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Special Appearance Denied In Sanctions Criminal Case

A New York federal judge recently held that a foreign bank could not challenge U.S. federal criminal jurisdiction prior to arraignment.

US Allegation

Halkbank is a Turkish majority state-owned bank. The United States alleged that Halkbank developed an illicit scheme comprised “of fraudulent transactions intended to deceive U.S. regulators and foreign banks” through which the bank transferred $20 billion to Iran in violation of U.S. sanctions on Iran. Specifically, the government has charged that the Bank used Iranian oil proceeds to purchase gold and masked transactions to fall within the “humanitarian exception” of the sanctions regime. The effect of the scheme was to create a pool of funds in Turkey and the United Arab Emirates, which Iran used to make international payments in U.S. dollars, and which payments passed undetected through the foreign banks and ultimately the U.S. financial system, in violation of U.S. sanctions.

Special Appearance Requested

Halkbank sought a special appearance to challenge the court’s criminal personal jurisdiction because “the Bank’s incidental contacts with the U.S. [were] insufficient to establish either general or specific personal jurisdiction over the Bank.” Halkbank framed the issue as one of first impression within the Second Circuit: “whether [a federal court] has personal jurisdiction in a criminal case over . . . a foreign entity with no physical operations in the U.S.”

Minimum Contacts Doctrine

The Supreme Court created the minimum contacts doctrine in International Shoe, when the Court stated that to subject a non-resident defendant to a court’s personal jurisdiction “due process requires only that . . . he have certain minimum contacts with [the jurisdiction] such that the maintenance of the suit does not offend ‘traditional notions of fair play and substantial justice.’” In the context of foreign corporations, the Court held in Asahi that there needs to be a “substantial connection” between the defendant and the forum state, and that this “substantial connection” “must come about by an action of the defendant purposefully directed toward the forum State.” The Court exemplified this by stating that “[a]dditional conduct of the defendant may indicate an intent or purpose to serve the market in the forum State, for example, designing the product for the market . . ., advertising . . . , establishing channels for providing regular advice to customers . . . , or marketing the product through a distributor . . . .”

District Court Denial

In December, District Judge Richard Berman denied Halkbank’s request to make a special appearance, finding “no evidence of a longstanding historical practice of allowing special appearances in criminal cases.” The judge based his decision on 18 USC § 3231, which provides federal courts with original jurisdiction to try offences against the laws of the United States, and the amendments to Federal Rule of Criminal Procedure 4(c)(3)(D), which now provides for service on organizations “by any means that gives notice.” Thus, according to Judge Berman, “[w]hile minimum contacts challenges may be appropriate in civil cases, such challenges do not apply to criminal matters.” Instead, he ruled that the only requirement for a federal court to exercise jurisdiction in a criminal case is that a “party . . . appears before it, regardless of how his appearance was obtained.”  Last month, the Second Circuit denied Halkbank’s Petition for a Writ of Mandamus, ruling that Halkbank had “not demonstrated that it lacks an adequate, alternative means of obtaining relief . . . .”  In so holding, the Second concluded that “challenges to [subject matter and personal] jurisdiction may be fully vindicated on appeal from a final judgment.”

Judge Berman did not decide Halkbank’s jurisdictional claims on the merits. To the contrary, he ruled that Halkbank was entitled to litigate jurisdiction following arraignment. Indeed, according to multiple press reports, Halkbank’s lawyers stressed that the bank agreed to be arraigned only after it had been assured that do so would not result in a waiver of its right to challenge the court’s jurisdiction.

Possible Challenge to Extraterritorial Application

Judge Berman also recognized that Halkbank might challenge the extraterritorial application of the federal statutes charged, which he likewise did not address. As we have written in the past, the US government has increasingly sought to expand the extraterritorial application of federal criminal statutes, including the International Emergency Economic Powers Act (IEEPA), the primary U.S. sanctions law, often utilizing novel and untested legal theories. The Second Circuit recently held that the question of extraterritoriality is a merits question and “not an issue related to the court’s [personal] jurisdiction.” Thus, Judge Berman concluded, the bank must first appear and be arraigned—which it did when it pleaded not guilty to all counts at a March 31st telephonic hearing—before challenging the extraterritorial application of the federal statutes charged in the indictment, which is far from a foregone conclusion.

© Copyright 2020 Squire Patton Boggs (US) LLP

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About this Author

Kevin McCart, Squire Patton Boggs Law Firm, Washington DC, Corporate and Litigation Law Attorney
Partner

Corporations and individuals facing allegations of white-collar criminal and civil violations call upon Kevin McCart to provide the effective legal strategies and investigative skills that will help them avoid prosecution and minimize damaging outcomes. Kevin has been lead counsel in criminal and civil matters in federal district and circuit courts, as well as military courts-martial. His global government and internal investigations background includes economic sanctions, money laundering, bank fraud, export controls, Foreign Corrupt Practices Act, False Claims Act,...

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