Introduction

            In United States v. Turkiye Halk Bankasi A.S., A/K/A Halkbank, the Second Circuit (Kearse, Cabranes, and Bianco) held that the common law of foreign sovereign immunity does not protect Halkbank from criminal prosecution based on its commercial activities.  The Court clarified that it defers to the Executive’s determination as to whether a party should be afforded common law foreign sovereign immunity, as expressed here by the Executive’s choice for the U.S. Attorney’s Office to prosecute Halkbank, provided that such determination is in accordance with the common law of foreign sovereign immunity.  The Court expressly reserved the issue of whether it would still defer to the Executive’s view of foreign sovereign immunity in a future case in which the Executive’s decision to deny immunity was in “derogation” of the common law.

Background

            This case arises out of a 2019 prosecution in which a grand jury in the Southern District of New York indicted Halkbank, a commercial bank owned by the Republic of Turkey, for conspiring to evade U.S. economic sanctions against Iran. The indictment alleged that Halkbank used gold exports and fraudulent humanitarian aid to launder billions of dollars, in order to provide the Government of Iran, the Central Bank of Iran, and the National Iranian Oil Company improper access to funds.  The indictment further alleged that senior officials at Halkbank made false statements regarding transactions with Iran to conceal the scheme from the U.S. Department of the Treasury.  Based on the alleged conduct, the indictment charged Halkbank with: (1) conspiracy to defraud the United States, in violation of 18 U.S.C. § 371; (2) conspiracy to violate the International Emergency Economic Powers Act, in violation of 50 U.S.C. § 1705; (3) bank fraud, in violation of 18 U.S.C. § 1344; (4) conspiracy to commit bank fraud, in violation of 18 U.S.C. § 1349; (5) money laundering, in violation of 18 U.S.C. § 1956(a)(2)(A); and (6) conspiracy to commit money laundering, in violation of 18 U.S.C. § 1956(h).

This is the second time the Second Circuit has opined on this case.  In 2020, Judge Berman denied Halkbank’s motion to dismiss the case on the grounds that Halkbank was immune under the Foreign Sovereign Immunities Act (“FSIA”) and the common law.  The Second Circuit affirmed Judge Berman’s decision in United States v. Turkiye Halk Bankasi A.S., 16 F.4th 336 (2d Cir. 2021) (“Halkbank I”).  On appeal, the Supreme Court affirmed in part, vacated in part, and remanded the case for further proceedings.  See Turkiye Halk Bankasi A.S. v. United States, 598 U.S. 264 (2023) (“Halkbank II”).  The Court agreed with the Second Circuit’s rulings that the District Court had subject matter jurisdiction over Halkbank’s criminal prosecution and that the FSIA does not provide foreign sovereign immunity in criminal cases, but found that the Second Circuit had not fully discussed the common law arguments made before the Court, and so vacated and remanded for full consideration of the common law immunity arguments.  This question of common law foreign sovereign immunity was the subject of the most recent appeal, as discussed below.

Opinion

            The Second Circuit reviewed, de novo, whether the common law of foreign sovereign immunity extends to shield Halkbank from criminal prosecution.  Its decision turned on three issues: (1) whether courts defer to the Executive Branch on determinations as to whether to deny common law sovereign immunity, (2) whether common law sovereign immunity extends to foreign-owned corporations engaged in commercial activity, and (3) whether the charged conduct was in fact commercial, rather than governmental. 

On the first issue, Halkbank argued that, regardless of the view of the Executive Branch, common law foreign sovereign immunity provides absolute immunity from criminal prosecution for instrumentalities of foreign sovereigns.  It also argued that courts may not defer to the Executive’s view as to whether it would deny (as opposed to grant) foreign sovereign immunity and must instead examine the issue de novo.  In contrast, the government argued that while the common law may provide for absolute immunity for foreign sovereigns in certain contexts, that protection does not extend to instrumentalities of those sovereigns engaged in commercial activities.  It also argued that the Court should defer to the Executive’s decision as to whether to extend or deny foreign sovereign immunity.

            The Court engaged in a close historical analysis of the application of foreign sovereign immunity going back to the early republic era.  The panel noted that foreign sovereign immunity originated from principles of international comity first outlined by the Supreme Court in Schooner Exchange v. McFaddon, 11 U.S. (7 Cranch) 116 (1812).  There, Chief Justice Marshall found that while foreign sovereigns have no inherent right to immunity from U.S. jurisdiction, the Executive had “impliedly consented to wa[i]ve its jurisdiction” over “national ships of war, entering the port of a friendly power open for their reception,” and so found that a national vessel of France was immune from U.S. jurisdiction.  Id. at 145–46.  The Second Circuit’s analysis noted that while courts have traditionally granted foreign sovereigns complete immunity from suit, “this was a function of the Executive Branch’s policy rather than a substantive rule of law.”  Opinion at 15.  

