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Banks face difficult decisions on compliance with US subpoenas for records located abroad after DC Circuit ruling

On August 6, 2019, the DC Circuit released a significant decision, In re Sealed Case, affirming contempt penalties against three Chinese banks for non-compliance with subpoenas calling for the production of records located outside the United States. The investigation by the US Department of Justice (DOJ) involves a Chinese company that allegedly acted as a front for a North Korean entity to evade US sanctions by conducting US dollar transactions through the banks’ US correspondent accounts. During its investigation, DOJ issued grand jury subpoenas to two of the banks, which have US branches, and a subpoena under the PATRIOT Act to the third bank, which has US correspondent accounts but no US branch. Although Chinese law prohibits banks from producing records to foreign authorities in the absence of a request pursuant to a mutual legal assistance treaty (MLAT), DOJ did not make such a request here given its view that doing so would be futile. The DC Circuit agreed with that argument.

In re Sealed Casehas several implications for foreign banks and companies that maintain branches or correspondent bank accounts in the United States. Under the DC Circuit’s ruling:

  1. US criminal authorities can obtain records held overseas by serving a subpoena on a US branch of a foreign bank or business or on a US-based representative of a foreign bank that maintains a US correspondent bank account, even where production of the records would violate a foreign country’s laws;

  2. US criminal authorities can use this subpoena power even where it has not attempted to obtain the overseas records through an MLAT request, if such a request would likely be ineffective; and

  3. The failure to comply with such a subpoena can result in a finding of contempt with the imposition of significant daily fines and, potentially, the termination of a foreign bank’s US correspondent banking relationship.

Prior precedent regarding DOJ’s authority to subpoena records located abroad

DOJ has long asserted the authority to serve grand jury subpoenas on a US branch of a foreign bank for records held overseas. In the seminal case addressing this issue, In re Grand Jury Proceedings (Bank of Nova Scotia), 691 F.2d 1384 (11th Cir. 1982), DOJ subpoenaed the US branch of a Canadian bank for records held in several Caribbean countries. The bank refused to comply on the ground that doing so could expose it to prosecution under Bahamian bank secrecy law. The Eleventh Circuit, in rejecting this challenge to the subpoena, stated that it would not allow a US criminal investigation to be “thwarted whenever there is conflict with the interest of other states.” It further held that DOJ had no obligation to request assistance from Bahamian authorities, stating that such a request is not “substantially equivalent” to a grand jury subpoena given the time required to pursue such a request and the uncertain likelihood of success.

The Second Circuit has similarly enforced a grand jury subpoena seeking records located abroad. In In re Grand Jury Subpoena Directed to Marc Rich & Company A.G., 707 F.2d 663 (2d Cir. 1983), DOJ served a subpoena seeking records of a Swiss commodities trading company on a wholly-owned subsidiary that was present in the United States. The Swiss parent moved to quash the subpoena on the grounds that it was not subject to the court’s jurisdiction and that Swiss law prohibited production of the materials in question. Without even addressing the possible violation of Swiss law, the Second Circuit found that the district court had personal jurisdiction over the parent and further held that a company subject to the court’s jurisdiction may not refuse to produce documents within its control that are located abroad.

In the above cases, two federal courts of appeals swiftly rejected arguments that international comity precluded enforcement of a subpoena for records located overseas. The DC Circuit, however, departed from these decisions in In re Sealed Case, 825 F.2d 494 (D.C. Cir. 1987), another case in which DOJ served a subpoena on a US branch of a foreign bank for records located in a country with bank secrecy laws. Expressing “considerable discomfort” with ordering a bank to produce documents in violation of the laws of a “foreign sovereign on that sovereign’s own territory,” the court reversed the district court’s contempt order against the bank, further noting that the bank was not alleged to have engaged in wrongdoing and was a state-owned entity. Although the 1987 panel declined at that time to decide “the general issue of whether a court may ever order action in violation of foreign laws,” last week, the DC Circuit answered that question in the affirmative.

DOJ has acknowledged that foreign governments have strongly objected to so-called Bank of Nova Scotia subpoenas and, as a result, prosecutors must obtain approval from DOJ’s Office of International Affairs before issuing such subpoenas for records located abroad. In fact, the MLATs between the United States and certain other countries, not including China, now require DOJ to make a good faith attempt to obtain assistance under the MLAT before issuing a Bank of Nova Scotia subpoena.

While courts have issued divergent decisions on DOJ’s authority to serve Bank of Nova Scotia subpoenas on a US branch of a foreign bank, no federal court of appeals has previously considered DOJ’s authority to issue subpoenas under the PATRIOT Act, 31 USC § 5318(k), to a foreign bank that maintains a correspondent banking relationship in the United States. Such subpoenas differ from Bank of Nova Scotia subpoenas in a key respect: while the latter can be used to obtain any records held by the subpoena recipient, the PATRIOT Act permits DOJ to demand only records that are “related to” the foreign bank’s US correspondent account. In May 2016, DOJ submitted to Congress a legislative proposal to expand the reach of PATRIOT Act subpoenas beyond records “related to” the foreign bank’s correspondent account to include records of “any related account at the foreign bank.” To date, however, Congress has not acted on this proposal.

In re Sealed Case

The subpoena enforcement litigation arose from a criminal investigation of a Chinese company that allegedly acted as a front for a North Korean entity, enabling the entity to evade US sanctions by making and receiving payments in US dollars. The North Korean government allegedly used the US currency obtained through this scheme to acquire materials that are essential to its nuclear weapons program. In carrying out the scheme, the Chinese front company routinely used US correspondent accounts held by three China-based banks.

