By Bruce Zagaris[1]

On April 30, 2019, the U.S. District Court for the District of Columbia unsealed an opinion issued on March 18, 2019, by Chief Judge Beryl A. Howell enforcing grand jury subpoenas and an administrative subpoena against three Chinese banks for records of transactions for a now-defunct Hong Kong based front company for North Koreas state-run company.  In doing so, Judge Howell found jurisdiction and, notwithstanding a conflict of law with China, that comity required the Chinese banks to comply with the subpoenas.[2]

Between October 2012 and January 2015, the Chinese banks were allegedly responsible for helping move $105,339,483.59 through U.S. correspond accounts.  Banks One and Two are Chinese banks with U.S. branches while Bank Three is a Chinese bank without any U.S. branch, but which maintains correspondent account.

Many of the transactions occurred after Treasury’s Office of Foreign Assets Control (OFAC) designated an entity as a Special Designated National.  The details in the Howell opinion appear to align with OFAC’s allegations in 2017 that the Hong Kong firm Mingzheng International Trading Limited acted as a front company to facilitate U.S. dollar transactions that helped North Korea’s proliferation program network, on behalf of a covert foreign branch of North Korea’s state-operated Foreign Trade Bank.[3]

In August 2018, a federal judge entered a default judgment against Mingzheng accounts in the U.S. that Justice Department officials alleged worked with three of China’s largest financial institutions:  the state-owned Bank of Communications, China Merchants Bank, and Shanghai Pudong Development Bank.[4]

Howell’s opinion states the U.S. government is investigating an entity for three crimes:  (1) money laundering; (2) violations of an order issued under the International Economic Emergency Powers Act, such as Executive Order 13382, a violation of 50 U.S.C. § 1705; and (3) violations of the Bank Secrecy Act.

In aid of the investigation, on December 26, 2017, the U.S. Attorney for the District of Columbia sent Bank Three a subpoena under 31 U.S.C. §5318(k)(3), which allows the Treasury Secretary and the Attorney General to “issue a summons or 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.”  Bank One’s and Bank Two’s local branch each received identical grand jury subpoenas.

In January 2018, representatives from Bank Three met with Chinese bank regulatory officials about the subpoena and learned that the only way under Chinese law that the bank could comply was through the process established under the bilateral China-U.S. June 19, 2000 Mutual Legal Assistance Agreement (MLAA).  In March 2018, Bank Three met again with Chinese bank regulatory officials and Chinese Ministry of Justice (MOJ) officials.  Chinese officials repeated that Bank Three should ask the U.S. government to request the subpoenaed records through the MLAA process and informed Bank Three that the MOJ would respond quickly to a MLAA request.  In a March 22, 2018 letter to Bank Three the MOJ confirmed this advice.  The letter also informed Bank Three that, if it “provide[s] relevant client information to the U.S. DOJ directly, the banking regulatory authorities will impose administrative penalties and fines on you, and you may bear civil or criminal liabilities depending on your situation.”  Bank One and Two have taken the same position as Bank Three.

Following these communications, a DOJ delegation visited China in April and August 2018 to discuss “China’s repeated failure to respond to MLAA requests – which necessitated the United States to proceed through Bank of Nova Scotia subpoenas and other authorities under U.S. law.” 

In November 2018, the U.S. government filed a motion to compel compliance with each of the three subpoenas.  During briefing, the MOJ sent two letters to the Court, in which it committed to “timely review and handle the requests for assistance sought by DOJ in accordance with the [MLAA] and applicable domestic law.”

On March 5, 2019, the Court held a hearing with all three banks, after which the banks filed supplemental briefs.  The Howell opinion observes that, if compliance with a grand jury subpoena “would be unreasonable or oppressive,” a court may quash or modify the subpoena.  Fed. R. Crim. P. 17(c)(2).  A subpoena might be unreasonable or oppressive if compliance would violate foreign law.  As the parties relying on foreign law, the banks must show that Chinese law would prevent compliance with the court’s order.

                        Jurisdictional Issues

The opinion states a motion to compel compliance presents first the issue of whether the subpoenas are enforceable and whether the banks are subject to the Court’s jurisdiction and whether the subpoena issued to Bank Three exceeds the government’s authority under 31 U.S.C.§ 5318.

The opinion states each bank is subject to the personal jurisdiction of the Court because both Bank One and Bank Two have consented to the exercise of such jurisdiction while applying to the Federal Reserve to open a branch in the U.S. and, even if those two banks had not given consent, all three banks have sufficient minimum contacts with the relevant forum, the U.S., for the exercise of such jurisdiction.

