- The indictment of Halkbank, majority-owned by Turkey, for allegedly participating in a multi-year scheme to help Iran evade U.S. sanctions, tests the limits of U.S. criminal jurisdiction to prosecute foreign sovereigns and their instrumentalities.
- The Second Circuit held that the prosecution of Halkbank could go forward because, even if the Foreign Sovereign Immunities Act grants immunity in the criminal context, Halkbank's alleged conduct fell under the "commercial activity" exception to sovereign immunity.
- Different Circuits have taken different approaches to the issue of sovereign immunity in the criminal context, prompting the United States Supreme Court to grant review and consider resolving that split.
- The Supreme Court's decision, expected later this year, is likely to have significant ramifications regarding U.S. authority to prosecute foreign sovereigns and their instrumentalities.
The Supreme Court of the United States is set to determine whether the United States can prosecute a commercial bank, which is majority-owned by the Republic of Turkey, for allegedly violating U.S. law. In 2019, U.S. federal prosecutors indicted Turkiye Halk Bankasi A.S. ("Halkbank") for allegedly participating in a multi-billion dollar money-laundering scheme with Iranian and Turkish affiliates to evade U.S. sanctions against Iran.
The parties present several key issues for the Court to consider: (1) whether federal courts have subject matter jurisdiction over criminal prosecutions of foreign sovereigns and their instrumentalities (or state-owned entities) under the general grant of federal criminal jurisdiction at 18 U.S.C. § 3231; (2) if so, whether (or how) the Foreign Sovereign Immunities Act ("FSIA") limits that general grant of criminal jurisdiction as applied to instrumentalities of foreign states; (3) if the FSIA limits a federal court's jurisdiction over a state-owned entity (i.e., makes them immune from criminal prosecution), whether the FSIA's statutory exceptions to sovereign immunity apply in the criminal context; and (4) if the FSIA's exceptions to sovereign immunity apply in criminal cases, whether the "commercial activity" exception applies in these specific circumstances.
This case concerns the immunity potentially applicable to entities only; it does not concern questions of immunity relating to individual persons.
This case has garnered international attention, particularly in light of the increasing significance of sanctions as a U.S. foreign policy and national security tool. As explained below, the Court's ruling could have a monumental impact on how foreign sovereigns and their state-owned entities approach compliance with U.S. sanctions programs—especially those related to Iran and Russia.
Oral argument is scheduled for January 17, 2023. The Court will likely consider a wide range of potential outcomes. At one extreme, the Court might conclude that § 3231 provides broad criminal jurisdiction over foreign sovereigns and that the FSIA does not apply in the criminal context, thus, preventing Halkbank from claiming sovereign immunity. Such an outcome could fundamentally shift the approach that U.S. law enforcement takes toward foreign states and their instrumentalities. Historically, U.S. prosecutors have only rarely attempted to prosecute state-owned entities. A decision broadly denying sovereign immunity from such prosecutions, however, would open the door to criminal prosecution on a wide scale, with significant implications for foreign policy and international comity.
At the other extreme, the Court may rule either that federal courts do not have jurisdiction over the prosecution of state-owned entities under § 3231 or that, even if they do, the FSIA strips this jurisdiction from federal courts without exception. A decision along these lines would confer broad immunity from criminal prosecution to entities that are majority state-owned, even in circumstances where such entities could be subject to civil liability.
In between, the Court could conclude that the FSIA generally applies in the criminal context, but find that the FSIA's "commercial activity" exception to sovereign immunity also applies in this case, thus depriving Halkbank of immunity. In that event, courts would treat instrumentalities of foreign states as presumptively immune from criminal jurisdiction but would assess on a case-by-case basis whether any of the FSIA's exceptions to sovereign immunity apply. Of course, the Court could go the other way and hold the "commercial activity" exception does not apply in this instance, which would safeguard Halkbank from prosecution but potentially expose other state-owned entities to prosecution depending on the facts of each case.
