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Litigation News

Litigation News | 2020

Comity Not Enough to Save Chinese Banks from Contempt Order

Summary

  • National security interests outweigh complying with Chinese laws.
  • The case involved allegations of money laundering in support of North Korea’s nuclear program.
  • A federal appeals court affirmed a contempt order against three Chinese banks for failing to comply with U.S. government subpoenas.
Comity Not Enough to Save Chinese Banks from Contempt Order
Peter Dazeley via Getty Images

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In a case involving allegations of money laundering in support of North Korea’s nuclear program, the U.S. Court of Appeals for the D.C. Circuit affirmed a contempt order against three Chinese banks for failing to comply with U.S. government subpoenas. In so holding, the court agreed with the district court that “the United States’ national security interest easily outweighs China’s interest in safeguarding its banking secrecy laws.”

Banks Refuse to Comply with the Subpoenas

In In re: Sealed Case, the U.S. government issued subpoenas to three Chinese banks seeking information about North Korea’s nuclear program. The government claimed that “North Korea manages to evade [U.S.] sanctions by using Chinese front companies that cloak the true ownership of the funds involved.”

All three Chinese banks that received subpoenas hold correspondent bank accounts in the United States. Two of the banks operate branches in the United States, and those banks received grand jury subpoenas. The third bank received a subpoena from the U.S. Attorney General pursuant to the Patriot Act. As the D.C. Circuit observed, “[t]he government does not currently suspect the subpoenaed Banks of any wrongdoing.”

The banks refused to comply, claiming that doing so would violate multiple Chinese laws. Specifically, the banks pointed to a bilateral agreement between the United States and China, known as the Mutual Legal Assistance Agreement (MLAA), which requires the two countries to assist each other “in proceedings related to criminal matters,” including by “providing . . . records or articles of evidence.” As the court of appeals observed, “[a]bsent an MLAA request, Chinese law prohibits banks from disclosing records to international investigators.” Therefore, the Chinese banks claimed that “failure to use the MLAA channel would expose the Banks to administrative and criminal penalties.” The United States responded that such a request would be futile, given “China’s slow and spotty history of providing records requested through that process.”

District Court Holds the Banks in Contempt

After about a year, the U.S. government filed a motion to compel with the U.S. District Court for the District of Columbia. The district court granted the motion, holding that it had personal jurisdiction over each of the foreign banks and that there were “no problems with the scope of the Patriot Act subpoena.” The district court further declined to quash the subpoenas based on comity principles, even though the government “conceded that compliance with the subpoenas would entail violating at least some Chinese laws.”

One month later, when the banks refused to comply with the district court’s order, the court held the banks in contempt and imposed a fine of $50,000 per day against each bank. However, the court issued a stay of the penalty during the pendency of an expedited appeal.

Court of Appeals Affirms

On appeal, the banks raised arguments based on personal jurisdiction, the scope of the Patriot Act, and comity principles. The court of appeals dispensed with each by agreeing with the district court’s analysis. First, the court agreed that the district court could exercise personal jurisdiction over the banks.

Second, with respect to the third bank, the Patriot Act authorizes the Attorney General to issue subpoenas requesting records “related to” a bank’s correspondent accounts in the United States. The D.C. Circuit concluded that, even though the subpoena sought documents related to transactions in countries other than the United States, “all of the Company’s records are ‘related to’ the Bank’s U.S. correspondent accounts because those accounts were part of the Company’s means of obtaining U.S. dollars.”

Finally, the court found “no abuse of discretion in the district court’s decision to enforce the subpoenas despite the fact that the United States chose not to pursue the MLAA process.” It found no fault with the district court’s conclusion that “the U.S. government had no obligation to submit a voluntary MLAA request because it would likely prove ineffective.”

The appellate court also affirmed the district court’s contempt orders against each of the three banks.

Observers Focus on Patriot Act’s Broad Scope

“I think the thing that really makes the case stand out are its facts,” says John H. Mathias Jr., cochair of the ABA Section of Litigation’s International Litigation & Dispute Resolution Committee. As Mathias observes, “right off the bat, you’ve got North Korea, money laundering, [and] using a phony company.”

The most interesting part of the case is about the “scope of the Patriot Act,” says Warrington Parker, cochair of the Section of Litigation’s Criminal Litigation Committee. The court’s conclusion that all accounts are “related to” the U.S. correspondent accounts was “a no-brainer kind of analysis,” he says. “It was a single purpose entity in the United States, and it was [allegedly] used to launder money,” Parker says. “I think they avoided the hard question related to how broad the Patriot Act is.”

National Security—The Elephant in the Room

Both Mathias and Parker think the national security interest issues were just too compelling to allow the banks to withhold these documents. “We’re talking about the mechanism whereby North Korea was laundering money to finance evasion of sanctions and the perpetuation of its nuclear arms program,” says Mathias. “So, that’s kind of the elephant in the room—and that was going to drive this decision no matter what.”

“This is just one of those cases where they’re facilitating money laundering,” agrees Parker. “This is basically criminal conduct that they’re engaged in,” he says.

Resource

  • Mark D. Hobson, “How Small-Fund Advisors Can Mitigate Money-Laundering Risks,” Bus. Law Today (Mar. 13, 2018).