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DC Circuit Court Requires Subpoenaed Chinese Banks to Produce Documents in Money Laundering Case

20 August 2019 | New York
Legal Briefings – By John O'Donnell, Joseph Falcone, Jonathan Cross, Alex Hokenson

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On July 30, 2019, the US Court of Appeals for the DC Circuit unanimously upheld a district court order requiring three unnamed Chinese banks to produce financial records subpoenaed by US federal prosecutors. Although the US government does not currently suspect that the subpoenaed banks took part in wrongdoing, the banks were allegedly used by a now-defunct front company, controlled by the North Korean government, to facilitate hundreds of millions of US dollars in transactions through correspondent accounts maintained by the subpoenaed banks at US financial institutions. The US government believes that the subpoenaed documents may reveal how North Korea circumvented US economic sanctions intended to prevent it from financing its nuclear weapons program. The DC Circuit, in considering the government's evidence, afforded considerable deference to the representations of the US Treasury Department's Office of Foreign Asset Control (OFAC) in several actions and notices relating to the alleged front company.

Notably, the US government sought not only records about transactions passing through the subpoenaed banks' US correspondent accounts, but all records relating to any transactions by the front company at the subpoenaed banks. In affirming the lower court's order, the DC Circuit has potentially opened a door through which the US government can obtain a wide array of transactional records from foreign banks, even if those records are unrelated to US operations or US correspondent accounts, if the transactions are "in service of an enterprise entirely dedicated to obtaining access to US currency." However, it remains to be seen whether the unique facts of this case will limit the effect of the court's decision.

Case background

The US government first served subpoenas on the banks in December 2017, seeking records in connection with its investigation into the alleged front company. The banks objected to these subpoenas, arguing that complying with the requests would require the banks to violate multiple Chinese laws. The banks requested that the US government submit a formal request for the records to the Chinese government through the Mutual Legal Assistance Agreement (MLAA). The US government, apparently believing that such a request would be futile based on past experiences, refused to submit an MLAA request to the Chinese government.

Following a year of unsuccessful negotiations between the banks and the US government, the US government filed a motion to compel enforcement of the subpoenas in November 2018. The district court granted this motion and ordered the banks to comply with the subpoenas.

The banks continued to decline producing the documents, reiterating their concerns over Chinese law and arguing that the court lacked jurisdiction over them. The district court held the three banks in contempt, and ordered each bank to pay a fine of $50,000 per day until they complied. The court stayed these fines contingent on the banks seeking an expedited appeal and the banks accordingly appealed to the DC Circuit.

Court finds two bases for personal jurisdiction

In their appeal, the banks objected to the subpoenas on jurisdictional grounds, arguing that that US courts lacked personal jurisdiction over them and thus could not order them to comply with the subpoenas. Although several high profile court decisions in recent years have greatly narrowed the jurisdictional reach of US courts in civil actions brought against foreign banks by private litigants (including the Supreme Court's ruling in Daimler AG v. Bauman and the Second Circuit's ruling in Gucci Am., Inc. v. Weixing Li), the Court held that there were two separate bases that permitted jurisdiction over the banks under the circumstances.

First, the Court held that two of the banks, which operated branch offices in the US, had previously consented to personal jurisdiction when they signed agreements with the US Federal Reserve in connection with opening their US branch offices. In these agreements, the banks had expressly consented to jurisdiction by US federal courts in any US government proceeding initiated under the Bank Secrecy Act. In light of these agreements, the Court held that the investigation into the North Korean sanctions violations was a proceeding that had arisen under the Bank Secrecy Act and thus it established jurisdiction over the two banks. The fact that the North Korean front company was not alleged to have actually used any of the US branch offices was immaterial.

Second, for the remaining third bank, which had not maintained any branch offices in the US and had not entered into a similar agreement with the US government, the Court held that its alleged use of a US-based correspondent bank account to facilitate transactions in US dollars on behalf of the North Korea-owned front company was sufficient to establish specific personal jurisdiction over the bank. The Court approved the subpoena's broad request for all records relating to the bank's US correspondent account, including records of related transactions that occurred outside of the US. The Court noted, however, that this was based on evidence that the specific front company in the case had "operated exclusively as a US dollar clearinghouse" for North Korea, suggesting that jurisdiction may be more limited under different circumstances. The court did not elaborate further, but such circumstances could include customers that do not engage in US dollar transactions or use US correspondent banking services. In light of this bank's more limited ties to the US, the US government had used a special subpoena pursuant to an anti-money laundering provision of the Patriot Act rather than the broader grand jury subpoenas used for the other banks.

Court Holds that Patriot Act Subpoenas Can Reach Records of non-US Transactions "Relating to" the Use of US Correspondent Bank Account

The court also clarified the scope of records that may be subpoenaed under the Patriot Act, in order to resolve a disagreement between the government and one of the banks over its service of process provision, 31 U.S.C. § 5318(k). The bank argued that the language should be narrowly construed to only include records of transactions that passed through the bank's US correspondent banking account. The government argued for a more expansive interpretation that would include all records that had "a connection with" the company's use of the US correspondent bank account, including transactions that were not made on the correspondent account itself.

The court analyzed the statute using statutory interpretation principles and endorsed the government's more expansive interpretation. The court held that records “related to” the company's use of the US correspondent account included "records of transactions that do not themselves pass through a correspondent account when those transactions are in service of an enterprise entirely dedicated to obtaining access to US currency and markets using a US correspondent account." 

International Comity Considerations

The banks also challenged the subpoenas as inconsistent with principles of international comity, as they would require the banks to violate Chinese banking secrecy laws and also because the US had not used the MLAA with China to make the requests. The Court rejected these arguments, upholding the district court's decision to enforce the subpoenas over international comity objections after it had determined that the US government's national security interests overcame China's interests in enforcing its banking secrecy law and that the MLAA request would "likely prove ineffective."

Implications for non-US Banks

The three banks may still appeal the decision to the Supreme Court or seek an en banc rehearing before all of the judges on the DC Circuit, but if the decision is not reversed it will have significant implications for non-US banks that maintain branch offices or correspondent bank accounts in the US. Although private litigants in US courts now face a very high bar to establish personal jurisdiction over foreign banks, this decision firmly establishes additional avenues to establish personal jurisdiction that are available to government investigators. The government may use this expanded jurisdictional reach to adopt a more aggressive approach to investigate financial crimes abroad, and to subpoena records from foreign banks.

In light of this decision, virtually any foreign bank which has signed an agreement with the Federal Reserve to open a US branch office may be deemed to have waived any objection to jurisdiction in connection with certain government investigations. These agreements require banks to expressly consent to personal jurisdiction in any matter initiated by the government arising under the Bank Secrecy Act and this consent is not limited to the bank's activities in the US branch offices.

This decision also means that the use of a US correspondent banking account to violate US sanctions can establish specific personal jurisdiction to subpoena records connected to suspect transactions. Significantly, this decision may be used to reach records of transactions which only "relate to" the use of the US correspondent account despite not being transacted through such accounts themselves. Thus, suspicious transactions in and through a US correspondent bank account may now be used to probe the bank's wider relationship with the customer.

As a result, banks should consider adopting effective safeguards to ensure that all transactions made in US dollars or which will be processed through a US correspondent bank account are in full compliance with US law. Banks should also consider what jurisdictional waivers and regulatory requirements they are consenting to through these agreements when deciding whether to operate a branch office in the US.