Halkbank is charged with laundering billions of dollars of proceeds from Iranian natural gas and oil sales in violation of U.S. sanctions imposed against Iran and various entities and persons associated with Iran. In particular, the charges involve accounts at Halkbank owned by the National Iranian Gas Company, the National Iranian Oil Company, and the Central Bank of Iran. All three of these entities were subject to U.S. sanctions during the indictment period.
Halkbank is accused of knowingly enabling a number of illicit transactions, such as: (1) "allowing the proceeds of sales of Iranian oil and gas deposited at Halkbank to be used to buy gold for the benefit of the Government of Iran"; (2) "allowing the proceeds of sales of Iranian oil and gas deposited at Halkbank to be used to buy gold that was not exported to Iran"; and (3) "facilitating transactions fraudulently designed to appear to be purchases of food and medicine by Iranian customers, in order to appear to fall within the so-called 'humanitarian exception' to certain sanctions against the Government of Iran, when in fact no purchases of food or medicine actually occurred." Halkbank allegedly transmitted billions of dollars from Iran, concealed Iran's connection to these funds by using front companies, and made payments on behalf of Iran and other sanctioned entities through the U.S. financial system in contravention of U.S. law.
Facing fraud, money laundering, and conspiracy charges, Halkbank moved to dismiss the indictment, arguing that: (1) it is immune from criminal prosecution under the FSIA (since it is 70% owned by the Turkish Government); (2) the FSIA's "commercial activity" exception to sovereign immunity does not apply in this case; and (3) regardless of the FSIA, Halbank is entitled to sovereign immunity under common law. The district court denied Halkbank's motion to dismiss, concluding that the FSIA grants immunity in civil, not criminal, cases and even if the FSIA applies in the criminal setting, Halkbank's conduct was covered by the "commercial activity" exception to sovereign immunity. Likewise, the district court rejected Halkbank's common law immunity claim. Halkbank appealed.
Second Circuit Opinion
In October 2021, the U.S. Court of Appeals for the Second Circuit ("Second Circuit") affirmed the district court's decision, albeit with a slightly different approach.
The Second Circuit began by discussing the history of sovereign immunity and the FSIA. It explained that "for most of our history, foreign sovereigns enjoyed absolute immunity in U.S. courts as 'a matter of grace and comity' in light of the 'perfect equality and absolute independence of sovereigns.'" Consequently, federal courts routinely deferred to other political branches, especially the Executive Branch, when determining whether to exercise jurisdiction over foreign states and their instrumentalities. In the 1950s, the Department of State began to take a more restrictive stance, developing the position that "foreign sovereigns were not immune from liability in U.S. courts for acts that are 'private or commercial in character[,]'" as opposed to "sovereign or public acts." Congress enacted the FSIA in 1976 "to 'endorse and codify the [State Department's] restrictive theory of sovereign immunity' and to 'transfer primary responsibility for deciding claims of foreign states to immunity from the State Department to the courts.'" Section 1604 of the FSIA provides that—absent statutory exceptions—foreign sovereigns and their instrumentalities are "immune from the jurisdiction of the courts of the United States."
The Second Circuit considered it unclear, however, whether Congress intended the FSIA to confer immunity on foreign states and their instrumentalities in the criminal context or whether that immunity is limited to civil cases. The Second Circuit ultimately determined that it did not have to decide that issue. Instead, the Second Circuit determined at the outset that the district court had subject matter jurisdiction "over the federal criminal prosecution of Halkbank" based on 18 U.S.C. § 3231, which gives federal courts "original jurisdiction" over "all offenses against the laws of the United States." Though Halkbank argued that the FSIA's grant of immunity in § 1604 cut back on that general grant of jurisdiction, the Second Circuit held "even assuming arguendo that the FSIA confers sovereign immunity in criminal cases, the offense conduct with which Halkbank is charged falls within the FSIA's commercial activities exception to sovereign immunity."
