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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.

Continue Reading  Halkbank Faces Prosecution: U.S. Court of Appeals Denies Sovereign Immunity

Farewell to 2023, and welcome 2024.  As we do every year, let’s look back.

We highlight 10 of our most-read blog posts from 2023, which address many of the key issues we’ve examined during the past year: criminal money laundering enforcement; compliance risks with third-party fintech relationships; the scope of authority of bank regulators; sanctions…

The Financial Crimes Enforcement Network (“FinCEN”) and the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) recently issued Joint Notice FIN-2023-NTC2, “Announnc[ing] New Reporting Key Term and Highlight[ing] Red Flags Relating to Global Evasion of U.S. Export Controls” (the “Joint Notice”). As we have blogged (here and here), these agencies issued two prior joint alerts warning financial institutions (“FIs”) about efforts by individuals or entities to evade Russia-related export controls administered by BIS.

The practical import of the Joint Notice – which re-emphasizes the focus of the U.S. government on fighting sanctions evasion – is that many customers involved in international trade should be subject to some degree of enhanced due diligence by FIs, simply because they participate in international trade.  FIs should review and adjust their risk assessments accordingly.

Continue Reading  FinCEN and BIS Issue Joint Notice on SAR Filings for Evasion of U.S. Export Controls

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.

Continue Reading  Supreme Court Rules Halkbank is Not Immune from Prosecution Under FSIA

Actions Highlight Risky Mix of Sanctions Law, Inadequate Transaction Monitoring and Dealing with Anonymity-Enhanced Cryptocurrencies

The Office of Foreign Assets Control (“OFAC”) and the Financial Crimes Enforcement Network (“FinCEN”) announced on October 11 simultaneous settlements with Bittrex, Inc. (“Bittrex”), a virtual currency exchange and hosted wallet provider. Under the OFAC settlement, Bittrex has agreed to pay $24,280,829.20 to settle its potential civil liability for 116,421 alleged violations of multiple sanctions programs. Under the FinCEN consent order, Bittrex agreed to pay a civil penalty of $29,280,829.20 for alleged anti-money laundering (“AML”) violations under the Bank Secrecy Act (“BSA”). FinCEN has agreed to credit Bittrex’s payment to OFAC against its penalty because it found that the alleged BSA violations “stem from some of the same underlying conduct”; thus, Bittrex’s total payments to the two regulators come to $29,280,829.20. 

According to the Department of the Treasury dual press release, the two settlements represent the first parallel enforcement actions by FinCEN and OFAC in the virtual currency and sanctions space. Also, it is OFAC’s largest virtual currency enforcement action to date. To further highlight the importance of the settlements, the press release quotes the OFAC Director Andrea Gacki and FinCEN Acting Director Himamauli Das, both sternly warning operators in the same environment as Bittrex to implement effective AML compliance and sanction screening programs.

It is conceivable that Bittrex, for years now, has been on notice that federal and state regulators are closely watching and expecting more comprehensive risk assessment programs and procedures from businesses transacting with virtual currency. As we previously blogged here, in 2019 the New York Department of Financial Services (“NYDFS”) denied Bittrex’s application for a Bitlicense, citing: “deficiencies in Bittrex’s BSA/AML/OFAC compliance program; a deficiency in meeting the Department’s capital requirement; and deficient due diligence and control over Bittrex’s token and product launches.”  In its letter denying Bittrex’s application, NYDFS set forth in detail the deficiencies it found in Bittrex’s BSA/AML/OFAC compliance program, noting that Bittrex’s compliance policies and procedures “are either non-existent or inadequate.”

As we will discuss, the FinCEN consent order highlights Bittrex’s alleged failure to address adequately the overall risk environment in which it operated, including transactions involving anonymity-enhanced cryptocurrencies, or AECs.  The consent order also highlights two repeated themes in enforcement actions: lack of adequate compliance staff, and a seemingly robust written compliance policy that was not matched by an effective day-to-day transaction monitoring system.

