Published by The Lawfare Institute
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The Anti-Money Laundering Act of 2020 (AMLA), part of the National Defense Authorization Act for fiscal 2021 that Congress enacted over President Trump’s veto, significantly expands the U.S. government’s authority to subpoena documents held by foreign banks overseas. The act also preserves the government’s ability to issue a financial “death penalty” to foreign banks that do not comply with such subpoenas by restricting access to the U.S. financial system. Here’s how we expect U.S. institutions to interpret that expanded authority. (One of this article’s authors, Liu, authorized the subpoena in the case described below while serving as U.S. attorney for the District of Columbia, and another author, Faruqui, litigated the case while serving as assistant U.S. attorney for the District of Columbia.)
By the fall of 2017, the U.S. Attorney’s Office for the District of Columbia had been investigating violations of U.S. sanctions targeting North Korea’s nuclear program for years, but the inquiry had hit a roadblock. The previous summer, the prosecutors leading the investigation had alleged in a civil forfeiture complaint that the North Koreans were using a Hong Kong-based front company, Mingzheng International Trading Limited, to launder millions of dollars on behalf of North Korea’s Foreign Trade Bank to finance that country’s nuclear weapons program. The prosecutors believed that Mingzheng was accessing the U.S. financial system through its accounts at three Chinese banks. But proving that theory would be a challenge. At a minimum, it would require obtaining Mingzheng’s financial records at the three banks—which were held on Chinese soil. Although the U.S. and China had entered into a mutual legal assistance agreement (MLAA) obligating each country to assist the other’s law enforcement investigations, that process was slow and cumbersome, and China’s record of compliance with the MLAA was effectively nonexistent.
Two of the Chinese banks of interest maintained branches in the United States, which made them subject to a well-established, but rarely used, legal process called Bank of Nova Scotia subpoenas—grand jury subpoenas to foreign banks with U.S. branches. But the third bank had no U.S. branch, only a correspondent account at a U.S. bank in New York.
Correspondent accounts are bank accounts established in the United States by foreign banks that enable those banks to conduct transactions in this country in U.S. dollars, even if they have no physical presence here. In the USA Patriot Act of 2001, enacted in the wake of the Sept. 11 terrorist attacks, Congress identified correspondent accounts as being particularly susceptible to money laundering and “manipulation by foreign banks.” Foreign actors routinely use correspondent accounts at U.S. banks to hide illicit funds and launder billions of dollars.
The Patriot Act authorized subpoenas to foreign banks for records related to correspondent accounts, “including records maintained outside of the United States relating to the deposit of funds into the foreign bank,” and empowered the Department of Justice and the Department of the Treasury to bar a foreign bank that refused to comply from correspondent banking in the U.S.
At the time of the North Korea investigation, there was little precedent to guide the D.C. prosecutors, but they decided to plow forward anyway. By late 2017, they were ready to move, and on Christmas Eve, the U.S. attorney made a special trip into the office to sign a Patriot Act subpoena to the third bank, kicking off 18 months of negotiations and litigation that ultimately led to a sweeping U.S. Court of Appeals for the District of Columbia Circuit opinion in 2019 upholding the subpoena. On the first day of 2021, Congress passed groundbreaking legislation, over the president’s veto, expanding the ability of U.S. authorities to obtain foreign bank records. The pleadings in the Patriot Act subpoena litigation were unsealed recently, and they provide many clues about how the U.S. government will use its new subpoena authority, how foreign banks might respond and how courts will rule if such subpoenas are challenged.
On Jan. 1, 2021, Congress enacted, over the president’s veto, the National Defense Authorization Act for fiscal 2021, which includes the Anti-Money Laundering Act of 2020. These statutes seek to modernize U.S. anti-money laundering and counter-terrorist financing laws and address new and emerging threats.
To tackle the problem of offshore money laundering, the AMLA expanded the U.S. government’s authority to subpoena records from foreign banks with U.S. correspondent accounts. The original source of that authority, the Patriot Act, empowered the Justice and Treasury departments to compel the production of records from foreign banks that did business in the United States but had no branches here. It limited that subpoena authority, however, to “records related to such correspondent account, including records maintained outside of the United States relating to the deposit of funds into the foreign bank.” Section 6308 of the AMLA amended this provision to allow the Justice and Treasury departments to issue subpoenas to any foreign bank that maintains a U.S. correspondent account for records related to “the correspondent account or any account at the foreign bank, including records maintained outside the United States.” The subpoena may relate to a broad range of subject matters: an investigation of a violation of U.S. federal criminal laws, an investigation of a violation of the Bank Secrecy Act, a civil forfeiture action, or an investigation related to the imposition of Section 311 “special measures.” Moreover, the AMLA expressly provides that potential conflicts with foreign law shall not be the sole basis for quashing or modifying a subpoena. It also significantly broadens the penalties for noncompliance by adding a daily $50,000 fine. The information obtained from the subpoenaed bank records ultimately led to the largest-ever indictment related to North Korea filed against Foreign Trade Bank officials and Mingzheng’s agents for $2.5 billion in sanctions, bank fraud, money laundering and financial kingpin violations.
