign bank records by subpoena, longstanding policies on international cooperation and comity considerations applied by US courts will continue to act as a check on DOJ and Treasury subpoena power.
These new provisions may face court challenges on constitutional grounds, as they present an aggressive assertion of extraterritoriality and personal jurisdiction over foreign banks. The NDAA authorizes the issuance of a subpoena to "any foreign bank that maintains a correspondent account in the United States" for "any records relating to the correspondent account or any account at the foreign bank."26 It remains to be decided whether a foreign bank "purposefully directs" its relevant activities at the United States, as necessary to establish a US court's personal jurisdiction over it,27 simply by maintaining a correspondent bank account in the United States. In 2016, the New York Court of Appeals held that Swiss-based Banque Pictet's alleged use of correspondent bank accounts in New York sufficed to provide the court with personal jurisdiction in a case brought by Saudi plaintiffs claiming the bank was involved in facilitating a Saudi corporate bribery scheme.28 However, a federal judge in the Southern District of New York concluded that "[t]he mere maintenance of a correspondent account in New York" establishes neither minimum contacts with the United States nor a basis for long-arm jurisdiction.29 In a different case, the Second Circuit suggested that only where the correspondent account at issue was "used as an instrument to achieve the very wrong alleged" would the maintenance of a correspondent account constitute sufficient contacts with the United States to establish jurisdiction.30
In conclusion, foreign banks maintaining correspondent bank accounts in the United States, as well as foreign companies that use correspondent bank accounts to conduct business in US dollars, should be aware of law enforcement's expanded authorities to access bank records for their transactions. And US banks holding accounts of non-US banks should be aware that they will become a stronger instrument of the government in enforcement of US laws extraterritorially.
1 See William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021, H.R. 6395, 116th Cong. § 6308 (2020); Combating Money Laundering, Terrorist Financing, and Counterfeiting Act, S. 1883, 116th Cong. (2019).
2 See Pub. L. No. 107-56, § 302(b)(4), 115 Stat. 272, 297 (2001).
3 Id., § 302(a)(6), 115 Stat. at 296.
4 31 C.F.R. § 1010.605(c).
5 31 U.S.C. § 5318(i), (j)(1)–(2).
6 Id. § 5318(k)(3)(A)(i).
7 932 F.3d 915 (D.C. Cir. 2019).
8 Id. at 931.
9 Id. at 939.
10 Id. at 932, 939.
11 Id. at 937–38.
12 The court observed that DOJ had proposed amendments to the PATRIOT Act in 2016 that would allow the government to subpoena foreign bank records unrelated to the correspondent account. Id. at 929–30. Those amendments were not adopted at the time of the decision. See U.S. Dep't of Justice, Anti-Corruption Legislative Proposals, 114th Cong., at 4 (May 5, 2016). DOJ's proposed 2016 amendments have been substantially incorporated into the NDAA.
13 H.R. 6395, § 6308(a)(2)(3)(A)(i).
14 Id. § 6308(a)(2)(3)(A)(i)(I)–(IV).
15 Id. § 6308(a)(2)(3)(A)(iv)(II).
16 Id. § 6308(a)(2)(3)(D)(ii), (E)(iii)(II).
17 Id. § 6308(a)(2)(3)(E)(i)–(iii)(I).
18 Id. § 6308(a)(2)(3)(E)(i)(II).
19 Id. § 6308(a)(2)(3)(C)(i).
20 U.S. Dep't of Justice, Anti-Corruption Legislative Proposals, at 9.
21 Combating Money Laundering, Terrorist Financing, and Counterfeiting Act of 2019, Section-by-Section Summary at 6 (June 18, 2019).
22 See H.R. 6395, § 6308(a)(2)(3)(A)(i)(I)–(IV).
23 See U.S. Dep't of Justice, Justice Manual § 9-13.500 (2020).
24 See H.R. 6395, § 6308(a)(2)(3)(A)(iv)(II).
25 See 932 F.3d at 937–38.
26 See H.R. 6395, § 6308(a)(2)(3)(A)(i).
27 See Burger King Corp. v. Rudzewicz, 471 U.S. 462, 472 (1985).
28 Rushaid v. Pictet & Cie, 68 N.E.3d 1, 10 (N.Y. 2016).
29 Tamam v. Fransabank SAL, 677 F. Supp. 2d 720, 731–32 (S.D.N.Y. 2010).
30 Licci ex rel. Licci v. Lebanese Canadian Bank, SAL, 732 F.3d 161, 171–72 (2d Cir. 2013).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.