            Halkbank argued that courts may apply foreign sovereign immunity even over the objection of the Executive.  It relied primarily on Berizzi Brothers Co. v. The Pesaro, 271 U.S. 562 (1926), in which the Supreme Court held that foreign sovereign immunity protected a merchant ship owned and operated by a foreign government, even when the State Department had expressed to the district court its view that “government-owned merchant vessels or vessels under requisition of governments whose flag they fly employed in commerce should not be regarded as entitled to the immunities accorded public vessels of war,” The Pesaro, 277 F. 473, 479 n.3 (S.D.N.Y. 1921).  The Second Circuit found that Halkbank overstated the import of Berrizi Brothers, given that the Supreme Court did not expressly consider the State Department’s view in reaching its decision, leaving it unclear whether the court was departing from the Executive’s view.  The Second Circuit also noted that later court decisions had questioned the ongoing validity of Berrizi Brothers, and so afforded it little weight.  Thus, on balance, and relying on the history, the Court agreed with the government that its decision to prosecute Halkbank was entitled to deference. 

            Further, the Second Circuit agreed with the Executive Branch that under the common law, foreign government instrumentalities were not categorically immune from prosecution.  The Court found that while courts had extended immunity to foreign corporations when they were engaged in governmental conduct, courts had not extended that common law immunity to corporations engaged in commercial activity.   Instead, the Court found that “the few courts that did extend immunity to state-owned corporations emphasized those entities’ performance of governmental functions.” Opinion at 31.  The Court therefore found that if an instrumentality’s activity was commercial in nature (as opposed to being a “strictly public or political act”), common law foreign sovereign immunity did not extend to the instrumentality’s conduct.  The Court made clear in a footnote that it was not “foreclos[ing] a sitaution in which the Executive decide[d] that a foreign state-owned corporation is entitled to immunity . . . even if the alleged conduct at issue is arguably commercial in nature.”  In other words, if a state or local prosecutor brought such an action, “[t]he Executive’s position would be entitled to deference in that case[.]”

Finally, the Second Circuit found that Halkbank’s conduct was commercial in character, as it is a bank engaged in commerce, rather than governmental conduct.  Halkbank argued that while it engaged in commercial conduct, the true nature of its conduct was governmental because Halkbank acted in service of the state.  The Government argued that the purpose behind the commercial conduct was irrelevant, and that the FSIA’s commercial activity exception was the appropriate test to apply when considering whether common law immunity exists.  

In ruling against Halkbank, the Court held that the purpose of Halkbank’s conduct was commercial, because the gravamen of the conduct (e.g., illicit financial transactions) was conducted through commercial private banking.  The fact that the transactions increased Turkey’s export statistics and therefore helped advance Turkey’s national economy did not confer immunity to otherwise commercial conduct.  Furthermore, the Second Circuit found that the conversations between Halkbank and the US Treasury involved sanctions compliance and therefore were commercial and not diplomatic in nature.  Accordingly, the Court found that no common law foreign sovereign immunity applied to protect Halkbank from prosecution.

The Second Circuit decided not to reach the question of whether the FSIA’s test was coextensive with the common law commercial activity exception.  Nor did the panel decide whether it would defer to the Executive’s decision to “indict[] a state qua state,”  which might be a step too far with respect to deference by the judiciary.

Analysis

The Court’s decision makes clear that common law foreign sovereign immunity does not shield agents or instrumentalities of foreign sovereigns from criminal prosecution when they are engaged in commercial activity, so long as the Executive decides to prosecute those entities.  The Court’s analysis leaned heavily into the need for the political branches to decide when criminal prosecution of an instrumentality was appropriate and when it should not occur.  Halkbank complained that foreign states would “react negatively” to the use of criminal prosecution of a state instrumentality.  No matter, said the panel:  the political branches and not the judiciary should decide these issues, as they have the institutional competence “to consider sensitive foreign policy issues” and “possess significant diplomatic tools” not found in the judiciary.

The Court’s decision to defer to the Executive in this arena is consistent with the general trend of the judiciary deferring to the Executive on matters relating to foreign policy and international affairs.  The Second Circuit’s decision to explicitly ground its reasoning in a desire not to “embarrass” the Executive, Opinion at 21, makes clear that this panel does not see its role as providing much of a check to the Executive when it comes to determinations of sovereign immunity.

The Court, however, declined to go as far as the government urged in one regard, inasmuch as it did not apply the FSIA commercial exception in the criminal law context when analyzing whether a given instrumentality was engaged in commercial activity.  The panel held that it would not “determine the extent to which the FSIA’s and common law’s standards differ,” given that it concluded that the charged activity is commercial.  It also remains to be seen whether common law foreign sovereign immunity will extend to charges against an instrumentality of a foreign sovereign where those activities were both commercial in nature and had a governmental purpose. 

With many foreign governments and their instrumentalities increasingly engaged in commerce and commerce-related activities, the Halkbank decision figures to be relevant in the future should those entities transgress the criminal law.  As one of us has discussed in recent years, there has been a trend of increasing enforcement of U.S. law against non-U.S. persons and entities.^[1]  In light of Halkbank, this seems likely to continue.