Section 6308 was a direct reaction to the lengthy litigation over the Patriot Act subpoena in the North Korea investigation. After the three Chinese banks refused to comply, the U.S. government sought a compulsion order and, ultimately, contempt sanctions. In response, the Chinese banks first argued that the U.S. District Court for the District of Columbia lacked personal jurisdiction over them. In an issue of first impression—a previously undecided question—the court held that the two banks with U.S. branches had consented to personal jurisdiction when they signed an agreement with the Federal Reserve permitting them to open branches in the United States. The third bank, however, pointed out that its only contact with the United States was the correspondent account that it maintained at a U.S. bank in New York, not the District of Columbia, and argued that, therefore, the district court in Washington could not exercise jurisdiction over it. The court rejected that argument, ruling that “since the relevant forum is the United States, each bank’s connections with any part of the country suffice.”
Second, the banks argued that complying with the subpoenas would require them to violate Chinese law on Chinese soil, and “ordering a foreign-sovereign-owned bank to violate foreign law on foreign soil violates basic ‘comity’ principles.” The banks asserted that the U.S. government should have used the MLAA process to obtain the requested documents and that producing the documents outside the MLAA channel would expose them to administrative and criminal penalties in China. In their pleadings, the banks cited “express instructions” from the Chinese Ministry of Justice not to produce any documents outside the MLAA process. The Chinese government also wrote to the court, offering assurances that it would review MLAA requests promptly and confirming that the banks would be sanctioned under Chinese law if they complied with the subpoenas.
The U.S. government responded that the banks were alleging a “theoretical violation of unenforced Chinese laws” and that they had failed to present evidence of any case in which a Chinese bank was subjected to liability for providing the type of information sought in the subpoena. In support of this assertion, according to the recently unsealed reply brief filed by the Department of Justice in support of the motion to compel, the department submitted expert testimony from George Washington University law professor Donald Clarke, a scholar of Chinese law, who asserted that the banks’ fears that compliance would subject them to penalties in China were “exaggerated” and “highly implausible” and that “China does not have a strong policy in favor of protecting the secrecy of bank account information.” The United States also presented evidence of the Chinese government’s repeated failures to cooperate with the MLAA process, explaining that “China has not provided—via the MLAA channel—records similar to those subpoenaed in this investigation in at least 10 years.” In addition, the government stated that prior to seeking a compulsion order, Justice Department officials had met twice with their Chinese counterparts to explain that the subpoenas were authorized under U.S. law and that the United States would seek to enforce them. Nevertheless, the Chinese government continued to object to producing the requested records in response to the subpoenas.
The unsealed pleadings revealed that the third bank also argued that the Patriot Act exceeded the government’s statutory authority. The bank contended that the act reached only records of transactions that passed through the U.S. correspondent accounts and that the subpoena it received was “impermissible” because it sought “all documents related to correspondent banking transactions for Mingzheng,” which included transactions involving any correspondent account, not just U.S. correspondent accounts. The bank also argued that the subpoena was “meant to capture a variety of records including signature cards, account ledger cards, customer account statements, and due diligence and bank records” despite the fact that there was “no reason to believe that any of these records” are related to the bank’s U.S. correspondent account. The U.S. government asserted that the act covered all records that have a “connection” with the U.S. correspondent account. Specifically, the department argued that the documents requested—including bank statements, supporting documentation of transactions and account-identification documents—all fell within the statute’s ambit, particularly because “Mingzheng existed for no other purpose but to illicitly access the U.S. financial system.”
The district court issued an order compelling compliance with the subpoenas. It concluded that the MLAA process was futile, rejected the banks’ arguments that they would be subject to significant civil and administrative penalties for turning over the records, and ultimately determined that U.S. national security interests outweighed China’s interest in its bank secrecy laws. With respect to the proper scope of Patriot Act subpoenas, the district court agreed with the department’s arguments and ruled that because Mingzheng existed only to circumvent U.S. sanctions, all of its transactions, both U.S.-dollar and non-U.S.-dollar-denominated, related to the correspondent account. After the bank still refused to produce documents, U.S. prosecutors sought a contempt order, which the district court granted, imposing a $50,000 a day fine until the banks complied.
The D.C. Circuit affirmed. It concluded that the U.S. government had no choice but to pursue the documents unilaterally because the MLAA process had led to nothing but “fruitless cooperation.” With respect to the bank’s Patriot Act-specific challenge, the circuit court agreed with the limited holding that Patriot Act subpoena authority applies to all transactions connected to the use of U.S. correspondent accounts, not merely the transactions that passed through U.S. correspondent accounts because Mingzheng had no legitimate business but, rather, existed for the sole purpose of evading sanctions. The circuit court also upheld the judicially created $50,000 daily fine.
