Banking and Finance Law Daily Chinese banks subject to subpoenas, contempt orders
Wednesday, August 7, 2019

Chinese banks subject to subpoenas, contempt orders

By Lisa M. Goolik, J.D.

The U.S. government is seeking records from three Chinese banks that allegedly facilitated transactions for a Chinese shell company operated by a North Korea-owned entity.

The U.S. Court of Appeals for the District of Columbia has affirmed a district court’s contempt orders against three Chinese banks for failing to turn over records that the U.S. government believes will clarify how North Korea finances its nuclear weapons programs. In a redacted opinion reissued on Aug. 6, 2019, the D.C. Circuit concluded that the district court had personal jurisdiction to enforce the subpoenas and that foreign records were within scope of the subpoena issued under the PATRIOT Act (In re Sealed Case, July 30, 2019, Tatel, D.).

Evading sanctions. While the United States has imposed sanctions against North Korea to cut off its access to the U.S. financial system, government investigators believe that North Korea uses Chinese shell companies to hide the true ownership of funds and avoid sanctions. In the instant case, the U.S. government uncovered "substantial evidence" that a now-defunct Chinese company, the name of which is redacted from the opinion, acted as a front for a North Korea-owned entity (NKE) by facilitating transactions that violated U.S. sanctions. The company’s assistance allegedly enabled North Korea to export hundreds of millions of dollars of coal and other minerals, generating revenue in U.S. currency that North Korea could then use to requisition other commodities vital to its weapons program.

To complete the transactions, the company routinely took advantage of U.S. correspondent bank accounts. The correspondent accounts were held by the three Chinese banks. As a result, the government sought the banks’ records to better understand the full scope of the operation.

The subpoenas. While the United States and China have a bilateral agreement—Mutual Legal Assistance Agreement—for obtaining these records, the United States chose not to go through the MLAA, viewing the process as "sluggish" and "typically fruitless." Rather, the government unilaterally issued subpoenas to all three banks in December 2017. The two banks with branches in the United States (Banks One and Two) received grand jury subpoenas, while the third (Bank Three)—has no branch in the United States and received a subpoena from the Attorney General pursuant to the PATRIOT Act.

After the banks failed to respond to the subpoenas, the government moved the district court to compel enforcement in November 2018. The banks disputed the district court’s personal jurisdiction and contended that enforcing the subpoenas would violate deeply ingrained principles of international comity.

Bank Three also protested that the scope of its subpoena exceeded the Attorney General’s PATRIOT Act authority.

The district court held that Banks One and Two had consented to personal jurisdiction when they signed an agreement with the federal Reserve permitting them to open branches in the United States. Bank Three, which has no branch in the United States, had sufficient contact with the United States as a whole. In addition, the district court concluded that comity principles did not require the subpoenas to be quashed. After the banks made clear they would not comply with the order, the district court held them in contempt.

Consent to personal jurisdiction. The D.C. Circuit first determined that personal jurisdiction extended to Banks One and Two because they consented to jurisdiction when they opened their U.S. branches. The Constitution forbids federal courts from exercising personal jurisdiction absent sufficient "minimum contacts" to satisfy "traditional notions of fair play and substantial justice." Unlike subject-matter jurisdiction, however, a party may "consent" to a court’s personal jurisdiction.

In order to establish U.S. branches, the banks executed agreements with the Federal Reserve to assure compliance with relevant provisions of federal law. As part of that deal, they "consent[ed] to the jurisdiction of the federal courts of the United States … for purposes of any and all … proceedings initiated by … the United States … in any matter arising under U.S. Banking Law."

As the government noted, the grand jury was investigating whether the banks exercised due diligence as to the company’s transactions, which is required by the Bank Secrecy Act. "In short, then, the government has assembled the necessary ingredients for jurisdiction: a criminal investigation initiated by the United States (the grand jury investigation) arising under U.S. Banking Law (the Bank Secrecy Act)," the court concluded.

Nationwide jurisdiction. The appellate court then turned to Bank Three, which by contrast, has neither opened a U.S. branch nor consented to personal jurisdiction. As a result, the court was required to determine whether Bank Three "has purposefully directed" its relevant "activities" at "the forum."

In many situations, Congress limits the territorial reach of federal district courts to that of the state in which they sit. The government maintained that the PATRIOT Act authorizes nationwide service of process. Under those circumstances, the Fifth Amendment requires only "minimum contacts with the United States" as a whole—rather than with the forum state.

The appellate court agreed. The service-of-process provision of the PATRIOT Act, codified in 31 U.S.C. § 5318(k), authorizes subpoena to "be served on the foreign bank in the United States if the foreign bank has a representative in the United States." Reading the section as to authorize nationwide service also aligns with the PATRIOT Act’s structure and purpose, the court stated. "Unlike federal district courts, which customarily serve a particular geographical area, Cabinet officers serve the entire country. Structurally speaking, then, Congress’s choice to give two such officers the subpoena power evokes an intent to rely on their nationwide reach."

As a result, for personal jurisdiction, Bank Three need only have sufficient contacts with the United States as a whole, and Bank Three failed to argue that its contact with the United States was insufficient, arguing only that it had insufficient contact with the District of Columbia.

Foreign records subject to subpoena. Lastly, the D.C. Circuit concluded that the records pertaining to the company’s Bank Three account and its correspondent banking transactions, no matter where they occurred, are "related to" the Bank’s U.S. correspondent accounts and subject to the subpoena. The PATRIOT Act authorizes both the Attorney General and the Treasury Secretary to issue a "subpoena to any foreign bank that maintains a correspondent account in the United States and request records related to such correspondent account, including records maintained outside of the United States relating to the deposit of funds into the foreign bank."

The evidence already collected demonstrated that the company’s sole reason for existence was to obtain U.S. dollars for the NKE. As a result, all of the company’s records were "related to" the U.S. correspondent accounts because those accounts were part of the company’s means of obtaining U.S. dollars. As a result, the court concluded that "records ‘related to’ a U.S. correspondent account include 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 U.S. currency and markets using a U.S. correspondent account.

The case is No. 19-5068.

Attorneys: Daniel Levin, Jacqueline L. Chung, and Owen Pell (White & Case LLP).

MainStory: TopStory BankSecrecyAct CrimesOffenses DistrictofColumbiaNews

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