The opinion also explains that a subpoena under 31 U.S.C. § 5318(k)(3)(A)(ii) may be served “on the foreign bank in the United States if the foreign bank has a representative in the United States.”  Congress enacted these provisions as part of the USA Patriot Act, in response to the 9/11 attacks, requiring foreign banks using U.S. correspondent accounts to appoint a representative and authorizing U.S. law enforcement to serve such representatives with subpoenas and summons to demand records tracing the source of foreign bank deposits established to handle cross-border transactions, even if the records have no other link to the U.S. or outside the country.  Coincidentally Judge Howell helped draft the provisions as Senate Judiciary Committee counsel before her appointment as federal judge in 2010.[5]

The opinion finds that the Court has personal jurisdiction since each bank has “purposefully availed itself of the privilege of conducting activities within the forum State’ or [] purposefully directed its conduct into the forum States.”  The opinion reasons that the banks availed themselves of the privileges of conducting transactions in U.S. dollars through correspondent accounts in the U.S.  The opinion finds that nothing about the exercise of jurisdiction, including the risk that any of the banks will be penalized in China, makes such exercise unjust under the circumstances.

                        International Comity

The second issue the opinion addresses is, even if the subpoenas are enforceable against the three banks, whether such enforcement is reasonable, as a matter of international comity.    When an enforcement order would create a “true conflict” between domestic and foreign law, the Court should consider, as a matter of international comity, whether to abstain from exercising its authority.  When there is a conflict, a court should seek a reasonable accommodation that reconciles the central concerns of both sets of laws.  The party relying on foreign law to establish a conflict, has the burden of showing that such law prevents compliance with the court’s order.

The opinion finds that the records’ Chinese origins, the slim chance of the banks suffering some hardship if forced to comply, and the banks’ good faith through this process all militate against enforcement of the subpoenas.  Conversely, the importance of the subpoenaed records, the specificity of the subpoenas, the lack of alternative channels for obtaining the records, and the risk of undermining a U.S. national security interest at the pinnacle of importance, all favor enforcement.

The opinion explains international comity is not a reason to refrain from compelling compliance with the subpoenas.  The principal factor, the interests of the relevant countries, could not be more firmly in favor of enforcement.  On the side of the U.S. government national security is at stake.  On the side of the Chinese banks no national interest in compromised.  In addition, the U.S. government has subpoenaed only records relevant to its national security investigation and has done so because no effective alternative method of accessing those critical records exists.  The banks’ potential hardship is speculative, and, in any event, any penalty is unlikely to be consequential.

The opinion orders Bank One and Two to appear before the grand jury to provide testimony at the earliest date available to the grand jury, or, in the alternative Bank One Bank wo must if the parties agree, promptly complete production of subpoenaed records, in lieu of appearing before the grand jury.  The opinion orders Bank Three to complete production of the subpoenaed records by March 28, 2019. 

                        Analysis

The opinion constitutes the first known instance in which a U.S. court has upheld subpoenas to a Chinese bank in sanctions investigation.[6]  For the last few years sanctions enforcement has been a major source of tension between China and the U.S.  Draconian sanctions were issued against ZTE, the China telecommunications entity.  Thereafter, President Trump modified and reduced sanctions.  The U.S. and China are battling over the extradition from Canada of Meng Wanzhou, the CFO and Vice President of Huawei, for making false statements in connection with Huawei’s transactions and business with Iranian entities in violation of U.S. Iran sanctions.  Criminal and civil cases are pending in the U.S. against Huawei for, inter alia, stealing intellectual property of U.S. firms.  The U.S. is pressuring countries around the world not to use Huawei for developing 5G technology. 

In its efforts to prevent North Korea’s nuclear proliferation program, the U.S. has for many years targeted transactions between Chinese banks and financial institutions and North Korean front companies.

The Howell opinion is likely to cause the Chinese financial industry to review their customer lists to minimize the potential burden of facing U.S. subpoenas, enforcement actions, or fines as well the potential embarrassment and reputational damage.[7] 

In view of the stalemate between North Korea and the U.S., alongside the recent diplomatic activity by North Korea to escape its isolation, and the apparent efforts of China and Russia to facilitate North Korea’s efforts to escape its isolation and the sanctions suffocating its economy, more criminal investigations of banks, financial institutions, and non-banking entities helping North Korea are likely.

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[1] The article was originally published on the International Enforcement Law Report on May 11, 2019, Volume 35, Issue 5. Link: https://www.ielr.com/content/us-court-enforces-grand-jury-subpoena-n-korean-sanctions-violations-against-chinese-banks

[2] In re Grand Jury Investigations of Possible Violations of 18 U.S.C. § 1956 and § 1705, U.S. District Court for the District of Columbia, Miscellaneous Case Nos. 18-175, 18-176 and 18-177, March 18, 2019.

[3] Spencer S. Hsu, Chinese banks ordered to cooperate in probe, Wash. Post, May 2, 2019, at A14, col. 1.

[4] Id.

[5] Hsu, supra.

[6] Id.

[7] Id., citing Joshua Stanton, who operates the site One Free Korea.

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