With a foreign bank accused of evading Iran sanctions, Supreme Court justices to rule on criminal prosecutions of state-owned non-US entities

According to reporting by the New York Times, Halkbank (“Halkbank”), a bank owned by the Turkish state, faces federal charges for evading Iran-related sanction imposed by the United States. The bank appears to deny such allegations.

The Foreign Sovereign Immunities Act of 1976 (the “FSIA”) regulates the extent to which entities associated with a foreign state (whether a head of state or a state-owned instrumentality entity engaged in purely commercial dealings) may be subject to legal claims in US courts.

Under the FSIA, civil suits against foreign entities are permitted in some circumstances.  In other words, any US person would be permitted to bring civil legal claims against a non-US target to the extent a variety of circumstances are satisfied.

Criminal lawsuits, whose consequences may be more grave than a civil lawsuit, against foreign sovereigns are a different matter.

“There just never has been a criminal prosecution of a sovereign or its instrumentality anywhere,” Halkbank’s attorney claimed, “The world has been around for, like, 7,000 years and no country has ever tried another country.”

In its article, the New York Times quoted that attorney as saying the following:  “President Madison did not indict Great Britain for arson for torching the White House in 1814.  President Roosevelt responded to Pearl Harbor by unleashing the full might of the American military against Japan, not a phalanx of prosecutors.”

In opposition, the attorney for the U.S. noted that, were Halkbank to prevail, “any foreign government-owned corporation could become a clearinghouse for any federal crime, including interfering in our elections, stealing our nuclear secrets or something like here, evading our sanctions and funneling billions of dollars to an embargoed nation, using our banks and lying to our regulators.”

Many penalties assessed against banks for sanctions violations arise in the context of regulatory probes (where the bank agrees to pay considerable fines in exchange for the US government agreeing to enter into a [deferred prosecution agreement] therewith [Link to  https://www.justice.gov/opa/pr/hsbc-holdings-plc-and-hsbc-bank-usa-na-admit-anti-money-laundering-and-sanctions-violations].

A bank that is not state-owned doesn’t have the ability to hide behind doctrines like sovereign immunity.  Halkbank may have decided to gamble that it will be held to be immune from criminal prosecution (if that is the eventual outcome in this case, then state-owned banks like it would have fewer incentives to cooperate with US sanctions-related regulatory probes or even comply with US sanctions laws).

If Halkbank prevails in this case, that wouldn’t necessarily mean it is free to engage in whatever sanctions-related conduct it elects to pursue.  Rather, regulators would continue to possess a variety of tools to apply against banks whose operations are considered problematic by its supervisory regulatory agencies.

If the Supreme Court stops the criminal prosecution of Halkbank from moving forward, the bank might end up being hobbled by its regulators. For Halkbank, such an outcome would end up being a Pyrrhic victory at best.

If your institution is navigating complex financial regulations, sanctions exposure, or foreign entity risk, contact us to schedule an introductory consultation with Castle Garden Law. Our firm advises clients in business law, financial compliance, and regulatory defense with a focus on strategic, international legal matters.