1

The Background of the Case

The Banks are not currently subject to the criminal proceedings. Rather, the Banks are being called as witnesses and the subpoenas are for evidence to be used in the grand jury investigation against the unnamed Hong Kong company. The Banks objected to the subpoenas on the grounds that, among other things, recently introduced Chinese laws and regulations—the Law of PRC on International Legal Assistance in Criminal Matters (the “ILACM") and Guidelines for Money Laundering and Terrorist Financing Risk Management of Legal-Person-Financial-Institutions (Trial Implementation) (the “Guidelines")—prohibit direct cooperation with foreign investigations. Complying with the American subpoenas would therefore require the Banks to violate Chinese laws and regulations. That is, if the Court enforced the subpoenas, the Banks would be in the unenviable situation of facing penalties in either the United States or China. The Banks argued that under the principle of international comity, Judge Howell should refrain from enforcing the subpoenas. The principle of international comity requires that when there is a “true conflict between domestic and foreign law… a court should seek a reasonable accommodation that reconciles the central concerns of both sets of laws."

Judge Howell conducted an in-depth analysis of the application of the principal of international comity under U.S law. The comity analysis includes five factors found in the Supreme Court of the United States ruling in Societe Nationale Industrielle Aerospatiale v. U.S. Dist. Court for S. Dist. of Iowa (“Societe Nationale")[1] and two additional factors as used in the Second Circuit Court’s ruling in Linde v. Arab Bank (“Linde").[2] These seven factors were “implicitly endorsed" by the D.C. Circuit Court in In re Sealed Case.[3] Utilizing these precedents, Judge Howell examined each of the seven factors and concluded that “international comity is not a reason to refrain from compelling compliance with the subpoenas."

2

Personal Jurisdiction

Although the focus of our article is on international comity, we thought it would be pertinent to include a few words on Judge Howell’s personal jurisdiction analysis. She came to the expected opinion that there was indeed personal jurisdiction over the Banks. Two of the banks had consented to jurisdiction when they registered to open branches in the United States. Even if they had not, all three banks satisfied the “minimum contacts" due process test for specific jurisdiction due to their use of the U.S. banking system. Judge Howell noted that “[i]t should hardly be unforeseeable to a bank that selects and makes use of a particular forum’s banking system that it might be subject to the burden of a lawsuit in that forum for wrongs related to, and arising from, that use."

Disappointingly, Judge Howell noted repeated mistakes made by the counsel for the Banks regarding their understanding of the minimum contacts test as it is applied to U.S. federal courts. Among other things, the Banks’ counsel focused their minimum contacts analysis for on whether the Banks had contact with the District of Columbia instead of correctly focusing on the Banks contact with the United States as a whole. We welcome you to read our previous article on specific jurisdiction that provides a comprehensive introduction on the way that U.S. federal courts determine the validity of jurisdiction over nonresident defendants.

3

International Comity

The main issue in this ruling is whether Judge Howell should refrain from exercising her authority to enforce the subpoenas due to the principle of international comity. In Societe Nationale, the Supreme Court established that the “threshold question" when dealing with comity questions was whether there was in fact a “true conflict between domestic and foreign law." If so, “a court should seek a reasonable accommodation that reconciles the central concerns of both sets of laws." The party relying on foreign law to establish a conflict “assumes the burden of showing that such law prevents compliance with the court’s orders."

There was no dispute in the case over whether there was a true conflict between domestic and foreign law as it was clear that compliance with the subpoenas would expose the Banks to legal penalties in China. Accordingly, Judge Howell’s judgement focused on conducting a balancing of comity factors to determine whether she should enforce the subpoenas.

The comity factors Judge Howell used came from Societe Nationale and Linde v. Arab Bank. In Societe Nationale, the Supreme Court listed five factors that “are relevant to any comity analysis": 1) importance to the investigation of the requested information; 2) specificity of the request for information; 3) origin of the information; 4) alternative means of obtaining the information; and 5) the interests of sovereigns in conflict.

In Linde, the Second Circuit Court added two additional factors for the comity analysis: 6) hardship on the party facing conflicting obligations; and 7) good faith.

The first factor looks at how important the requested information is to the investigation. In this situation, the government argued that the “subpoenaed documents are the foundation of the United States’ investigation." The banking records are required to track cash flows of the unnamed Hong Kong company under investigation relating to the sanctions violations and the government does not otherwise have access to the records. The Banks argued that while they agreed that the requested records would contain information that would further the investigation, an almost year long wait between the issuance of the subpoenas and the government’s decision to request enforcement showed that records were not that important to the investigation.

Judge Howell noted that this delay was due to the government’s decision to explore possible diplomatic options, including the possibility of making a request for assistance through the Agreement Between the Government of the United States of America and the Government of the People’s Republic of China on Mutual Legal Assistance in Criminal Matters (the “MLAA"). Judge Howell concluded that the requested information was important, and that the pursuit of a diplomatic solution should not be held against the government and therefore found the first factor favored enforcement.

