Second Circuit Holds for the Government in Halkbank Remand

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The U.S. Court of Appeals for the Second Circuit has issued its opinion in U.S. v. Turkiye Halk Bankasi (Halkbank) following the Supreme Court’s decision to remand the case for further consideration of common law immunity issues. The same panel of Second Circuit judges held for the government the first time it heard the case in 2021, concluding that Halkbank was not entitled to immunity. Not surprisingly – and as Bill Dodge and I predicted after oral argument – the panel reached the same conclusion in Halkbank II: no immunity. The opinion concluded that Halkbank, as a state-owned enterprise, is not entitled to common law immunity for its non-governmental conduct, including the conduct alleged in this case.

Background

Halkbank is a Turkish commercial bank owned in large part by the Turkish government’s sovereign wealth fund. The bank was charged with assisting the evasion of sanctions on Iran, as well as fraud and money laundering. It served as a repository for proceeds from Iran’s sale of oil to Turkey, and it allegedly laundered those proceeds as humanitarian assistance payments through the U.S. financial system, in order to funnel illicit funds to Iran.  A jury convicted a Halkbank manager of fraud and conspiracy for related conduct.

Criminal prosecution of corporations is very unusual in other countries, even more so when the accused is a state-owned bank. Halkbank has argued from the outset that as a foreign state-owned enterprise it is entitled to immunity from prosecution under the Foreign Sovereign Immunities Act (FSIA) or federal common law.  Both lower courts initially rejected those arguments, reasoning that the FSIA does not apply to criminal prosecutions, that (even if did it) the prosecution of Halkbank comes within the FSIA’s exception for commercial activity, and that Halbank was not entitled to common law immunity.

The Supreme Court’s Decision

The Supreme Court agreed with the lower courts that Halkbank is not entitled to immunity under the FSIA, holding 7-2 that the statute is inapplicable in criminal cases. It would have been easy enough for the Court to affirm the lower courts’ decisions that Halkbank is not entitled to common law immunity either, thus clearing the way for the prosecution to move forward. Instead, the Court remanded the case back to the Second Circuit, noting that “the Court of Appeals did not fully consider the various arguments regarding common-law immunity.”  Justice Gorsuch (joined by Justice Alito) disagreed with the majority’s statutory analysis and would have held that the FSIA applied but did not confer immunity on Halkbank. His opinion notes that “many thorny questions lie down the ‘common law’ path” that the Second Circuit faced on remand. As Justice Gorsuch wrote:

Right out of the gate, lower courts will have to decide between two very different approaches. One option is to defer to the Executive Branch’s judgment on whether to grant immunity to a foreign sovereign – an approach sometimes employed by federal courts in the years immediately preceding the FSIA’s adoption. The other option is for a court to make the immunity decision looking to customary international law and other sources.

Justice Gorsuch also noted separation of powers concerns about requiring the courts to abide by legal determinations by the executive branch – thereby “relegating courts to the status of potted plants.”

The Second Circuit on Remand

On remand, the Second Circuit held that the government brought “federal criminal charges against Halkbank for its commercial activity” and that “common-law foreign sovereign immunity imposes no bar on that prosecution.” Although some of the Second Circuit’s language suggests that it took the first of the two “options” presented by Justice Gorsuch and simply deferred to the executive branch, the opinion is perhaps better read as saying that no decision about deference was necessary because deferring to the executive branch and following the common law both lead to the same result in this case:  no immunity.

One reason to read the opinion this way is that the court says almost nothing about the separation of powers issues involved in “deferring” to the executive branch to make federal law. Nothing much, that is, about relegating federal courts the status of potted plants (to use Justice Gorsuch’s term). The Second Circuit does makes desultory reference to the Court’s discredited language in United States v. Curtiss-Wright Export Corp.(1936) and a handful of other cases (including a civil case from the Second Circuit affording deference to the executive branch). But it makes no effort to engage with the separation of powers problems involved when the executive branch gets to both make and enforce law, problems that Bill Dodge and I described in an amicus brief, the problems to which Justice Gorsuch referred. The old system of deference to the executive, one that was partially in place before the enactment of the FSIA, led to what Justice Scalia termed “bedlam,” but Halkbank II provides not even a hint of these difficulties.

Reading the opinion as making an independent common law decision and avoiding the executive power determination is also sensible because virtually all of the opinion is about common law. After rejecting (correctly in my view) Halkbank’s purported distinction between government decisions for and against immunity, the court devotes almost all of its legal analysis to whether Halkbank is entitled to immunity under the common law.  After a lengthy analysis of cases and other common law sources, the court concludes that “[a]lthough prior cases have extended immunity to sovereigns and their instrumentalities based on their governmental conduct, we find that the common law places no independent bar on the prosecution of state-owned corporations for their commercial activity.”  It then finds that Halkbank’s alleged conduct in this case was “commercial” not “governmental” and thus not entitled to common law immunity. This reasoning obviates any need to decide whether the executive branch has authority to make immunity decisions that bind courts. Common law and deference bring us to the same place: Halkbank is not entitled to immunity.

Finally, what the court does say about “deference” underscores its failure to explain the basis and scope of its reasoning on that issue. For example, the court observes that “[i]t is undisputed in this case that the United States would not subject Turkey – a state qua state – to criminal prosecution; indeed, the government acknowledges that doing so would be ‘in derogation of the common law.’”  By accepting this representation by the government, the court fails to grapple with any of the difficult issues that deference presents.

An actual decision in favor of deference means that the government has the constitutional authority to make – that is, to legislate – the law on immunity. It means that the government (i.e. the President) can freely decide to indict Turkey or Russia or Germany or Brazil or China should – after all, the government controls the prosecution as well – and that immunity poses no bar.  Full stop. Such power is not properly termed “deference,” it is executive control. That position is so extreme that, although it is exactly what the government argues, the government dodges the full implications of it by saying that it would never bring such a prosecution. But such a representation binds no one in the government. By accepting that representation as true, the Second Circuit failed to engage the real issues and reached a decision that lacks any meaningful content on the question of “deference.”

The court makes another observation, this one in footnote 12, that further highlights its rudderless deference analysis:

this is not to foreclose a situation in which the Executive decides that a foreign state- owned corporation is entitled to immunity in a criminal case (e.g., one brought by a state or local prosecutor), even if the alleged conduct at issue is arguably commercial in nature. The Executive’s position would be entitled to deference in that case. We more narrowly hold here that common-law immunity from criminal prosecution is not afforded to a foreign, state-owned corporation for its commercial activity when the Executive has determined, through its prosecution, that the corporation should not receive such immunity.

The court gives no explanation of why the executive branch would have authority to contravene the common law and confer immunity (as it says here) but would lack the authority to contravene common law by withholding immunity (the question the court says that it does not decide). There is one potentially compelling reason to distinguish between these two scenarios:  withholding immunity may violate customary international law whereas conferring additional immunity does not. But the court says very little about international law, so it is impossible to know if this distinction motivates the difference. Another possible distinction is that conferring immunity as suggested in footnote 12 would displace state law (not an issue in Halkbank itself). But, in that case, federalism would appear to cut the other way – as an additional reason to be wary of law-making by the president – as the Court underscored in Medellin v. Texas (2008) when it held that President Bush had no power to displace Texas state law even on a foreign relations matter of compelling importance.  Without any reasoning to support this conclusion, it should not be considered part of the court’s holding.

Conclusion

In Halkbank II, the Second Circuit endeavored to write an opinion with a narrow holding.  And that is how it exactly how the case should be understood. The court held that Halkbank is not entitled to immunity under the common law, which is consistent with the government’s position that Halkbank is not entitled to immunity in this case.