Second Circuit Hears Halkbank Oral Argument
March 5, 2024
On February 28, 2024, the Second Circuit heard oral argument in United States v. Turkiye Halk Bankasi A.S. From the judges’ questions—which admittedly came almost exclusively from Judge Bianco—the panel seems likely to hold that Halkbank, a Turkish state-owned bank, is not immune under federal common law from criminal prosecution for violating U.S. sanctions on Iran. That outcome would not be surprising, because that was the result that the same three-judge panel reached the first time it confronted the question in this very case. If the panel does rule against Halkbank, it could do so in two quite different ways: by ceding lawmaking authority to the executive branch or by deciding the federal common law question for itself.
To the Supreme Court and Back Again
Halkbank is a commercial bank that was indicted for laundering billions of dollars of Iranian oil and natural gas proceeds. Doing so violated U.S. sanctions against Iran, the indictment alleges. Almost all of Halkbank’s conduct took place in Turkey, although some of the transactions were cleared through the United States (8:30, 10:00). Halkbank is not a central bank, but it is majority-owned by the government of Turkey, leading to protracted litigation about whether it is entitled to foreign sovereign immunity pursuant either to federal common law or to the Foreign Sovereign Immunities Act (FSIA).
The Second Circuit held the first time around that neither the FSIA nor common law entitled Halkbank to immunity. The Supreme Court held that the FSIA does not apply in criminal cases, thus affirming that Halkbank is not entitled to statutory immunity. On the common law issues, the Second Circuit reasoned that “at common law, sovereign immunity determinations were the prerogative of the Executive Branch; thus, the decision to bring criminal charges would have necessarily manifested the Executive Branch’s view that no sovereign immunity existed.” It would have very easy for the Supreme Court to affirm on this ground as well, but it did not. Instead, the Court remanded the case for reconsideration.
Deference to the Executive Branch
The oral argument before the Second Circuit shifted among three interrelated but distinct issues about deference to the executive: Second Circuit and Supreme Court precedent; the policy implications of giving the executive branch controlling authority over immunity issues; and separation of powers. Unfortunately, little of the time at argument was devoted to the third question, which means that the constitutional problems with executive law-making were not explored and the stakes of a ruling in favor of the government were not articulated.
Precedent
Judge Bianco began by asking Halkbank’s lawyer about precedent (1:30). Here is an overview of that issue. There are two Supreme Court admiralty cases from the 1940s that say, in dicta, that the courts should defer to executive branch in some immunity matters, and there are recent cases in the Second Circuit holding that the executive branch controls immunity in cases against foreign officials (which also fall outside the scope of the FSIA). For the most part, the issue of executive control simply does not arise anymore because the purpose of the FSIA was to take immunity determinations away from the executive branch and give it to the courts. Yet in the years before enactment of the FSIA, lower courts did defer to the executive. That practice is described in subsequent Supreme Court cases such Republic of Argentina v. NML Capital in which Justice Scalia, writing for the Court, described the executive deference system as “bedlam.”
John Williams, arguing for Halkbank, addressed the precedent in several ways. He noted that the prior cases involved deference to the government’s decisions in favor of immunity, rather than a decision—as in this case—against immunity (14:50). He parsed the language of the Court’s 1945 decision in Republic of Mexico v.Hoffman, which suggests that executive deference only applies if the immunity is advanced on new grounds (2:00), and he distinguished the prior cases as involving civil, not criminal, jurisdiction (15:50, 20:45).
Precedent provides what might seem like an easy way for the Second Circuit to resolve this case and rule for the government. It also, of course, provided a way for the Supreme Court to affirm—and yet the Court remanded. If the panel choses to rely on precedent in favor of executive control, it should do better than the first time around, when it cited only Verlinden v. Central Bank of Nigeria (1983), a case that discussed the history of the FSIA but did not actually involve deference to the executive.
The panel’s citation to a case not really on point underscores the difficulty: there is no precedent that compels a ruling in favor of the government on this ground, as Ingrid has argued. Such a ruling would be a major constitutional decision, giving the President the power to make law that binds the states and the federal judiciary. The old admiralty cases say nothing about the Constitution. Their reasoning, such as it is, is based solely on policy. The constitutional issues—right at the heart of Articles II and III, and the Supremacy Clause of Article VI—are the concerns that led the Court to remand the case. Those are the issues that the Second Circuit should address.
Policy
The oral argument covered some policy considerations on both sides. Judge Bianco raised a concern about shielding foreign state-owned corporations from criminal liability when they take actions that cause harm in the United States (5:30, 11:30). But rejecting executive control does not mean that Halkbank wins—it may well not be entitled to common law immunity, as discussed below. Judge Bianco also expressed concern about “embarrassment” to the executive branch if courts accorded immunity to a foreign state-owned corporation indicted by the United States government (12:20). That argument proves too much. The Supreme Court often rules against the executive branch in cases related to foreign policy and war. Its decisions are based on the applicable law, not ad hoc determinations of what might be embarrassing. Here, the embarrassment argument is especially weak. In the many high-stakes immunity cases decided under the FSIA, the government gets no deference at all. Moreover, immunity determinations around the world are made by courts.
On the other hand, Judge Bianco also expressed concern that, if the executive branch controls immunity, there would effectively be no immunity from federal prosecution for foreign states and state-owned enterprises (22:30). Michael Lockard, arguing for the government, offered assurances that, of course, it would never indict an actual foreign government (21:20)—and Judge Bianco seemed to agree that foreign states themselves should not be indicted (22:50). But that is not how executive control works. If the courts accept law-making by the executive branch, then it controls. Period. If a President decides to indict a foreign state—despite common law, international law, and the representations made by assistant U.S. Attorneys—courts would have to obey that decision. The position is so extreme that the U.S. government backed away from it at oral argument before the Supreme Court. Whatever result the panel reaches in this case, it should acknowledge the far-reaching power that the executive branch is seeking here.