The U.S. courts’ rulings caused a ripple effect throughout the Chinese financial sector. Stock prices for the three banks perceived to be those involved in the litigation plummeted shortly after the publication of the circuit court’s opinion. Chinese banks have since sought to revamp their contingency plans in the face of the possibility of being cut off from the U.S. dollar or losing access to U.S. dollar settlements in anticipation of the amended legislation.
In the wake of the D.C. Circuit’s opinion, federal investigative agencies and regulators pushed for amendments to the existing anti-money laundering framework, including those further permitting the U.S. government to aggressively collect all records from foreign banks, and in October 2020, the House of Representatives committed to passing them. The enacted version of the AMLA codifies the D.C. district court and D.C. Circuit opinions in many ways. For example, the AMLA preserves the government’s authority to terminate correspondent bank accounts, considered a “death penalty” for foreign banks; significantly broadens the range of documents that a Patriot Act subpoena can reach; expressly provides that local law does not, by itself, justify noncompliance; and codifies the $50,000 daily fine, which had no statutory basis in the original Patriot Act.
At the same time, it remains unclear how frequently U.S. prosecutors will seek to use this expanded subpoena authority. Since Patriot Act subpoenas inevitably implicate international relations, they cannot be issued without a significant degree of intragovernment consultation and coordination, including written approval from the Office of International Affairs in the Justice Department’s Criminal Division, which manages the department’s relations with its international counterparts. Moreover, although the federal courts in D.C. upheld the Patriot Act subpoena, they also made clear that their holdings were grounded in their conclusions that China’s compliance with its MLAA obligations had been unreliable and that the critical U.S. national security interests at stake, involving North Korea’s nuclear program, outweighed the comity concerns raised by the subpoena. During a floor debate on the AMLA amendments’ reach and application, Rep. Blaine Luetkemeyer urged the Treasury and Justice departments “only to use this new authority where a foreign bank operates in a jurisdiction as to which no MLAT or other information-sharing agreement exists or where the relevant foreign government has not satisfied its obligations under an MLAT or other information-sharing agreement.” In addition, in the nearly 20 years since the passage of the Patriot Act, there has been only one other publicly known issuance of such a subpoena.
It also remains to be seen whether—even in the face of noncompliance—the U.S. government will exercise its authority to terminate correspondent banking relationships. Notably, both the old and the new versions of the statute require such termination only after receipt of a written notice from the government that the foreign bank has failed to comply with a Patriot Act subpoena, or failed to challenge it in a timely fashion. Neither version of the statute expressly requires the government to issue such a notice, suggesting that it may have a measure of discretion with respect to whether to impose the financial “death penalty.” Where doing so will have significant consequences for the U.S. financial system, as with a foreign bank that is deeply integrated into the U.S. economy, the government may be extremely hesitant to do so. The U.S. government may also be reluctant to litigate the new Patriot Act subpoena authority, because of resource issues and because a loss in court could be a significant blow to that authority.
In addition, in the wake of the D.C. Circuit’s decision and the passage of the AMLA, China has enacted legislation making it more difficult for foreign authorities to obtain information stored in that country. On March 1, 2020, China passed Article 177 of the Securities Law, stipulating that no Chinese entity or individual may, without the approval of the relevant Chinese authorities, transmit any securities-related documents or information outside of China, even if the companies under investigation are listed on U.S. stock exchanges and have voluntarily subjected themselves to U.S. regulation as a condition of their U.S. listing. And on Jan. 9, 2021, China enacted its first sanctions-blocking statute to counteract the impact of foreign sanctions on Chinese persons and entities. MOFCOM Order No. 1 of 2021 on Rules on Counteracting Unjustified Extraterritorial Application of Foreign Legislation and Other Measures establishes a mechanism for the government to designate certain foreign laws as unjustified extraterritorial applications and prohibit compliance with such laws. The law provides that a Chinese person or entity can apply for an exemption from compliance with the prohibition by submitting a written application to the State Council. Although the reach of these laws has not been widely tested, they provide the Chinese government with tools to prohibit compliance with information requests from foreign authorities, including AMLA subpoenas. It is also possible that other countries will follow suit in some fashion.
That said, the AMLA unquestionably gives U.S. prosecutors more leverage in seeking to obtain documents held by foreign banks overseas. The new provisions in the National Defense Authorization Act geared toward fighting money laundering, terrorist financing and sanctions, combined with the Congress’s willingness to override the president’s veto, signal bipartisan concern about these threats and readiness to grant investigators and prosecutors tools to combat them. Much of the practical effect of the new statute may well take place behind the scenes—in negotiations between banks and U.S. prosecutors, banks and their local authorities over document productions, and policymakers in both countries. The one thing that is certain is that there will be much more time spent on, and attention paid to, Patriot Act subpoenas than at any other time in the past 20 twenty years of their existence.