Why the Indictment Against Halkbank Must Be Dismissed
May 9, 2023
“Turkish flag” by quinn.anya
is licensed under CC BY-SA 2.0
In 2019, the United States indicted Turkiye Halk Bankasi (Halkbank), a Turkish state-owned bank, alleging a multiyear scheme to evade U.S. sanctions against Iran by using fraudulent transactions to transfer the proceeds of oil and gas sales to Iran. Last month, the Supreme Court rejected Halkbank’s claim of immunity under the Foreign Sovereign Immunities Act and remanded the case to the Second Circuit to consider Halkbank’s potential immunity under federal common law.
In a prior post, I argued that Halkbank is not entitled to immunity from criminal prosecution under federal common law. I nevertheless think that the indictment against Halkbank must be dismissed because it is impermissibly extraterritorial. The central charge against Halkbank—that it conspired to violate the Iran sanctions regulations—is fatally flawed because the only connection with the United States on which it rests is the clearing of dollar transactions electronically through New York.
This is not enough to establish the “genuine connection” with the United States that customary international law requires. The International Emergency Economic Powers Act (IEEPA) does not authorize the President to apply sanctions that international law. To the contrary, it authorizes the President to prohibit financial transactions only “by any person, or with respect to any property, subject to the jurisdiction of the United States.” Although Congress may not have been thinking specifically of international law when it limited the President’s authority, a longstanding canon of statutory construction requires that federal statutes be read not to violate international law if fairly possible. Thus, even without the express jurisdictional limitation, IEEPA must be read not to authorize sanctions in violation of international law.
Most of the other charges in the indictment rest on the central charge—the alleged violation of IEEPA—and are therefore also invalid. The exceptions are the bank fraud charges, but they run afoul of the federal presumption against extraterritoriality.
According to the indictment, Halkbank designed and implemented a scheme to help Iran repatriate more than $20 billion in proceeds from oil and gas sales to Turkey’s national oil company. Halkbank allegedly used the proceeds to buy gold for Iran and created fraudulent transactions in food and medicine that would fit within a humanitarian exception to the U.S. sanctions.
Before indicting Halkbank itself, the United States indicted two individuals. Reza Zarrab, a Turkish/Iranian businessman, was arrested on a trip to Disney Word. After failing to get the charges dismissed, he pleaded guilty and agreed to testify against Mehmet Hakan Atilla, Halkbank’s Deputy General Manager, who was arrested in New York in 2017 and convicted in 2018.
The United States charged Halkbank with six violations of U.S. law: (1) conspiracy to defraud the United States, (2) conspiracy to violate IEEPA, (3) bank fraud, (4) conspiracy to commit bank fraud, (5) money laundering, and (6) conspiracy to commit money laundering. Halkbank challenged the charges on extraterritoriality grounds, but the district court (Judge Richard Berman) rejected the challenge, treating all the charges together, found that
the presumption against extraterritoriality does not apply. Indeed, “there is a sufficient domestic nexus between the allegations in [the Indictment] to avoid the question of extraterritorial application altogether.” See United States v. Mostafa, 965 F.Supp.2d 451, 469 (S.D.N.Y. 2013). According to the Government, “the very purpose of the scheme was to launder Iranian oil proceeds through U.S. financial institutions for use to make international payments throughout the world.” See Opp. at 18. The alleged scheme involved Halkbank’s “concealment of information from, and misrepresentations to, U.S. government departments and officials in this country.” See Opp. at 19. And, “at least approximately $1 billion was laundered through the U.S. … through domestic accounts.” See Opp. at 3, 19.
This analysis is woefully lacking. The U.S. Supreme Court has made clear that courts must determine the geographic scope of each statutory provision separately. And courts must use the two-step framework that the Supreme Court has articulated rather than relying on general statements about domestic nexus. This district court also gave no consideration to the customary international law limits on prescriptive jurisdiction.
In a chapter for a book on secondary sanctions that is to be published soon, I test each of the charges against Halkbank against the presumption against extraterritoriality and the limits of customary international law. I find that none of the charges can stand.
