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Enforcement Edge
December 1, 2021

Second Circuit Affirms Halkbank’s Lack of Foreign Sovereign Immunity in Criminal Prosecution

Enforcement Edge: Shining Light on Government Enforcement

The US Court of Appeals for the Second Circuit recently addressed whether and when foreign sovereigns are immune from criminal prosecutions inside the United States. United States v. Turkiye Halk Bankasi A.S., No. 20-CR-3499 (2d Cir. 2021). Although the court did not decide whether the Foreign Sovereign Immunities Act (FSIA) applies to criminal cases, it held that to the extent the Act does, its exceptions to immunity must apply as well.

Foreign states and certain state agencies and companies are presumptively immune under the FSIA from state and federal court jurisdiction, meaning that American courts generally cannot hear cases brought against them. But the FSIA contains several enumerated exceptions. If a case falls within any one of those exceptions, the FSIA effectively strips foreign states of their immunity and allows them to be sued as if they were a private party, opening the door to years of often painful civil litigation.

One open question, however, has been whether and to what extent the FSIA regime protects foreign sovereigns from criminal prosecution. In 2019, the US government put that question to the test when a grand jury indicted Turkiye Halk Bankasi A.S.—known as Halkbank—for allegedly violating US sanctions against Iran by helping launder billions of dollars’ worth of Iranian oil and natural gas proceeds and then lying to US Treasury officials about it.

Halkbank moved to dismiss the indictment on the grounds that it was immune from criminal prosecution because it is majority-owned by the Government of Turkey and thus a “foreign state” within the meaning of the FSIA. Halkbank also argued that the FSIA’s exceptions to immunity did not apply, both because those exceptions generally applied only in civil cases, and because its specific conduct did not fall within any of the FSIA’s exceptions. Finally, Halkbank argued that, regardless of the FSIA’s applicability, it was also immune from prosecution under the common law.

On October 1, 2020, the district court denied Halkbank’s motion. It held that the FSIA confers immunity on foreign sovereigns only in civil proceedings, but that even if the FSIA also conferred immunity in criminal cases, the Act’s commercial activity exception would cover Halkbank’s conduct. Furthermore, the district court was unpersuaded by Halkbank’s argument about common-law immunity.

On appeal, the Second Circuit affirmed. To start, the court concluded that it had jurisdiction over the interlocutory appeal under the collateral order doctrine. In the past, the court had regularly entertained appeals from threshold determinations of sovereign immunity in civil cases, and the Second Circuit saw no reason not to apply the same rule to appeals from sovereign immunity determinations in criminal cases as well.

On the merits, the Second Circuit held that Halkbank was not immune from prosecution. Halkbank had argued otherwise by citing two provisions of the FSIA, one of which confers immunity on foreign sovereigns “from the jurisdiction of the courts of the United States,” and the other of which grants district courts jurisdiction over “any nonjury civil action against a foreign state.” Halkbank argued that putting those two provisions together made clear that foreign sovereigns were entirely immune from criminal prosecution, because the FSIA extended immunity to all cases but gave jurisdiction over only civil cases. But the Second Circuit disagreed with that interpretation, holding instead that federal courts had an independent basis of jurisdiction over all criminal offenses under 18 U.S.C. § 3231, and that Section 3231 sufficed to grant courts jurisdiction over criminal cases involving foreign sovereigns so long as their conduct fell within one of the FSIA’s enumerated exceptions.

On that front, the Second Circuit concluded that Halkbank’s conduct fell within the FSIA’s “commercial activity” exception. States lose their immunity under this exception in suits that are based upon (1) “a commercial activity carried on in the United States by a foreign state”; (2) “an act performed in the United States in connection with a commercial activity of the foreign state elsewhere”; or (3) “an act outside the territory of the United States in connection with a commercial activity of the foreign state elsewhere and that act causes a direct effect in the United States.” Here, the indictment alleged that Halkbank laundered money for Iranian interests through the US financial system and then lied to US Treasury officials about doing so. The court concluded that this conduct qualified as “commercial activity” under any of the exception’s three prongs because violating sanctions was an activity any private bank could do, and the violations had either occurred inside the United States (communications to US Treasury officials) or caused a direct effect within the United States (communications to US Treasury officials and US banks’ complicity in unlawful money laundering).

Finally, the Second Circuit dismissed Halkbank’s common-law immunity argument, reasoning that, if the FSIA conferred sovereign immunity in criminal cases, then its enactment had displaced any pre-existing common-law practice. Even if the FSIA had not displaced the common law, that common law would presumably also have had an exception for commercial activity similar to the one in the FSIA. And in any event, the court held, common-law sovereign immunity determinations were traditionally subject to the Executive Branch’s views. By bringing criminal charges against Halkbank, the Executive Branch had necessarily signaled that Halkbank lacked immunity.

On one level, the Second Circuit’s decision answers an important question about the scope of foreign sovereign immunity, greenlighting as it does one of the first criminal prosecutions of a foreign sovereign in US history. But on another level, the decision raises more questions than it answers. For instance, the Second Circuit avoided deciding whether the FSIA applies to criminal prosecutions at all, reasoning that it need not resolve that question either way because the case fell within one of the FSIA’s exceptions to immunity. The Second Circuit also did not address many of the implications of its decision, including whether the FSIA’s removal clause—which is limited to “[a]ny civil action brought in a State court against a foreign state”—means that foreign sovereigns cannot remove criminal cases from state court.

Halkbank has petitioned for panel rehearing and rehearing en banc, so the Second Circuit’s decision may not be the last word. Either way, we’ll keep you posted.

© Arnold & Porter Kaye Scholer LLP 2021 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.