Continue Reading  OFAC and FinCEN Settle with Bittrex in Parallel Virtual Currency Enforcements

On August 8, the Office of Foreign Assets Control (“OFAC”) sanctioned “notorious” virtual currency “mixer” Tornado Cash, which allegedly has been used to launder more than $7 billion worth of virtual currency since its creation in 2019.  Tornado Cash is a virtual currency mixer that operates on the Ethereum blockchain.  Tornado Cash receives a variety of transactions and mixes them together before transmitting them to their individual recipients.  The stated purpose of such mixing is to increase privacy, but mixers are often used by illicit actors to launder funds because the process enhances anonymity and makes it very hard to track the flow of funds.  According to the Treasury Department press release, “[d]espite public assurances otherwise, Tornado Cash has repeatedly failed to impose effective controls designed to stop it from laundering funds for malicious cyber actors on a regular basis and without basic measures to address its risk.”  This statement seems to imply that Tornado Cash is run by actual people – an implication that is at the heart of the controversy over these sanctions, as we will discuss.

The sanctions against Tornado Cash have elicited enormous controversy in the crypto world because, some argue, (1) Tornado Cash is not an entity run by actual people, but is merely code; and (2) although OFAC has the legal authority to sanction people and entities, it lacks such authority to sanction code or a technology – or at the very least, such sanctions create many practical problems for innocent actors, including in ways which no one has foreseen fully.  As we discuss,  even a member of the U.S. House of Representatives has waded into the controversy this week, questioning the ability of OFAC to issue the sanctions and demanding answers.  The controversy also reflects that, once again, whether one chooses to focus on the word “privacy” or on the word “anonymity” typically reflects an a priori value judgment predicting one’s conclusion as to whether something in the crypto world is good or bad. 

Indisputably, the Tornado Cash sanctions are, to date, unique and unprecedented.  Although they may turn out to be an outlier experiment by OFAC, public pronouncements by the U.S. Treasury Department strongly suggest that, to the contrary, they represent part of the future of crypto regulation, in which the enormous power of the U.S. government to issue broad sanctions obliterates legal and practical hurdles which could stymie other agencies, such as the Financial Crimes Enforcement Network (FinCEN).  This may be because, ultimately, the government actually agrees that no person is in control of a powerful technology that has easy application for malicious uses, and that is precisely the problem.

Continue Reading  OFAC Sanctions Virtual Currency “Mixer” Tornado Cash and Faces Crypto Backlash

The Second U.S. Circuit Court of Appeals, in a recent 27-page decision, held that Halkbank, the state-owned Turkish lender, cannot claim sovereign immunity under the Foreign Sovereign Immunities Act (“FSIA”) in a money laundering and sanctions-related prosecution.  Upholding a decision by U.S. District Judge Richard M. Berman, the court ruled that even if the FSIA could shield the bank in a criminal case, the charges against Halkbank fall under the “commercial activity” exception to FSIA immunity.  This interpretation of the commercial activity exception significantly limits the immunity bestowed under the FSIA in criminal cases and furthers American deterrence against foreign financial institutions that allegedly facilitate evasion of U.S. sanctions or launder funds through the U.S. financial system.  Halkbank now faces potential trial for an alleged $20 billion money laundering scheme, bank fraud, and conspiracy charges.
Continue Reading  Second Circuit Says Turkish Halkbank Must Face Criminal Charges In Money Laundering and Iran Sanctions Case

Second Post in a Series on the FATF Plenary Outcomes

As we blogged, last month the Financial Action Task Force (“FATF”) held its fourth Plenary, inviting delegates from around the world to (virtually) meet and discuss a wide range of global financial crimes and ongoing risk areas. Following the Plenary, FATF identified a number of strategic initiatives for future research and publication, and issued six reports to detail their findings on specific topics. One such report, Money Laundering from Environmental Crime (the “Report”), and its implications for anti-money laundering (“AML”) and countering the financing of terrorist (“CFT”), will be the focus of this post.

The 66-page Report is compiled from case studies and best practices submitted by over 40 countries, as well as input from international organizations like the International Monetary Fund and World Bank. While this Report is the first deep dive into environmental crimes and recommendations for members of the FATF Global Network, it is not the first time FATF has addressed environmental issues. The current Report aims to build upon FATF’s previous study on money laundering and the illegal wildlife trade, on which we also blogged. The current Report is also connected to earlier FATF studies on money laundering risks from the gold trade and the diamond trade.  Indeed, the Report references U.S. enforcement cases involving money laundering and gold or diamonds on which we previously have blogged (see here, here and here).