Conspiracy to Violate IEEPA
As mentioned above, the central charge against Halkbank is that it conspired to violate IEEPA, and more specifically the regime of sanctions against Iran adopted by the President pursuant to IEEPA. The presumption against extraterritoriality presents no obstacle to this charge. IEEPA provides a clear indication that it applies extraterritorially by authorizing the President “to deal with any unusual and extraordinary threat, which has its source in whole or substantial part outside the United States” and by specifically authorizing him to regulate transactions in foreign exchange, transfers, and payments through banking institutions “to the extent that such transfers or payments involve any interest of any foreign country or a national thereof.” The Treasury Department has issued regulations prohibiting the exportation of services from the United States, and their re-exportation, to Iran regardless of whether the exporter or re-exporter is a U.S. person. Importantly, these regulations apply to what are commonly called “U-Turn transactions” between non-U.S. banks that begin and end outside the United States but are cleared through correspondent banks in the United States. These clear indications of geographic scope are sufficient to rebut the presumption against extraterritoriality.
The problem with the IEEPA charge is that it violates customary international law, which is something IEEPA does not authorize the President to do. The statutory authority for financial sanctions against Iran is expressly limited to transactions “by any person, or with respect to any property, subject to the jurisdiction of the United States.” Congress may not have been thinking of international law when it added this limitation. Nevertheless, the Charming Betsy canon of interpretation provides that courts must read federal statutes not to violate international law if fairly possible. Certainly, it is fairly possible here. In addition, it is doubtful that the President has constitutional authority to violate customary international law in the absence of express congressional authorization, authorization that IEEPA does not provide.
The question under customary international law is whether the United States has jurisdiction to prescribe rules to govern the conduct of foreign parties outside the United States. Customary international law permits exercises of prescriptive jurisdiction when there is a “genuine connection” between the subject of the regulation and the regulating state. There are six traditional bases for jurisdiction to prescribe: territory, effects, active personality, passive personality, the protective principle, and universal jurisdiction. The key question is whether any of these bases would allow the United States to prohibit foreign parties from engaging in transactions outside the United States when the only U.S. connection is the clearing of the transaction through correspondent banks in the United States—what has been “correspondent account jurisdiction.”
It seems clear that neither territorial jurisdiction nor active personality (nationality) jurisdiction apply. Halkbank and its co-conspirators are not U.S. nationals, and their conduct arranging the transactions occurred outside the United States. The most intuitively plausible basis for prescriptive jurisdiction is effects jurisdiction—that by arranging transactions in dollars outside the United States, Halkbank and the other defendants caused the clearing of those transactions in the United States. The problem with this argument is that to establish a genuine connection under customary international law, the effects must be substantial. It is difficult to see how merely clearing a transaction between foreign nationals that begins and ends outside the United States rises to the level of a substantial effect. The clearing does not in any way disrupt the U.S. financial system. The clearing does make U.S. sanctions less effective outside the United States, but that is not a domestic effect.
Passive-personality jurisdiction fares no better. It allows a state to regulate conduct outside its territory that harms its nationals. This principle is widely accepted for terrorist offenses and attacks on government officials, but it is not clear that it applies more broadly. More fundamentally, the only “harm” suffered by U.S. nationals from the clearing of transactions in the United States is the harm that U.S. correspondent banks would suffer from violating U.S. sanctions. Using passive-personality jurisdiction in these circumstances results in a kind of bootstrapping, in which a state’s regulation of its own nationals lays the foundation for regulating foreign nationals. This is very different from the circumstances in which passive-personality jurisdiction has been recognized previously.
Nor do the remaining bases of prescriptive jurisdiction justify the application of U.S. sanctions. The protective principle allows a state to prescribe law with respect to certain conduct outside its territory by persons not its nationals that is directed against the security of the state or against a limited class of other fundamental state interests. It has traditionally been limited to offenses like espionage, terrorism, and counterfeiting. Although Iran’s nuclear program and support for terrorism may well constitute threats to the national security of the United States, the same can hardly be said about clearing transactions that have no connection to terrorism or to Iran’s nuclear program. Universal jurisdiction allows a state to prescribe law with respect to certain offenses of universal concern, such as genocide, crimes against humanity, war crimes, certain acts of terrorism, piracy, the slave trade, and torture, even if no specific connection exists between the state and the persons or conduct being regulated. But there is no plausible argument that clearing transactions in violation of U.S. sanctions is an offense of universal concern.
In short, when a transaction involves foreign parties and foreign conduct, and the only U.S. connection is the clearing of the transaction through correspondent banks in the United States, the ‘genuine connection’ that customary international law requires for jurisdiction to prescribe is lacking. IEEPA does not authorize the President to violate international law. Indeed, the relevant provision of IEEPA gives the President authority to regulate only transactions, “subject to the jurisdiction of the United States.” Even without this express limitation, it is a longstanding principle of statutory interpretation that federal statutes should be read not to violate international law.
