But Court Gives Turkish Bank Another Chance to Avoid Charges Under Common-Law Sovereign Immunity
On April 19, 2023, the United States Supreme Court issued a highly-anticipated decision in the case of Turkiye Halk Bankasi A.S., aka Halkbank v. United States. The court ruled that Turkish state-owned Halkbank remained subject to criminal prosecution in U.S. courts under the Foreign Sovereign Immunities Act (“FSIA”) for fraud, money laundering and sanctions-related charges related to the bank’s alleged participation in a multi-billion dollar scheme to evade U.S. sanctions involving Iran. Specifically, in a seven to two decision, the Court held that the FSIA does not provide foreign states and their instrumentalities with immunity from U.S. criminal proceedings. However, the Court remanded the case back to the Court of Appeals for the Second Circuit to determine whether Halkbank still can claim sovereign immunity under common law principles. The Court’s opinion clearly extends beyond just financial institutions owned by foreign governments, and instead implicates any number of foreign state-owned entities.
As we previously blogged, on October 15, 2019, the U.S. Attorney for the Southern District of New York charged Halkbank with money laundering, bank fraud, and sanctions offenses under the International Emergency Economic Powers Act, or IEEPA. According to the indictment, Halkbank had facilitated transactions worth billions of dollars on behalf of Iranian entities that were subject to U.S. sanctions by disguising the true nature of the transactions and using fraudulent documents to hide the involvement of Iranian parties.
Halkbank sought to have the case dismissed on the grounds that U.S. courts lacked jurisdiction over the bank and argued that it was immune from prosecution under the FSIA, which generally prohibits U.S. courts from exercising jurisdiction over foreign governments and their agencies. The district court rejected Halkbank’s argument, reasoning that the FSIA does not grant immunity to criminal proceedings, and denied its motion to dismiss the case. Halkbank appealed the district court’s decision to the U.S. Court of Appeals for the Second Circuit, which affirmed the district court’s ruling in November 2021. The Second Circuit assumed that the FSIA does apply to criminal proceedings, but held that Halkbank’s alleged misconduct fell into the FSIA’s “commercial activity” exception. Halkbank then petitioned the U.S. Supreme Court for certiorari in May 2022, which the Court granted October, and the Court heard oral arguments in January 2023.
Justice Brett Kavanaugh wrote for the 7-2 majority, joined by Chief Justice John Roberts and Justices Thomas, Sotomayor, Kagan, Coney Barrett, and Brown Jackson. The Court first addressed Halkbank’s contention that the district court lacked jurisdiction under 28 U.S.C. § 3231, which provides that “[t]he district courts of the United States shall have original jurisdiction, exclusive of the courts of the States, of all offenses against the laws of the United States.” Halkbank argued that because the statute does not explicitly mention actions against foreign sovereigns, it must be read to preclude such prosecutions. Halkbank pointed to civil and bankruptcy statutes that, unlike § 3231, expressly refer to actions against foreign states and their instrumentalities. The Court rejected this argument, reasoning, “scattered references in distinct contexts do not shrink the textual scope of § 3231,” which applies to “all” federal criminal offenses without regardless of the identity or status of the defendant.
The Court next rejected Halkbank’s argument that the FSIA rendered it immune from criminal prosecution, holding that the FSIA does not grant immunity to foreign states or their instrumentalities in criminal proceedings. The Court relied on the text of the FSIA in making this determination, noting that the statute exclusively addresses civil suits against foreign states and their instrumentalities. The Court pointed to several provisions within the FSIA which underscore its civil application, such as the FSIA’s service provisions, language regarding answers and responsive pleadings and default judgments, and references to counterclaims, punitive damages, and litigants. The Court further noted the FSIA does not contain any references to criminal proceedings. “If Halkbank were correct that the FSIA immunizes foreign states and their instrumentalities from criminal prosecution, the subject undoubtedly would have surfaced somewhere in the [FSIA’s] text. Congress typically does not ‘hide elephants in mouseholes.’”
Halkbank argued that §1604 of the FSIA renders it immune not only from civil suits but also from criminal prosecutions. Section 1604 states that “[s]ubject to existing international agreements,” a “foreign state shall be immune from the jurisdiction of the courts of the United States and of the States” unless an exception to immunity applies. The Court held that this provision could not be read in isolation, but must be considered alongside neighboring provisions, where it becomes “overwhelmingly evident that §1604 does not grant immunity to foreign states and their instrumentalities in criminal matters.”
The Court noted Halkbank’s concern that if the FSIA does not apply to criminal proceedings, then state prosecutors could also bring criminal proceedings against foreign states, creating foreign policy concerns. The Court stated that it “must interpret the FSIA as written,” and observed that “it is not evident that the premise of Halkbank’s consequentialist argument is correct.”
Common Law Immunity
Even though the Court held that the FSIA did not bar prosecution, it nonetheless concluded that the Second Circuit did not fully consider whether the bank has immunity under “common law” principles. “Nor did the Court of Appeals address whether and to what extent foreign states and their instrumentalities are differently situated for purposes of common-law immunity in the criminal context.” The Court therefore remanded on the issue of common-law immunity.
Justices Neil Gorsuch and Samuel Alito concurred in part and dissented in part. They agreed with the majority’s holding that §3231 covers foreign sovereigns but took the position that the FSIA does apply to criminal cases. Nonetheless, Justices Gorsuch and Alito reasoned that Halkbank’s prosecution should be allowed to continue because the FSIA’s commercial activities exemption applies.
Although the Second Circuit still needs to address the issue of common-law sovereign immunity, the Halkbank decision – the FSIA does not protect foreign state-owned companies against potential U.S. prosecution – must be considered in concert with the fact that the jurisdictional reach of U.S. criminal statutes can be far, and rest upon relatively limited touches with the U.S. financial system. As we noted in our blog post regarding the 2019 indictment against Halkbank, the indictment asserted that the “purpose and effect” of the alleged schemes were to “create a pool of Iranian oil funds in Turkey and the United Arab Emirates held in the names of front companies, which in turn concealed the funds’ connection to Iran. From there, the funds were used to make international payments on behalf of the Iranian government and Iranian banks—including payments to and through the U.S. financial system.” In other words, the indictment focused on conduct and alleged schemes primarily occurring outside of the U.S., except for certain attendant fund transfers flowing through the U.S. financial system, which not surprisingly involved the Southern District of New York.