Judge upholds subpoenas to three Chinese banks in N. Korea sanctions probe
By SPENCER S. HSU | The Washington Post | Published: May 1, 2019
WASHINGTON — A federal judge has ordered three Chinese banks partly or wholly owned by the Beijing government to turn over documents in a U.S. criminal investigation into how a Hong Kong corporation allegedly helped North Korea's regime evade sanctions, new court filings show.
A March 18 opinion unsealed late Tuesday by Chief U.S. District Judge Beryl Howell marked the first known instance in which a U.S. court has upheld subpoenas to a Chinese bank in a sanctions probe. The banks had argued that if it complied, it would violate laws in its country and be exposed to fines and legal penalties from its own government.
"Allowing China to gum up United States' investigations by dictating how the United States can pursue evidence, especially when the two countries' interests are not aligned, is antithetical to sound law enforcement," Howell wrote.
In a sweeping and bluntly worded 59-page opinion, Howell found that the USA Patriot Act, adopted after the 9/11 attacks, authorized law enforcement to demand records tracing the source of foreign bank deposits funneled to accounts at U.S. banks set up to handle cross-border transactions, even if the records have no other tie to the United States or outside the country.
Records capturing "cash deposits . . . intrabank transfers and foreign currency deposits" that can be used to launder money through the United States "are precisely the type that the statute permits the government to subpoena," wrote Howell, who helped draft the Patriot Act as Senate Judiciary Committee counsel before her appointment as a federal judge in 2010.
It is unclear whether the banks could face any U.S. criminal liability for the targeted company's actions and whether they have complied with the subpoenas or face contempt proceedings if they have not. No Chinese bank has been the subject of prosecution for violating U.S. sanctions.
The stakes in the case are high on several fronts.
The three Chinese banks are owned in large part by the government, rely on access to U.S. financial markets and cannot overlook that European banks recently have paid billions in fines to settle U.S. allegations of facilitating Iranian sanctions violations.
The judge noted that curbing North Korea's weapons program is a "critical" U.S. national security interest, while the Chinese warned of potential "reciprocal" economic and security consequences for U.S. interests.
Spokeswomen for Howell and the U.S. attorney's office in Washington declined to comment.
In the opinion, Howell commended the banks, whose names are redacted, for engaging the U.S. legal system in good faith, but she also called the prospect that they could face punishment for violating data and customer secrecy laws at home "overblown," given the Beijing government's significant ownership.
The opinion marks one of the few confirmed cases in which U.S. authorities have identified a reputed node of North Korea's illicit foreign financial system, digging for more intelligence to understand how companies may be witting or unwitting facilitators of unlawful activity, analysts said. The opinion also renews pressure on China's financial sector to take action against its nuclear-equipped neighbor, several analysts said.
The Trump administration has targeted new sanctions for North Korea's nuclear program, but it stopped short last year of moving to cut off the country's path to the international financial system.
It was known that U.S. authorities were probing North Korea's use of China's banking system as way to move money around the world despite sanctions and anti-money-laundering controls, and this week's disclosure of a widening criminal investigation provided insights into how Washington might confront Beijing.
Howell ordered the three banks to comply with two grand jury subpoenas and one administrative subpoena from the Justice Department for documents related to a national security investigation. The opinion said the investigation involves a now-defunct front company in Hong Kong that allegedly helped finance North Korea's nuclear program, despite international sanctions, by laundering more than $100 million through the United States between 2012 and 2015.
The court did not identify the banks, the Hong Kong company or state-run North Korean entity, citing grand jury secrecy.
Details of the entities and transactions laid out in the Howell opinion appear to align with U.S. government allegations in 2017 that the Hong Kong firm Mingzheng International Trading, which was hit with U.S. sanctions, acted as a front company to facilitate U.S. dollar transactions that helped North Korea's proliferation program network, on behalf of a covert foreign branch of North Korea's state-run Foreign Trade Bank.
In the civil forfeiture case brought by the Justice Department, a federal judge last August entered a default judgment against Mingzheng accounts in the United States that authorities say worked with three of China's largest financial institutions: the state-owned Bank of Communications, China Merchants Bank and Shanghai Pudong Development Bank.
Details in Howell's opinion about the degree of state ownership of the banks under subpoena and how many U.S. branches each bank has also appear to align with the three Chinese financial institutions in the 2017 case.
The three named banks did not respond Wednesday to requests for comment on the Howell order, nor did U.S.-based attorneys for those banks, or China's embassy in Washington. Attorneys for the Chinese banks were not identified in the court opinion unsealed Tuesday.
Howard Hogan, a Washington trademark attorney, said Howell's ruling expands a decadelong body of law in which U.S. judges have rejected the argument that Chinese banks are protected by Chinese secrecy laws and do not need to comply with U.S. court subpoenas.
"If you want to take the fight against unlawful activity seriously, you have to follow the money . . . whether it's counterfeiting, violating sanctions orders, or whatever criminal enterprise you can think of," said Hogan, who has helped Gucci, Nike and other brand owners compel the Bank of China to produce bank records of U.S. counterfeit good traffickers in cases mentioned in Howell's opinion.
The court ruling said that the three banks didn't comply with subpoenas issued in December 2017 and that the Justice Department moved to compel compliance in November 2018. After briefings through the winter, Howell held a closed-door hearing March 5 before issuing her ruling 13 days later.
In her opinion, Howell cited Justice Department statistics that show Chinese authorities have responded to 15 of 50 U.S. requests over the past decade for bank records under a legal assistance pact between the two countries that is Beijing's preferred way to respond to U.S. criminal inquiries. Most of the replies were "incomplete, untimely" or lacked certifications needed to have them admitted in U.S. court, the opinion stated.
"The Department of Justice no longer needs to take overtures of China's willingness to assist the United States with investigations into North Korea seriously," Howell wrote.
According to Howell's opinion, "Bank One" and "Bank Two" have more than one U.S. branch, through which the company that is the target of the investigation moved $47 million in suspect transactions into the United States.
The subpoenas sought testimony and records, including account-opening documents for the target company, signature cards, account statements and copies of all deposits, withdrawals and transfers from 2012 through 2017.
The ruling said "Bank Three" received an administrative subpoena for similar records through which $58 million was "shuttled" through the United States, andHowell upheld the U.S. government's demand under the Patriot Act even though the bank has no U.S. branches.
Joshua Stanton, who runs the site One Free Korea and has advised House and Senate staffers on North Korea sanctions law, predicted that the Howell opinion would send "a big shock" through China's financial industry and set off a "furious scrub of their customer lists" to minimize the potential embarrassment or burden of facing U.S. subpoenas, enforcement actions or fines.
"The very risk of having to litigate more cases like this should have a deterrent effect on other banks in China to meet their due-diligence obligations," Stanton said.