Fred Davis
Sovereign Owned Enterprises, or “SOEs,” are commercially active businesses that are owned by foreign governments. A UN agency estimates that they account for about ten percent of global economic activity. As they become increasingly active in international business in competition with privately owned or publicly traded companies, they risk prosecution if their activities violate criminal laws. On January 17, 2023, the Supreme Court heard oral argument on a case that presented a radical possibility: that SOEs are immune from any prosecution in the United States. The case is complex, and the issues pending before the Court consequential. No clear outcome emerged from the briefing and argument, and the most likely alternative dispositions could lead to untoward results.
The case involves Halkbank, a bank majority owned by Turkey that is active in international finance, and has been indicted in the Southern District of New York for extensive money laundering operations. It argues that the Foreign Sovereign Immunities Act of 1976 (“FSIA”) protects it from prosecution, a position rejected by the District Court and the United States Court of Appeals for the Second Circuit.
The question is complex because of the unusual structure of the FSIA: § 1604 of the Act provides a blanket immunity for a “foreign state” from the “jurisdiction of the courts of the United States and of the States” subject only to specifically designated “exceptions.” One of the exceptions listed in § 1605 provides that a foreign state “shall not be immune from the jurisdiction of courts of the United States or the States in any case … in which the action is based upon a commercial activity.” The Second Circuit held that Halkbank’s activities fell under this exception. While this outcome would seem to make perfectly sound practical sense, it is difficult to conclude that the drafters of the FSIA intended it. This is because the grant of immunity in § 1604 is unlimited and broad while the exceptions to it in § 1605 may well be limited to civil, rather than criminal, matters. If this is so, as Halkbank argues, then it is excluded from prosecution by the blanket immunity provision and not brought back in by the exception. The several arguments made by the Solicitor General to justify the prosecution all depend on difficult statutory analyses; no analysis makes complete sense of the FSIA. And troublingly, all of the likely outcomes may lead to mischievous results.
The statutory interpretation debate is complex, and any effort to synthesize it here would lead to undue oversimplification. Professors Professors Jack Goldsmith of Harvard Law School and Curtis Bradley of Chicago Law School explored all sides of the matter in an excellent series of posts, available here, here, and here; they hesitantly conclude (“We do not claim that this is the only possible reading”) that the FSIA does apply to criminal prosecutions, that the statutory exceptions “are limited to civil suits,” and that as a result “the federal government would not currently be able to bring criminal prosecutions” against SOEs. They also explore several non-statutory sources of immunity.
However it rules, the Court may be forced to choose between two unappetizing outcomes: It may rule in favor of Halkbank that SOEs are in fact immune from any prosecution in the United States, which would wreak havoc in the enforcement of federal and State criminal statutes. If it rules in favor of the DoJ that Halkbank can be prosecuted – either by concluding that the FSIA does not apply to criminal prosecutions at all, or by applying the “commercial activities” exception — it risks submitting true foreign nations acting as such to prosecutions by State officials in State courts, with limited federal oversight or control.
This anomaly arises because of two features of the FSIA.
First, its formal definition of a “foreign state” lumps SOEs together with true foreign nations: As defined, “a foreign state” includes “an agency or instrumentality of a foreign state,” which itself is defined as an entity “a majority of whose shares or other ownership interest is owned by a foreign state or subdivision thereof.” As far as the FSIA is concerned, an allegedly rogue corporation like Halkbank is treated exactly the same as a friendly foreign nation in all its majesty because its qualification as a “foreign state” is simply a function of who owns its shares rather than the nature of its activity. Thus, whatever interpretation of the FSIA the Court comes up with for SOEs will also apply to foreign nations.
Second, consistently with the strong policy that the federal government, not the States, is responsible for the conduct of foreign affairs, the FSIA goes to great lengths to assure that certain actions against foreign states be brought exclusively in federal courts. It does this by creating in 28 U.S.C. § 1330 “original jurisdiction” for actions against foreign states and in § 1441(d) it provides for removal to federal court of any such action brought against a foreign state in a State court. The problem is that these provisions very specifically and by their express terms apply only to “civil actions;” as the Solicitor General admitted in the DoJ’s brief in Halkbank, the FSIA “does not speak to the removal of criminal cases.” Further, the general criminal jurisdiction provision found in 18 U.S.C. § 3231, upon which the Second Circuit relied to justify a federal prosecution of Halkbank, does not apply to a State prosecution.
How, then, would a State prosecution of a foreign nation proceed if the DoJ prevails in this case? The SG offered two theories in support of its argument that the DoJ can prosecute Halkbank.
- That the blanket immunity provision of 28 U.S. Code § 1604 does not apply to criminal prosecutions at all, in which case the question of immunity would be governed by non-statutory principles such as customary international law, or
- That the “exception” for “commercial activities” under Section 1605 does
The problem is that under either theory, in the admitted absence of any removal mechanism a State prosecution would have to play out in the first instance exclusively in State courts, with possible Supreme Court review only of a “final judgment” in the State system. (Review under Theory B would be fairly clear under the Supremacy Clause; review under Theory A raises all sorts of complications, including the applicability of federal preemption doctrine and the extent of “federal common law.”)
This would potentially lead to great mischief – a possibility not lost on the Justices, who had many questions for the SG about how to handle an “elected local prosecutor” who gets the bright idea to prosecute an “unfriendly” nation – or even a friendly one. The principle that one nation cannot prosecute another appears to be one on which there is a real consensus under customary international law. Any derogation from it would have a huge impact on the foreign relations of the United States. Yet the SG’s arguments, if accepted, would lead to a significant weakening of federal control of potential State involvement through prosecutorial activism.
Fred Davis is the principal of Fred Davis Law Office LLC. A longer version of this article was recently published in the International Enforcement Law Reporter.
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