In a sweeping decision, the United States Court of Appeals for the D.C. Circuit recently affirmed a District Court Contempt Order issued against three Chinese banks for failing to comply with U.S. government subpoenas. In re: Sealed Case, No. 19-5068 (D.C. Cir. Aug. 6, 2019). Those subpoenas (two grand jury subpoenas and one issued by the Attorney General pursuant to the Patriot Act) sought records of companies that the U.S. believes are helping to finance North Korea’s nuclear weapons program. Even though the Court acknowledged that complying with the subpoenas would violate Chinese laws and that an earlier D.C. Circuit opinion in a criminal investigation went the other way, the Court emphasized the national security interests of the U.S. justified upholding the District Court’s order. This decision demonstrates the vast extra-territorial reach of the U.S. government over financial transactions occurring around the world. Financial institutions with correspondent banking relationships with the U.S. should understand that such relationships may well result in them being required to produce records, even if such production would violate the laws of their home country.
This case involved three banks with correspondent accounts in the U.S. Two of the banks operated branches in the U.S., but the third did not. All three are based in China and the government of China owns a substantial minority of each of the banks. The government presented substantial evidence that a now-defunct Company acted as a front for North Korea to execute business transactions to obtain U.S. dollars, which were then used to get material and services to help its nuclear weapons program. This Company used accounts at these three banks for those transactions.
The U.S. issued grand jury subpoenas to the two banks that had branches in the U.S. and issued a Patriot Act subpoena from the Attorney General to receive information about the Company’s accounts at these banks. The banks refused to comply, citing Chinese law that prevented them from doing so. In addition, the banks pointed to an alternative method to obtaining the information – through the U.S.-China Mutual legal Assistance Agreement (MLAA). The Chinese government even wrote to the District Court and stated that it would promptly review any request submitted pursuant to the MLAA and that these banks would be sanctioned if they violated Chinese law. The U.S., on the other hand, presented evidence that the MLAA process was not likely to lead to the U.S. obtaining the information, given historical precedent and the diplomatic efforts the U.S. had already used in trying to obtain the information.
The District Court performed a comity analysis pursuant to previous precedent and the Restatement of Foreign Relations Law of the United States. It first found the necessary conflict between U.S. and Chinese laws. Then it found that while there were factors that strongly weighed against enforcing the subpoenas (documents originated outside U.S. and the banks acted in good faith) other factors weighed the other way (documents contained unique information vital to the investigation and the subpoenas targeted a specific collection of records). In looking at the remaining factors, the District Court concluded that “the United States’ national security interest easily outweighs China’s interest in safeguarding its banking secrecy laws.” In the end, the District Court concluded that “[on]n balance, international comity is not a reason to refrain from compelling compliance with the subpoenas.” The District Court first ordered the banks to comply with the subpoenas, and when they did not, the Judge held them in contempt and fining them $50,000 each day, stayed while pending expedited appeals.
The D.C. Circuit concluded that the District Court applied the correct legal standard in evaluating comity. It also agreed with the District Court’s distinguishing of a 1987 D.C. Circuit decision that contained many factual parallels to the case on appeal, but held that the subpoenas at issue should not be enforced. Most important, the earlier case concerned a “domestic law enforcement matter,” which “hardly compares to the national security interests and associated potential harm caused by non-compliance with a subpoena related to an investigation into funding a state-sponsor of terrorism’s nuclear weapons program.” This was the key that gave the D.C. Circuit comfort in enforcing these subpoenas.
There may be a temptation to question this case’s precedential value on the ground that the Court tilted toward the government because the subpoenas aimed at combatting the very real existential danger that North Korea’s nuclear weapons program poses to the U.S. But this respected appellate court’s comprehensive rejection of the appellants’ arguments, coupled with the current Administration’s expansion of what is considered national security (cf. immigration, tariffs, trade negotiations), may embolden federal prosecutors to use subpoenas in other kinds of investigations against banks that are not located in the U.S., but which have established correspondent banking relationships with the U.S. Similar to the long reach of U.S. sanctions laws, the long reach of U.S. subpoena power can affect foreign financial institutions’ relationships with their customers and their governing authorities.