Finally, concerns were raised about state court prosecutions (32:50). The government offered assurances here, too—that the executive branch would step in and making binding submissions to state courts (33:15). The Supremacy Clause issues aside, we already know that the system of executive deference does not work well. The “bedlam” was caused in part because the executive branch does not always make immunity determinations in specific cases (22:20), leaving courts to parse prior executive branch practice and statements to determine the applicable “law.”
The Constitution
Chief Justice Roberts explained in Medellin v. Texas (2008) that the government’s “compelling” foreign policy interests “do not allow us to set aside first principles. The President’s authority to act, as with the exercise of any governmental power, ‘must stem either from an act of Congress or from the Constitution itself.’” These first principles were largely absent from the oral argument before the Second Circuit, although Halkbank did at one point invoke separation of powers (if not federalism).
In Medellin, the President, like the executive branch in Halkbank, sought to create binding federal law by himself. The Chief Justice wrote in that case:
[I]t should not be surprising that our Constitution does not contemplate vesting such power in the Executive alone. As Madison explained in The Federalist No. 47, under our constitutional system of checks and balances, “[t]he magistrate in whom the whole executive power resides cannot of himself make a law.” J. Cooke ed., p. 326 (1961).
Following that reasoning, the government should not be permitted to make the law of immunity and dictate how it applies in particular cases, which is exactly the power that the government seeks in this case. To be sure, federal common law as developed by courts can also present separation of powers and federalism objections. But interstitial federal common law is routinely developed and applied by federal courts in areas such as the act of state doctrine and piercing the corporate veil of foreign entities as part of their judicial power under Article III, with no difficulties and no “bedlam.”
Federal Common Law
Instead of blindly ceding law-making power to the executive branch, the Second Circuit could decide the common-law immunity question for itself. Indeed, the Supreme Court characterized the question as one of “common law”—both in Halkbank and previously in Samantar v. Yousuf—strongly suggesting that it is properly one for a court, rather than the executive, to decide.
Mr. Williams began (1:00) by invoking the Supreme Court’s decision in The Schooner Exchange v. McFaddon (1812) for the proposition “that sovereign immunity from criminal prosecution is and always has been, in this country, absolute.” He emphasized the following language, coming back later in the argument (13:20) to quote it:
The jurisdiction of the nation within its own territory is necessarily exclusive and absolute. It is susceptible of no limitation not imposed by itself.… All exceptions, therefore, to the full and complete power of a nation within its own territories, must be traced up to the consent of the nation itself. They can flow from no other legitimate source.
This passage, however, hardly supports a claim of absolute immunity. In fact, it is jurisdiction that Chief Justice Marshall describes as being “absolute” here, rather than exceptions to jurisdiction (immunity).
When his turn came to address The Schooner Exchange for the government, Mr. Lockard observed (25:10) that “principles of customary and international law have changed over time” and that the law in 1812 was different from the in the 1920s or the 1970s. He returned to this point later (38:30), noting that during the twentieth century, “customary international law changed” “to reflect the way that the world itself was changing.”
With respect to modern practice, Judge Bianco expressed concern that there appeared to be only one case “in the history of the world” (5:00) holding that a state instrumentality is immune from criminal prosecution, a 2004 decision by the French Court of Cassation. He went on to ask whether state-owned banks funneling money to terrorists killing Americans (5:25) or to drug cartels (11:45) could be indicted. But Mr. Williams held to the position that state-owned banks are absolutely immune from prosecution absent legislation to the contrary (5:40).
Of course, Mr. Williams also argued that those hypotheticals were distinguishable because Halkbank acted at the direction of Turkish officials and with the “public purpose” of expanding Turkey’s export statistics (18:25). For the government, Mr. Lockard conceded (25:25) that customary international law “at this time” would not permit indictment for performing a public function (though he refused to say that the government would never bring such an indictment). But Halkbank’s acts were clearly commercial, Mr. Lockard continued (27:40), as the Second Circuit had concluded previously. Towards the end of the argument (39:45), he further noted that the United States has previously indicted state-owned companies without those companies raising any defense of sovereign immunity. This reflected the shared understanding of the United States and foreign governments, he continued, “that under customary international law, immunity did not apply in those situations” (40:30).
It is striking how much the government invoked customary international law at oral argument, given the complete absence of such reliance in its brief. As described above, Mr. Lockard noted that customary international law had changed over time and expressed views on what today’s customary international law does and does not permit. Additionally, Mr. Lockard three times relied on the executive’s responsibility to interpret customary international law as a basis for deferring to executive determinations of immunity (20:15, 24:39, 28:30).
In rebuttal, Mr. Williams objected (43:35) that government was “not pointing to a standard.” “My colleagues on the other side say, ‘Trust us, we considered the standards of customary international law. Trust us, this is consistent with common law norms of sovereign immunity.’” There is some force to this objection. As we noted in our amicus brief (pp. 22-23), the executive’s views on customary international law are entitled to great weight, although they are not conclusive. But without a reasoned explanation of customary international law in the government’s brief, deference becomes more difficult.
Conclusion
It seems very likely that the Second Circuit will hold on remand, as it did previously, that Halkbank is not immune from prosecution in this case. There is a straightforward way to reach that result that does not require the courts to behave as “potted plants” and blindly follow the government’s determinations.
As Bill has explained, even Halkbank’s amicus, Professor Roger O’Keefe, agrees that state instrumentalities are immune from prosecution only when they exercise state authority. Federal common law should follow the same rule. In this case, if Halkbank was not performing a public function or exercising sovereign authority, then it is not immune from prosecution.