As this post will discuss, these areas of money laundering risk are often overlooked and are especially difficult to monitor. Further, the Report finds that “[l]imited cooperation between AML/CFT authorities and environmental crime and protection agencies in most countries presents a major barrier to effectively tackle [money laundering] from environmental crimes.”  Stated otherwise, government AML/financial flow experts and government environmental law experts don’t understand or even consider each other’s area of expertise, and often don’t communicate with each other, resulting in missed enforcement opportunities.  With global environmental crimes generating up to $281 billion per year, the Report suggests that government interventions are not proportionate to the severity of this issue. By issuing this Report, FATF hopes to raise awareness of the scope and scale of harm caused by environmental crimes and related money laundering, and enhance collaboration by financial crime and environmental crime enforcement officials.
Continue Reading  FATF Issues First-Ever Report on Environmental Crime and Money Laundering

Court Rejects Halkbank’s Claim That the Foreign Sovereign Immunities Act Shields the Bank From Prosecution

A motion to dismiss an indictment accusing Turkey’s majority state-owned Halkbank of money laundering, bank fraud and Iran-related sanctions offenses was denied by U.S. District Judge Richard M. Berman of the Southern District of New York in a recent 16-page decision.  The Court ruled that the Foreign Sovereign Immunities Act (“FSIA”) does not bestow immunity in U.S. criminal proceedings on financial institutions owned in whole or in part by foreign governments. Even if it did, the FSIA’s commercial activity exemptions would apply and support Halkbank’s prosecution. This development is the latest in the ongoing, complex battle between Halkbank the U.S. Department of Justice – a prosecution involving potential political battles as well.

As we have blogged, the U.S. Attorney for the Southern District of New York charged Halkbank on October 15, 2019 with a six count indictment for bank fraud, money laundering and conspiracy to violate the International Emergency Economic Powers Act (“IEEPA”), stemming from the bank’s alleged involvement in a multi-billion dollar scheme to evade U.S. sanctions against Iran.  The Court later rejected an attempt by Halkbank to enter a “special appearance” contesting jurisdiction, making it clear that international financial institutions must appear for arraignment in criminal actions.  The decision served as a warning to foreign defendants brought into U.S. federal court: issues of jurisdiction in criminal cases must be litigated only after arraignment.

Judge Berman’s most recent ruling found that Halkbank is not immune from criminal prosecution in the United States under FSIA, and that the allegations in the indictment were plead sufficiently to avoid dismissal.  This ruling of course has a potentially broader application to any foreign majority state-owned entities which allegedly scheme to violate U.S. criminal law: given sufficient nexus between the scheme and the United States, FSIA will not shield the foreign entities, because the Act only applies to civil matters that do not fall under its “commercial activities” exceptions.
Continue Reading  Turkey’s Majority State-Owned Halkbank Is Not Immune from U.S. Prosecution in Iran Sanctions and Money Laundering Case

Second Post in a Two-Post Series

On March 19, 2020, Swedbank received its first sanction at the conclusion of parallel investigations by Swedish and Estonian authorities for its role in the seemingly non-stop Anti-Money Laundering (“AML”) debacle centered around Danske Bank and its now-notorious Estonian Branch. In the first of what will likely be multiple sanctions, Swedbank AB was ordered to pay a record 4 billion Swedish Krona ($38 million) and its subsidiary, Swedbank AS, has been ordered to improve its AML risk control systems to comply with applicable requirements.

In our first post, we discussed the various public AML-related investigations and enforcement actions plaguing Swedbank. In this post, we discuss the details and implication of the report of internal investigation regarding Swedbank’s alleged deficiencies in its AML processes performed by an outside law firm at the request of Swedbank, which has made the report publically available.

The Report is lengthy and detailed.  As we discuss, however, the Report highlights some basic, evergreen issues in AML compliance and enforcement: the need to implement adequate systems to manage high-risk customers; the need to identify beneficial ownership; the need for top management to understand and truly respect AML compliance; the need for transparency with regulators; and the need for transparency by financial institutions with investors and the public.

Continue Reading  AML Problems Plague Swedbank: The Internal Investigation Report