Court bolsters US power to grab foreign bank records

A US appeals court has bolstered the power of federal prosecutors to grab records from foreign banks even if the transactions at issue did not pass through US accounts.

In a ruling released on Tuesday, three appeals court judges in Washington sided with the Department of Justice against a trio of Chinese banks, including one that had received a subpoena under the Patriot Act.

The case stems from a justice department investigation into alleged attempts by North Korea to evade US sanctions using a Hong Kong-based front company, Mingzheng International Trading, which itself banked with the three Chinese lenders.

The judges found that the Patriot Act allows access to records held by foreign banks that use US correspondent accounts, including “records of transactions that do not themselves pass through a correspondent account” if those transactions were part of a larger scheme to access dollar funding through US correspondent accounts.

In the ruling, the judges cautioned that their finding relied on evidence that Mingzheng “operated exclusively as a US dollar clearinghouse” for North Korea, indicating the ruling may not apply where the alleged facts differ.

“Under such circumstances, all records pertaining to the company’s bank . . . account and its correspondent banking transactions, no matter where they occurred, are ‘related to’ the bank’s US correspondent accounts,” they wrote.

Ryan Fayhee, a former justice department prosecutor, said the ruling would be a “huge boost” to US efforts to investigate possible sanctions violations and would have far-reaching implications for foreign banks that decide to use US correspondent accounts.

“As a consequence of that decision . . . you are agreeing to subject yourself to US jurisdiction over records that relate to that correspondent banking,” said Mr Fayhee, now a partner at Hughes Hubbard.

“Those are subject to US subpoena power, even if maintained outside of the United States,” he added.

The three Chinese lenders are not named in the ruling, but the details correspond to Bank of Communications, China Merchants Bank and Shanghai Pudong Development Bank.

The banks were referenced in a related 2017 civil forfeiture case filed by the justice department that alleged Minzheng used accounts at the lenders to funnel cash to North Korea.

Bank of Communications and China Merchants Bank both have branches in the US and received grand jury subpoenas. Shanghai Pudong Development Bank, which has only had a US correspondent account, received a subpoena under the Patriot Act.

All three banks declined to comply, arguing that Chinese law prevented them responding to requests for information outside of the channels agreed in a US-China mutual legal assistance treaty.

The justice department argued the treaty was largely ineffective and that the Chinese government had not reliably responded to requests regarding North Korea in the past.

In a brief to the court in June, lawyers for SDPB argued that the justice department’s failure to use the legal assistance treaty suggested prosecutors viewed the matter “as a ‘test case’ to see just how far the courts will allow the government to stretch the limits of its subpoena power under the Patriot Act”.

A district court found the banks in contempt earlier this year, fining them $50,000 a day, which it stayed pending appeal. The appeals court upheld the contempt orders last week but did not release the opinion until Tuesday.

None of the banks is suspected of any wrongdoing, according to Tuesday’s ruling, but the finding by the appeals court raises the possibility that SPDB could be cut off from US dollar funding.

The Patriot Act gives the US attorney-general and the US Treasury secretary the power to ban foreign banks from using US correspondent accounts if they fail to comply with a subpoena issued through the act.

Any such move would have dramatic implications for SDPB, the largest bank in Shanghai with $900bn of assets, and for relations between the US and China, which are already deteriorating as their trade war heats up.

It was unclear whether the US would take such a step, and whether the banks would comply with the subpoenas or appeal to the Supreme Court. US attorneys for the banks either declined to comment or did not immediately return a request for comment on Tuesday.

A spokeswoman for the US attorney’s office for the District of Columbia, which is leading the investigation, did not immediately return a request for comment.

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