Supreme Court to rule on Foreign Sovereign Immunity in criminal law context

The Court’s forthcoming decision will have a significant effect for foreign-state-owned enterprises operating in the United States by clarifying the risks and consequences of failing to abide by applicable U.S. laws and regulations.

Background

The Government indicted Halkbank in 2019 for violating the U.S. sanctions regime against Iran. According to the indictment, Halkbank allegedly laundered Iranian oil and gas proceeds through illicit shipments of gold and fraudulent food transactions at the behest of the Turkish government. The U.S. Government claims that the scheme freed USD20 billion of Iranian funds that otherwise would have remained frozen. One of the scheme’s ringleaders, Reza Zarrab, pleaded guilty and Halkbank’s former deputy general manager has been convicted already.

Halkbank moved to dismiss the indictment on the basis of sovereign immunity. The bank is 87.7% owned by Türkiye’s sovereign wealth fund, which is part of the Turkish state. According to Halkbank, this makes it an “agency or instrumentality” of Türkiye (formerly Turkey) and thus entitled to state immunity.

Under the Foreign Sovereign Immunities Act (FSIA), a foreign state and its agencies or instrumentalities “shall be immune from the jurisdiction of the courts of the United States and of the States” except as provided by narrow exceptions, including the “commercial activity” exception, enumerated elsewhere in the statute. The FSIA clearly applies in civil suits and grants federal district courts original jurisdiction over “any nonjury civil action against a foreign state.”

However, the FSIA contains an apparent lacuna with respect to criminal prosecutions. Elsewhere the U.S. Code endows the federal district courts with original jurisdiction of “all offenses against the laws of the United States.” In Halkbank, the Supreme Court will have to determine whether the plenary grant of criminal jurisdiction trumps the FSIA or whether the FSIA adequately carves out foreign states from criminal prosecutions as it does for civil suits.

Halkbank argued for the latter. The Second Circuit disagreed. It sidestepped the question of whether the FSIA applied at all in a criminal prosecution, and instead, assuming that it did, held that Halkbank’s conduct was “commercial activity” and thus actionable in either the civil or criminal contexts. The Supreme Court granted certiorari to hear Halkbank’s appeal.

Does the FSIA govern criminal prosecutions?

Halkbank’s appeal rests on three primary arguments. First, it argues that 18 U.S.C. § 3231 - the general criminal jurisdiction statute identified above - does not apply to foreign states at all. Congress enacted that statute as part of the Judiciary Act of 1789 at a time when foreign sovereigns held absolute immunity in both civil and criminal proceedings. The Government has never before construed that statute to apply against a foreign state. Second, the later-in-time FSIA by its terms only applies in civil cases. The statute’s detailed provisions regarding civil cases, which also touch upon service of process, pre-judgment attachment, execution against assets, and other accompaniments of civil suits, only serve to confirm that foreign sovereigns enjoy absolute immunity in the criminal context. Third and finally, even if the FSIA’s civil exceptions applied in the criminal context, Halkbank’s relevant conduct was too geographically remote from the United States to meet the requirements of the commercial activity exception and thus warrant prosecution.

The Government, in contrast, argues for an expansive reach of the general criminal jurisdiction statute and that the FSIA applies only to civil cases, leaving district courts’ criminal jurisdiction over foreign-state-owned corporations undisturbed.

The parties and amicus curiae identified other salient issues for the Court’s consideration. One example is the nature of Halkbank’s ownership by the Turkish sovereign wealth fund. Under the existing precedent of Dole Food Company v. Patrickson, state immunity extends one “level” down - but not two. Under this analysis, the Turkish sovereign wealth fund is entitled to state immunity, but Halkbank arguably has none even before reaching the question of whether immunity applies in the criminal context at all. Halkbank, however, argues that the fund has no separate juridical identity - it is simply an account - and that the majority ownership is held by the state, not the state’s agency.

Another issue is distinguishing the body of law that should apply to immunity issues in criminal prosecutions of foreign-state-owned corporations if the FSIA does not. The likely answer is federal common law, which could create tension between the Executive Branch’s authority in foreign affairs matters and the courts tasked with adjudicating the immunity issues in each individual case. Congress enacted the FSIA in 1976 in order to resolve that tension and the Court may be reluctant to create that tension anew. The Court may also differentiate between a prosecution against the state versus a prosecution against a state-owned enterprise despite the indictment’s allegation that the Turkish state itself was acting through Halkbank. The Government conceded that the former had never been done, but offered several other contemporaneous examples of the latter. Finally, the Court queried what effect, if any, customary international law had on the issues posed by the appeal.

Conclusion

Halkbank illustrates that the FSIA’s reach over corporate entities remains unsettled. During this same term, the Court denied certiorari in NSO Group Technologies Limited v. WhatsApp Inc. This appeal would have resolved the petitioner’s argument that it, a private company, was acting as an agent of a foreign state and thus entitled to sovereign immunity. The Ninth Circuit held otherwise. By letting the appellate court’s decision stand, the Court avoided the question for now. But NSO Group and Halkbank illustrate that nuanced questions concerning the FSIA’s application to private or quasi-public entities will continue to occupy its docket in terms to come.

Foreign-state-owned enterprises and their commercial partners must always comply with U.S. laws and regulations. A decision affirming the U.S. Government’s ability to prosecute could clarify the stakes of non-compliance. If the Court declines to limit the application of common law immunity, these enterprises could be exposed to prosecution at the state or local level in addition to federal enforcement actions. If the decision touches upon the Patrickson analysis of one “level” down immunity, might cause affected enterprises to consideration reorganisation to take advantage of direct foreign state ownership. The forthcoming decision expected by June 2023 should prove of great interest to international businesses and their legal advisors alike.