Supreme Court to Decide Whether the Foreign State-Owned Corporations are Immune from Criminal Prosecution

*The United States Supreme Court Building at Dusk*

By: R. Daniel Knaap

The Supreme Court is set to decide whether Türkiye Halk Bankasi A.S. (Halkbank), a Turkish state-owned bank, is immune from criminal prosecution under the Foreign Sovereign Immunities Act (FSIA). The ultimate judgment will likely have implications for foreign state instrumentalities in the United States, as well as United States-owned entities across the world

Introduction

In 2019, Turkish state-owned bank Halkbank was indicted for violating U.S. sanctions on Iran by engaging in a scheme to launder billions of dollars stemming from the sales of Iranian oil and natural gas.[1] Halkbank unsuccessfully argued that it was immune from criminal prosecution under the FSIA in federal District[2] and Circuit[3] courts. The Supreme Court granted certiorari to decide whether the FSIA extends to criminal prosecutions of foreign state-owned entities.[4] Azerbaijan, Pakistan, and Qatar as amici warn the Supreme Court of the ramifications if it upholds the Second Circuit’s decision: “The result will cause a downward spiral of disharmony that will undermine international comity and spur diplomatic recriminations and retaliations.”[5]

Background

In Halkbank v. United States,[6] The petitioner is charged with violating U.S. sanctions on Iran by engaging in a scheme to launder billions of dollars stemming from the sales of Iranian oil and natural gas.[7] Halkbank is 87.7% owned by the Turkish Wealth Fund, which is an instrumentality of Turkey.[8] Consequently, under the Foreign Sovereign Immunities Act of 1976 (FSIA) 28 USC § 1603, Halkbank is Turkey (although one amicus submission argues otherwise[9]).

The District Court for the Southern District of New York (SDNY) held that the FSIA does not grant immunity in criminal proceedings.[10] The court supported its finding by relying on the “comprehensive analysis of the text and legislative history” of the FSIA in United States v. Hendron.[11] The SDNY further held that, even if the FSIA provided immunity from criminal prosecutions, that immunity was waived under 28 USC § 1605(a)(2), the FSIA’s commercial activity exception.

Halkbank directly appealed that decision under the collateral order doctrine.[12] The Second Circuit reviewed de novo and upheld the decision.[13] However, it did not decide whether FSIA § 1604 confers immunity in the criminal context because “the offense conduct with which Halkbank is charged falls within FSIA’s commercial activities exception to sovereign immunity.”[14] Halkbank then petitioned the Supreme Court to reverse the Second Circuit’s decision and hold that foreign sovereigns and their instrumentalities are immune from criminal prosecution under 18 USC § 3231 by virtue of the FSIA.[15] The Supreme Court granted certiorari on October 3, 2022, and oral arguments took place on January 17, 2023.[16]

Oral Arguments

Justices Thomas and Sotomayor questioned Halkbank whether immunity is a part of subject-matter jurisdiction, and instead considered it to be an affirmative defense. Justice Sotomayor next raised the possibility of referring the case back to the Second Circuit because it “proceeded in its analysis from a series of assumptions that we would be disagreeing with.”[17] Justices Kavanaugh and Barrett inquired about whether decisions regarding criminal prosecutions against foreign sovereigns and their instrumentalities are a matter of national security and should be left to the President.

Regarding the FSIA, Justice Jackson questioned whether there was “anything in this statute that suggests that Congress was focused on or was thinking about immunity for criminal prosecution.”[18] Halkbank recognized that Congress was focused on civil cases when it drafted the FSIA “because those are the only kind that ever existed.”[19] Justices Barrett and Gorsuch then questioned why the FSIA’s immunity provision should be applicable in criminal proceedings while the commercial activity exception wouldn’t be. Halkbank responded by referring the Justices to § 1330, which limits application of the FSIA’s immunity exceptions to civil actions.[20] For the FSIA’s immunity provision, Halkbank asserted that “there’s always been absolute immunity, no ands, ifs, or buts, for criminal cases.”[21]