Conspiracy to Defraud the United States and Money Laundering
Halkbank was also charged with conspiracy to defraud the United States under 18 U.S.C. § 371, with money laundering, and with conspiracy to commit money laundering. As with the charge of conspiracy to violate IEEPA, the presumption against extraterritoriality is no bar to these charges (the analysis is somewhat complicated and is spelled out in the chapter mentioned above). But each of these charges depends on the validity of the central charge discussed above. If the central charge is invalid, these charges must fall too.
Section 371 prohibits conspiracies “to commit any offense against the United States, or to defraud the United States, or any agency thereof in any manner or for any purpose.” The indictment alleges that Halkbank conspired to violate Section 371 by obstructing the Treasury Department’s enforcement of economic sanctions. Here, the indictment does allege some conduct in the United States, specifically that Halkbank’s Deputy General Manager made misleading statements to U.S. Treasury officials, conduct to which Judge Berman briefly referred. But this charge still depends on the prosecution showing that Halkbank obstructed the Treasury Department’s lawful functions. If the sanctions applied to Halkbank are not lawful, there can be no conspiracy to obstruct the Treasury Department’s lawful functions.
The money laundering charge alleges that Halkbank engaged in financial transactions to carry on an unlawful activity and the conspiracy to commit money laundering alleges that Halkbank conspired to do the same. The unlawful activity alleged is the violation of U.S. sanctions. Once again, if the sanctions applied to Halkbank are not valid, then the activity being carried out was not unlawful, and both the money laundering charges fail.
Finally, the indictment charged Halkbank with charged with bank fraud and conspiracy to commit bank fraud. This fraud consisted of concealing from U.S. correspondent banks the connection of the transferred funds with Iran, connections that made the transfers in violation of U.S. sanctions. Here, the problem is not customary international law but rather the U.S. presumption against extraterritoriality.
With respect to customary international law, application of the bank fraud provisions is supported by the passive-personality principle, which, as discussed above, allows a state to prescribe law with respect to conduct outside its territory that harms its nationals. Halkbank’s correspondent banks in the United States are U.S. nationals to whom U.S. sanctions against Iran clearly apply. Concealing information from those banks in a way that could cause them to violate U.S. sanctions could well amount to bank fraud.
But the presumption against extraterritoriality limits the bank fraud provisions so as to preclude their application to Halkbank on the facts alleged. In Bascñán v. Elsaca, the Second Circuit applied the Supreme Court’s two-step framework for the presumption to the bank fraud statute. At step one, the court of appeals found no clear indication that the bank fraud statute was intended to apply extraterritorially. At step two, the court held that the focus of the bank fraud statute was the scheme to defraud and found conduct in the United States relevant to the scheme in the defendant’s own use of U.S. mails and wires to order the transfer of funds from U.S. bank accounts. In Halkbank’s case, by contrast, the scheme to conceal Iran’s connections to the funds being transferred occurred outside the United States. Although a Halkbank employee met with Treasury officials in Washington, D.C., there do not seem to have been similar meetings in the United States with U.S. banks or any other U.S. conduct relevant to the bank fraud scheme.
The conclusion that all the charges against Halkbank are invalid because they violate domestic and international law limits on extraterritoriality may strike the reader as surprising. It may, therefore, be worth noting that my analysis applies primarily to situations of so-called “correspondent account jurisdiction,” where the only connection to the United States is the clearing of otherwise unrelated transactions by non-U.S. persons through U.S. correspondent banks. U.S. sanctions are consistent with customary international law to the extent that they regulate conduct by U.S. persons, or conduct that occurs in the United States, or conduct that has substantial effects in the United States. Correspondent account jurisdiction is unlawful because it lacks the genuine connection with the regulating state that customary international law requires.
But Halkbank’s case is one of correspondent account jurisdiction, and IEEPA does not authorize the application of sanctions to Halkbank in this case. This means that the charge of conspiring to violate IEEPA is invalid, as are the Section 371 and money laundering charges that logically depend on the IEEPA charge. The bank fraud charges stand on a different footing. They are permissible under international law but run afoul of the presumption against extraterritoriality because no conduct occurred in the United States.
The bottom line is that all the charges against Halkbank must be dismissed.