In the course of its investigation, DOJ sought certain records from the three banks. Although Chinese law prohibits banks from disclosing records to foreign authorities in the absence of a request pursuant to an MLAT, DOJ chose not to make such a request, citing the historic lack of cooperation by Chinese authorities in responding to such requests. Instead, DOJ served grand jury subpoenas (i.e., Bank of Nova Scotia subpoenas) on the two banks with branches in the United States and a PATRIOT Act subpoena on the third bank, which had no branch in the United States but did have a US correspondent account. 

After the banks refused to comply, DOJ sought and obtained a compulsion order from the district court. When the banks made clear that they would not comply with the compulsion order, the district court held them in contempt and imposed a fine of $50,000 per day, but stayed the penalty pending the banks’ appeal. To date, DOJ has not sought to terminate any of the banks’ US correspondent banking relationships under section 5318(k) for non-compliance with the subpoenas.

Key elements of the court’s decision

In its opinion, the DC Circuit first addressed personal jurisdiction. The court found that two of the banks consented to jurisdiction with respect to any matters initiated by the United States arising under US banking law when they applied to the Federal Reserve to open their US branches. Because the investigation is focused in part on whether the US banks hosting the correspondent accounts complied with the Bank Secrecy Act, the court concluded that the matter fell within the scope of the banks’ consent. Citing the Second Circuit’s decision in In re Grand Jury Subpoena Directed to Marc Rich & Company A.G., the court further held that the location of the subpoenaed records outside the United States has “no bearing” on personal jurisdiction.

The court held that the third bank, which did not consent to personal jurisdiction, had sufficient contacts with the United States. In doing so, the court rejected a state-specific contacts analysis, holding instead that section 5318(k) authorizes nationwide service on any representative of a foreign bank in the United States. The court declined the bank’s invitation to invoke the presumption against extraterritoriality in assessing this question, concluding that the service-of-process provision “has no impact on the substantive extraterritorial reach of federal law.”

The court next considered whether the PATRIOT Act subpoena exceeded DOJ’s authority to demand documents “related to” a US correspondent account. As described by the court, the subpoena was comprehensive, even seeking records related to transactions by the Chinese company through correspondent accounts in other countries. The court found that the phrase “related to,” as used in section 5318(k), encompasses all records that have a connection with the use of a US correspondent account, including “predicate” transactions involving the deposit of funds into the foreign bank, even if some transactions did not pass through a US correspondent account. Because DOJ had made a sufficient showing that the Chinese company allegedly “operated exclusively as a U.S. dollar clearinghouse” for a North Korean entity, the court held that all records related to the company properly fell within the subpoena’s scope. The court cautioned, however, that its decision was fact-dependent and does not authorize DOJ to “obtain essentially any document or record from any foreign bank with a U.S. correspondent account.”

The balance of the court’s opinion addressed comity and the fact that complying with the subpoenas would expose each bank to legal penalties in China. In undertaking this analysis, the court assessed a constellation of factors and emphasized two of them, namely, the relative interests of the United States and China and whether there were alternative means of obtaining the records. With respect to the former factor, the court noted that the domestic law enforcement matter at issue in its 1987 decision in In re Sealed Case “hardly compares to the national security interests” at stake in an investigation “into funding a state-sponsor of terrorism’s nuclear weapons program.” With respect to the latter factor, the court considered China’s record of handling MLAT requests over the last decade. Given that China had either provided no response at all or given inadequate or untimely responses to prior requests, the court concluded that DOJ had no obligation to pursue an MLAT request that would likely prove ineffective. 

Potential implications

The DC Circuit’s ruling brings the court more closely into line with other federal appellate courts, which have similarly required banks to produce records located abroad even where doing so would violate foreign law. The court’s opinion, however, signaled that it will give careful consideration to comity arguments, assessing the significance of DOJ’s investigative interests and whether the foreign country has a record of responding constructively to MLAT requests. Historically, other US courts have been far more quick to conclude that a US criminal investigation overrides competing foreign interests and that a request for legal assistance is not equivalent to a subpoena.

As the first appellate decision addressing DOJ’s authority to issue subpoenas under PATRIOT Act section 5318(k), the court provided significant guidance regarding the permissible scope of such subpoenas. Although the court’s ruling that the subpoena at issue here could encompass all records relating to the Chinese company turned on the specific factual allegations in the case, the court nonetheless endorsed the view that records “related to” a US correspondent account include not only records of the correspondent account itself (which could be obtained from the US institution), but also preparatory or predicate steps for using the correspondent account, such as the deposit of funds into the foreign bank.

The decision also highlights the substantial penalties that can result from non-compliance. Even though DOJ conceded that the banks had acted in good faith to obtain the Chinese government’s permission to produce the records, the court affirmed a $50,000 per day contempt fine for non-compliance. The decision does not address DOJ’s authority to terminate a foreign bank’s US correspondent relationships for non-compliance with a subpoena, as DOJ has not, to date, sought to exercise that authority. Depending on the banks’ response to the DC Circuit’s ruling, if DOJ decides to take that step, it could have a profound and detrimental effect on the banks’ ability to engage in US dollar transactions. In either case, the decision reaffirms DOJ’s broad authority to obtain records located outside the United States.