On October 22, 2024, the U.S. Court of Appeals for the Second Circuit ruled that Türkiye Halk Bankası A.Ş. (“Halkbank”), owned by the Republic of Turkey, can be prosecuted for allegedly helping Iran evade U.S. sanctions and committing related money laundering and bank fraud.
The court rejected Halkbank’s claim of immunity, stating that foreign state-owned companies are not protected from prosecution for commercial, non-governmental activities under U.S. common law. This decision allows U.S. prosecutors to pursue charges against Halkbank for allegedly laundering $20 billion of restricted funds through the use of money services businesses and front companies, coupled with the making of false statements to the U.S. Department of the Treasury regarding transactions with Iran to conceal the scheme.
The Second Circuit’s ruling underscores a pivotal point: foreign state-owned corporations cannot claim blanket immunity from prosecution in the U.S. for commercial activities under either the common law or the Foreign Sovereign Immunities Act (“FSIA”). This will be particularly true in cases involving charges of money laundering, which necessarily involve financial transactions. Further, the alleged involvement of foreign government officials in the charged schemes will not bestow, standing alone, immunity from prosecution.
This case has a long procedural history. The U.S. District Court for the Southern District of New York denied Halkbank’s motion to dismiss the indictment on the grounds of foreign sovereign immunity. Halkbank was indicted in 2019 for allegedly conspiring to evade U.S. sanctions against Iran, along with related money laundering and bank fraud charges. The district court rejected Halkbank’s claim of immunity under the FSIA – a decision affirmed by the Second Circuit in 2021. The U.S. Supreme Court ultimately ruled that the FSIA does not apply to criminal cases and remanded to the Second Circuit for further examination of Halkbank’s alternative, common-law immunity arguments. (Our comprehensive collection of blog posts related to Halkbank can be found here, here, here, and here.)
Upon remand, the Second Circuit found that common-law foreign sovereign immunity does not protect Halkbank from prosecution, stressing the difference between a foreign state and a foreign state-owned corporation. The court emphasized deference to the Executive Branch’s judgment to charge Halkbank, because the charges related to commercial, non-governmental activities.
The Second Circuit explained that the principle of foreign sovereign immunity originated from the 1812 Supreme Court case Schooner Exchange v. McFaddon, which established that foreign sovereigns do not have an inherent right to immunity but may receive waivers from the U.S. government under international comity. In 1952, the U.S. State Department announced that it would follow the “restrictive theory” of foreign sovereign immunity, in which immunity is confined to suits involving a foreign state’s “public acts,” as opposed to a foreign state’s “strictly commercial acts.” In 1976, Congress enacted the FSIA, codifying the restrictive theory and shifting primary responsibility for immunity determinations from the Executive Branch to the Judiciary, while still allowing deference to the Executive Branch’s assessments.
The Second Circuit first agreed with the government that Halkbank’s prosecution reflected the Executive Branch’s view that foreign sovereign immunity was inapplicable. The indictment indicated that Turkey owned the majority of Halkbank’s shares, which suggested that the Executive Branch had considered the prosecution’s implications for U.S.-Turkey relations and deemed foreign policy concerns insufficient to preclude action.
The Second Circuit then found that the Executive Branch’s view as to Halkbank was entitled to deference and that such deference applies in criminal cases. It rejected Halkbank’s argument that the prosecution contradicted established principles of foreign sovereign immunity. Although “relatively few cases have expressly deferred to the Executive’s position that foreign sovereign immunity is not warranted[,]” the Executive Branch’s decision to deny immunity here was not “unprecedented,” and “Halkbank cannot identify a single case where common-law immunity was applied to a foreign state-owned entity facing federal criminal charges.”
The court acknowledged that the United States would not prosecute Turkey as a sovereign state. Nonetheless, the Second Circuit explained that courts traditionally distinguish between the immunity afforded to foreign states and the immunity afforded to their owned entities: immunity to state-owned enterprises performing governmental functions is granted but blanket immunity to foreign state-owned corporations can be withheld in criminal cases under common law, allowing prosecution for their commercial activities. The court found it unnecessary to decide the government’s argument that the common-law immunity standard is coextensive with the commercial activity exception under the FSIA “because we conclude that Halkbank’s activity charged in the indictment is commercial even if we consider, as Halkbank urges, the purpose of that activity.”
The Second Circuit described the bank’s argument as follows:
. . . . Halkbank argues that its alleged conduct constitutes political or public acts under the [controlling] test [for immunity]. In particular, Halkbank argues that the indictment focuses on “internal administrative acts” of the Turkish government because it alleges that Turkey designated Halkbank as the “sole repository of proceeds from the sale of Iranian oil,” . . . ; that certain government officials “participated in and protected [the alleged] scheme,” . . . ; and that the alleged scheme would “benefit the Government of Turkey” by “artificially inflat[ing] Turkey’s export statistics, making its economy appear stronger than it in fact was[.]” Halkbank further argues that the indictment implicates “acts concerning diplomatic activity” because it includes a charge based on Halkbank’s alleged misrepresentations to U.S. Treasury officials regarding its compliance with sanctions against Iran.
The Second Circuit rejected this argument because the “gravamen” of the indictment was that Halkbank participated in money laundering and other fraudulent schemes designed to evade U.S. sanctions. Halkbank caused transactions “conducted via private, commercial banking channels and thus are ‘far more of the character of a private commercial act than a public or political act.’”
Likewise, “[a]llegations that the charged schemes arose from Halkbank’s designation as the repository of Iranian oil proceeds and benefitted Turkey’s government by making its economy appear stronger do not transform Halkbank’s commercial activity into ‘internal administrative acts,’ even if certain government officials were involved in the schemes.”
Finally, the Second Circuit reasoned that “the fact that one of the charges against Halkbank relates to its alleged misrepresentations to U.S. Treasury officials does not mean that the indictment implicates ‘acts concerning diplomatic activity’ of Turkey. Discussions between Halkbank and U.S. Treasury officials regarding sanctions compliance are not ‘diplomatic,’ even in the ‘broad sense of the word.’”
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