November 17, 2019

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D.C. Circuit Rules in Favor of Broad Reach of Patriot Act Subpoenas

Opinion Allows DOJ Broad Access to Foreign Banks’ Correspondent Account Records Relating to Alleged Front Company Operating for North Korea

On August 6, the U.S. Court of Appeals for the District of Columbia kept in place $50,000-per-day fines on three Chinese banks—whose identities are redacted—for refusing to comply with subpoenas issued by the Department of Justice (“DOJ”) for records of a Hong Kong company (“Company”) that allegedly facilitated hundreds of millions of dollars of transactions for a North Korean state-owed entity (“NKE”), in violation of U.S. sanctions.

We will focus on the court’s ruling that a subpoena issued under a provision of the USA PATRIOT Act allows access to records held by foreign banks that use U.S. correspondent accounts, including records of transactions that do not themselves pass through a U.S. correspondent account, if those transactions were part of a larger scheme to access dollar funding through a U.S. correspondent account.

Background

According to the U.S. government, North Korea’s weapons programs pose “a grave and growing threat” to the security of the U.S. and—indeed—the world. In order to finance those programs, North Korea “uses state-owned entities and banks” to conduct financial transactions “in support” to finance its efforts. To impede those efforts, the U.S. maintains a robust sanctions regime against North Korea and the various entities it controls. Certain of those sanctions—enacted in 2013— are intended to cut off North Korea’s access to the U.S. financial system. But North Korea is said to evade those restrictions through, among other means, its use of front company transactions originating in foreign-based banks, which are in turn processed through correspondent bank accounts in the U.S.

In this case, the DOJ alleges that more than $100 million in illicit U.S. dollar payments—all for the benefit of the North Korea’s government—were made using the three appellant banks’ correspondent accounts in the U.S. The DOJ, as part of its investigation into these transactions, issued grand jury subpoenas to the two banks with local branches in the U.S. The third bank (“Bank Three”)—which has no physical presence in the U.S.—was served with an anti-money laundering subpoena pursuant to the USA PATRIOT Act. See 31 U.S.C. § 5318(k)(3)(A) (“Patriot Act Subpoena”). That provision allows the government to seek records “related to” a correspondent account in the U.S., “including records maintained outside of the [U.S.] relating to the deposit of funds into the foreign bank.” Id. at § 5318(k)(3)(A)(i). Each of the three subpoenas seek all records (within a specified date range) concerning “all correspondent banking transactions associated with certain accounts linked to the Company.”

Procedural History

The banks refused to comply with the various subpoenas and on November 29, 2018, the DOJ moved to compel each bank’s compliance with their respective subpoena. With respect to the Patriot Act Subpoena, Bank Three argued, in part, that it was unenforceable because it was not restricted to records related to a correspondent account in the U.S., but rather appears to address any correspondent account, including accounts located abroad that have no relation to the U.S. (that Bank Three maintains non-U.S. based correspondent accounts was not disputed).

The government argued—and on March 18, 2019, the district court agreed—that the Patriot Act Subpoena issued to Bank Three was not overbroad, in light of convincing evidence that the Company exists for the sole purpose as a front company for the NKE. In other words, no part of the Company “can be separated from the ploy to put money through the [U.S.] financial market.” As such, a “subpoena for records revealing the source of funds that [the Company] deposited into Bank Three and then funneled through the [U.S.] correspondent account, which might include records without a direct tie to the [U.S.] account, are accessible.”

The D.C. Circuit’s Opinion

On appeal, Bank Three repeated its argument to the district court that the Patriot Act Subpoena calls for records related to non-U.S. correspondent accounts, with no directive that those records must be related to a correspondent account in the U.S. In its response, the DOJ relied, in part, on what it characterized as “Congress presciently anticipat[ing] this scenario—e.g., a front company with the singular purpose of illegally securing U.S. dollars—when it provided an example of records ‘relat[ing] to’ a foreign bank’s U.S. correspondent account.” In re: Sealed Case, No. 19-cv-5068., Doc. No. 1795045. That is, Section 5318(k)(3)(A)(i) states that such records “includ[e]” records maintained outside of the U.S. “relating to the deposit of funds into the foreign bank” (emphasis added).

The appellate court was persuaded that a plain reading of the statute permits the scope of the Patriot Act Subpoena. “By specifying that its view of records ‘related to’ a U.S. correspondent account includes such a predicate transaction, Congress embraced an expansive view of the term in line with the government’s.” As a corollary, the court went on to hold that records related to a U.S. correspondent account include records of transactions that do not themselves pass through a correspondent account when those transactions “are in service of an enterprise entirely dedicated to obtaining access to U.S. currency and markets using a U.S. correspondent account.” With respect to Bank Three in particular, the court ruled that because the district court correctly concluded that no part of the Company can be separated from the NKE’s “ploy to put money through the U.S. financial market,” the subpoena’s request for all of the Company’s correspondent banking transactions do, in fact, relate to Bank Three’s U.S. correspondent accounts.

Takeaways

The appellate court’s decision strengthens the DOJ’s ability to obtain records from foreign banks, even if the transactions under scrutiny did not pass through U.S. accounts. That said, the court was careful to note that, “The government’s power to subpoena the records in this case derives from the evidence that this particular company operated exclusively as a U.S. dollar clearinghouse for the NKE. Under such circumstances, all records pertaining to the Company’s Bank Three account and its correspondent banking transactions, no matter where they occurred, are ‘related to’ the Bank’s U.S. correspondent accounts.” In short, it was ultimately the nature of the Company’s activities, and not the mere fact that it maintained correspondent accounts in the U.S., that subjected its foreign records to U.S. subpoena power.

Copyright © by Ballard Spahr LLP

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About this Author

Bradley Gershel, Ballard Spahr Law Firm, New York, Securities and White Collar Litigation Attorney
Associate

Mr. Gershel's practice focuses on white-collar criminal defense, internal and regulatory investigations, and complex civil litigation. He has represented corporate and individual clients in a wide range of matters at all phases of litigation, and practices in both state and federal court. Mr. Gershel also has an extensive pro bono practice, with a particular focus on representing individual clients in federal courts and agencies in immigration matters. He is a frequent contributor to Money Laundering Watch, Ballard Spahr's blog focused exclusively on money...

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