The court explained the FSIA's "commercial activity" exception strips foreign states of their immunity in three scenarios. Namely, when the case is based upon (1) "a commercial activity carried on in the United States by the foreign state"; (2) "an act performed in the United States in connection with a commercial activity of the foreign state elsewhere"; or (3) "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."
Applying the "commercial activity" exception to this case, the Second Circuit considered the "gravamen" of Halkbank's conduct to be its alleged involvement in the design of fraudulent transactions intended to evade U.S. sanctions, as well as making false statements to U.S. officials in an attempt to hide the scheme. The Second Circuit found such conduct sufficient to qualify under all three prongs of the commercial activity exception as either commercial activity in the United States, an act in the United States in connection with commercial activity elsewhere, or an act outside the United States in connection with commercial activity elsewhere that caused a direct effect in the United States.
Finally, the Second Circuit rejected Halkbank's common law immunity argument, considering common law immunity to have been superseded by the FSIA and, in any event, finding that common law immunity contains a similar commercial activity exception.
Petition for Certiorari and Circuit Split
Halkbank filed a petition for writ of certiorari ("Petition") with the Supreme Court in May 2022. Halkbank highlighted the uniqueness of this prosecution, asserting that the Second Circuit decision "authorizes the first ever criminal trial of a foreign sovereign" which presents significant foreign policy and national security implications.
Halkbank also identified a circuit split that it asked the Court to resolve. The Sixth Circuit, in Keller v. Cent. Bank of Nigeria, 277 F .3d 811, 819 (6th Cir. 2002), held that "the FSIA grants immunity to foreign sovereigns from criminal prosecution, absent an international agreement stating otherwise." Halkbank contrasted the Sixth Circuit decision with the Second Circuit decision in this case, along with decisions in the Tenth Circuit and the D.C. Circuit. Specifically, in Southway v. Cent. Bank of Nigeria, 198 F .3d 1210, 1214 (10th Cir. 1999), the Tenth Circuit refused to recognize foreign sovereign immunity in the criminal context. The U.S. Court of Appeals for the D.C. Circuit took an approach similar to the Second Circuit in In re Grand Jury Subpoena, 912 F .3d 623, 627 (D.C. Cir. 2019) (per curiam).
Possible Implications of the Supreme Court's Decision
Halkbank and the government have submitted briefs to the Supreme Court, and the Court has scheduled oral argument for January 17, 2023. A wide range of possible outcomes are in play.
The Court may conclude, as the government argues, that subject matter jurisdiction exists over Halkbank under the general criminal-jurisdiction statute (18 U.S.C. § 3231) and that the FSIA does not apply in the criminal setting. A decision along these lines would give the Executive branch wide latitude to balance enforcement priorities, national security implications and diplomatic considerations in deciding whether to prosecute foreign states and their instrumentalities.
If the Court were to side with Halkbank, it would reverse the Second Circuit decision, concluding that the FSIA limits federal court jurisdiction over foreign sovereigns, either because (a) the FSIA permits a court to exercise subject matter jurisdiction over only certain civil, not criminal, cases, or (b) the FSIA's exceptions to sovereign immunity do not apply in the criminal context. Such a holding would broadly immunize foreign states and their instrumentalities from criminal prosecution for violating U.S. sanctions or other criminal laws, even in circumstances where the entity could be subject to civil liability.
In between, the Court could conclude that the FSIA applies in the criminal context, and go on to evaluate whether the "commercial activity" exception to immunity applies in this case. In that event, criminal jurisdiction over foreign sovereigns would be subject to a case-by-case assessment of the applicability of one or another of the FSIA exceptions. The Court's analysis of the commercial activity exception with respect to Halkbank, at the very least, could provide significant guidance for majority state-owned commercial banks (like Halkbank)—and other state-owned entities—to rely upon when confronting the "commercial activity" exception to sovereign immunity.
No matter the result, the Court's ruling is likely to have a major impact on how or whether the United States prosecutes foreign sovereigns for criminal violations going forward.
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