Second Circuit Broadly Interprets Exception to Immunity for Foreign Entities Under the Foreign Sovereign Immunities Act
The Second Circuit last week in United States v. Halkbank significantly limited the immunity granted under the Foreign Sovereign Immunities Act (FSIA) by giving a broad interpretation to the act’s “commercial activity” exception. Entities that could otherwise claim FSIA immunity should be aware that the commercial activity exception is likely to present a significant obstacle to obtaining the immunity under the act.
Halkbank involved a bank that was majority-owned by the government of Turkey — and therefore covered under that FSIA — charged with participating in a scheme to launder billions of dollars of Iranian oil and natural gas proceeds in violation of U.S. sanctions against the Iranian government. The bank was charged in an indictment with, among other things, conspiring to defraud the United States by obstructing the lawful functions of the U.S. Treasury, conspiring to violate the International Emergency Economic Powers Act (IEEPA), bank fraud, and money laundering. The bank moved to dismiss the indictment, arguing that it was immune from criminal prosecution under the FSIA.
The Second Circuit first noted that there is a circuit split as to whether FSIA immunity is available all together in criminal cases, but declined to decide the issue, deciding the case instead of under the FSIA’s commercial activity exception. Under that exception, the FSIA does not provide immunity for actions falling into any of three categories: “commercial activity carried on in the United States by the foreign state;” actions “performed in the United States in connection with the commercial activity of the foreign state elsewhere;” or actions “outside the territory of the United States in connection with the commercial activity of the foreign state elsewhere and that act causes a direct effect in the United States.”
In interpreting the term “commercial activity,” the court leaned heavily on the FSIA’s language stating that “the commercial character of an activity shall be determined by reference to the nature of the course of conduct or particular transaction or act, rather than by reference to its purpose.” The court quoted its own precedent in explaining that “purpose is the reason why the foreign state engages in the activity and nature is the outward form of the conduct that the foreign state performs or agrees to perform. ” In other words, “the issue is whether the particular actions that the foreign state performs… are the type of actions by which a private party engages in trade and traffic or commerce.”
Because the bank’s communications, in meetings and conference calls, with Treasury officials in the United States are the type of activity in which banks routinely engage, the “commercial activity” exception applied to deny the bank immunity for its activities within the United States. Likewise, although the banking activities performed in Turkey on behalf of the government of Iran caused a direct effect in the United States, they were ordinary commercial-type transactions and therefore excluded under the commercial activity exception although they were at the behest of and served the purposes of the sovereign.
Significantly, the court rejected the bank’s argument that its activities outside the United States were “sovereign, not commercial” because, according to the bank, it was the government of Turkey that designated the bank as its repository for the proceeds from the sale of Iranian gas and oil. The court held that this reasoning “conflates the act with its purpose.” In other words, the designation of the bank as a repository for the illicit funds went to the purpose of the transactions — i.e., the Turkish government’s need for a financial institution to hold the proceeds of sales to Iran — rather than the inherent nature of those transactions — regulatory and banking activities “that could be, and in fact regularly [are], performed by private sector businesses.”
The case is highly significant because it substantially narrows FSIA immunity for commercial entities and highlights the difficulties sovereign entities will have in asserting immunity for commercial-type transactions regardless of whether those transactions are performed with the purpose of accomplishing some objective of the sovereign.