The U.S., recognized a “strong customary international law principle against prosecuting a state” in response to Justice Thomas’ question whether the U.S. could criminally prosecute Turkey.[22] However, Halkbank is a “person” under the Crimes Act[23] and Section 13 of the Judiciary Act,[24] “the predecessor of today’s 3231.”[25] The U.S. re-emphasized the “separateness between corporations and sovereigns” by relying in part on Bancec.[26] Justice Sotomayor focused on the role of the executive in decisions on whether to criminally prosecute foreign sovereigns or its instrumentalities, referring to the pressure that the Trump administration exerted on the Justice Department to drop this lawsuit.[27] Similarly, Justice Alito envisioned rogue elected State prosecutors and judges that would criminally indict foreign sovereigns or its instrumentalities contrary to the President’s foreign policy.[28]

On the FSIA, the U.S. argued that the definition of “foreign state” includes instrumentalities because of “possible foreign policy implications” and that these implications are why criminal charges like the ones against Halkbank are so rarely brought.[29] Justice Gorsuch then turned to the Second Circuit decision, hinting that a remand may be more appropriate since the Second Circuit did not decide the FSIA § 1604 question.[30] Similarly, Justice Jackson inquired whether the Supreme Court should “send it back to the Second Circuit to really flesh that out?”[31]

Implications (400 words)

Although there is no categorical bar against the criminal prosecution of foreign state-owned entities—and some have argued that the default position should be that they should be prosecutable at least with regard to their commercial activities[32]—there could be severe consequences.[33] This case is politically sensitive and the President of Turkey, has exerted considerable pressure following the indictment to stop the prosecution of Halkbank.[34] Further, there are the potential retaliatory consequences for U.S. instrumentalities abroad.[35] Although the U.S. government does not conduct commercial activities through state-owned entities like Turkey does with Halkbank, it does regularly engage in commercial transactions through separate entities.

Conversely, a finding that Halkbank is immune from criminal prosecution would allow foreign instrumentalities to get away serious federal crimes, such as “interfering in our elections” and “stealing our nuclear secrets.”[36] Moreover, the U.S. brought dozens of criminal cases against the world’s most powerful banks in the wake of the 2008 financial crisis. These cases, brought, as one commentator put it, “much needed discipline in international finance.”[37] Justice Gorsuch considered yet another implication, namely that individual States would interpret a holding that FSIA § 1604 does not cover criminal prosecutions as a green light to prosecute foreign states and its instrumentalities.[38]

The oral arguments did not clearly indicate in what direction the Supreme Court will go. While the Justices seemed generally unimpressed by Halkbank’s 18 USC § 3231 argument, they seemed more receptive to the FSIA argument. However, in light of the questions asked by the Justices, the Court may very well remand the case for further proceedings, leaving the potential consequences for a later day.

R. Daniel Knaap is a second-year student at Columbia Law School and a Staff member of the Columbia Journal of Transnational Law. He graduated from the University of Connecticut School of Law in 2021. Before joining the Columbia Law community, Daniel worked as a legal intern at the World Bank’s International Centre for Settlement of Investment Disputes in Washington, D.C.

[1] https://www.nytimes.com/2019/10/15/us/politics/halkbank-turkey-iran-indictment.html

[2] United States v. Halkbank, 2020 WL 5849512 (S.D.N.Y. Oct. 1, 2020).

[3] United States v. Turkiya Halk Bankasi A.S. 16 F.4th 336 (2d Cir. 2021).

[4] Turkiye Halk Bankasi A.S. v. United States, 143 S. Ct. 82 (2022).

[5] https://www.supremecourt.gov/DocketPDF/21/21-1450/247088/20221121134220454_No.%2021-1450%20-%20Merits%20Amicus%20Brief%20for%20Azerbaijan%20Pakistan%20and%20Qatar.pdf

[6] https://www.supremecourt.gov/docket/docketfiles/html/public/21-1450.html

[7] United States v. Turkiye Halk Bankasi A.S., 16 F.4th 336, 342 (2d Cir. 2021).

[8] https://www.supremecourt.gov/DocketPDF/21/21-1450/246391/20221114142235857_Halkbank%20Brief%20for%20Petitioner%20and%20Statutory%20Addendum.pdf

[9] https://www.supremecourt.gov/DocketPDF/21/21-1450/250647/20221221152328041_21-1450%20bsac%20Feldman%20%20Keitner.pdf

[10] United States v. Halkbank, 2020 WL 5849512 (S.D.N.Y Oct. 1, 2020).

[11] 813 F.Supp. 973 (E.D.N.Y. 1993).

[12] https://www.law.cornell.edu/wex/collateral_order_doctrine