The second factor examines whether the request for information was suitably specific. Judge Howell noted that the subpoenas are “tailored to specific financial records, for a defined date range, at banks [the Hong Kong company] is known to have used to launder funds." Furthermore, “other courts have found subpoenas that seek information limited to accounts known to be connected to the matter under investigation satisfactorily specific." One of the banks argued that since the subpoena requested “all" related information to the account, it was not specific enough as it could encapsulate other, unrelated information. However, Judge Howell noted that the unnamed Hong Kong company appears to have only existed as a front to launder money and therefore, there was no other, unrelated banking information. The second factor therefore favored enforcement.

The third factor looks at where the information originated. If the information comes from abroad, then the third factor would favor non-enforcement. The United States conceded that this factor favored non-enforcement as the documents originated in China and Judge Howell agreed.

The fourth factor considers whether there are alternative methods of obtaining the requested information. This was the most disputed factor. The United States argued that while the MLAA provided an alternative avenue for obtaining the documents, China had not used the MLAA channel to provide “records similar to those subpoenaed by the grand jury… in at least 10 years." The Banks argued back that this was not an accurate reflection of the MLAA process and that anyway, “both the banks and… [China’s Ministry of Justice] have committed to responding to an MLAA request in this case." Judge Howell was generally unsympathetic that the MLAA process was a meaningful alternative for obtaining the subpoenaed information for the following reasons:

First, the Supreme Court ruled in Societe Nationale that there was no requirement that the United States resort to using evidence sharing mechanisms such as the MLAA due to the potential for long delays and other issues. Second, the U.S. Department of Justice stated that when it came to requests for bank records, China has generally been unhelpful. They stated that they had only received a limited number of responses and those responses were often incomplete, untimely, or failed to include the necessary certification. Third, although the Banks had acted in good faith and were sincere in their willingness to cooperate, the reliance on China’s Ministry of Justice (“MOJ") and other Chinese authorities to approve a request made cooperation questionable. While the MOJ provided a letter promising timely support, the letter actually noted that the MOJ was not responsible for the final approval and no assurances were given regarding the timeliness of decisions by other relevant Chinese authorities. The government also cited examples of Chinese authorities failing to cooperate with the United States following assurances of assistance. Judge Howell concluded that as a result of these circumstances, the government does not have a “viable alternative" for obtaining the records and therefore the fourth factor favored enforcement.

The fifth factor weighs the competing interests of each country in the outcome of the case. For the government, the argued that the case pertains to “how North Korea, a nuclear armed state is a state sponsor of terrorism, financed its weapons of mass destruction program in spite of extant sanctions." Non-enforcement of the subpoena would therefore undermine a critical national interest. On the other hand, Judge Howell accepted the Banks argument that China’s has an interest in the development of a sound banking system. Compliance with the subpoena would violate bank secrecy laws, such as the Guidelines, which promote that interest. However, Judge Howell noted that under existing Chinese law, banks may disclose records to domestic authorities if required by Chinese regulation and therefore even “Chinese authorities recognize that bank secrecy can co-exist with limited disclosure to government agencies." Furthermore, “the fact that numerous Chinese government organs are vested with the power to override the confidentiality provisions only underscores the notion that the secrecy laws were not designed to protect Chinese citizens who engage in unlawful behavior." Based on this, Judge Howell concluded that no Chinese interest was infringed upon in this case. As such, she found the fifth factor “heavily favored" enforcement as non-enforcement would “undermine the United States national security interests and not undermine any articulated Chinese interest."

The sixth factor examines the hardship the Banks would face if there was enforcement. The two questions to be answered were “how likely are the [Banks], given the Chinese government’s ownership stake… to face severe administrative penalties," and “for the same reason, how likely are the banks, or their employees, to face criminal penalties."

Judge Howell was unpersuaded by the case examples provided by the Banks relating the imposition of administrative or criminal penalties. The examples were seen as either wholly unrelated to the Banks current situation or the punishment was nominal in nature. Indeed, she concluded that the imposition of penalties, severe or otherwise, by Chinese authorities would be “unprecedented" in the current circumstances. While the Banks submitted letters from the MOJ that included warnings of civil, administrative, and criminal penalties if they complied with the subpoenas, Judge Howell observed that the letters were inconsistent in their warnings, included mistakes regarding the details of this specific case, and lacked clear details on what penalties the Banks would actually face. Judge Howell observed that those letters “do not suggest that the Chinese government is inclined to take the counter-intuitive step of imposing heavy penalties against banks in which the Chinese government has a substantial ownership interest." Still, she found that the sixth factor “ever so slightly" favored non-enforcement as there was indeed the chance of some hardship. 

The seventh and final factor was whether the Banks acted in good faith. The government agreed that the none of the Banks had acted in bad faith. Therefore, the seventh factor favored non-enforcement.

Judge Howell balanced the seven factors and concluded that “international comity is not a reason to refrain from enforcing the subpoenas." She noted that the Banks had in their favor the records’ Chinese origins, the slight chance of suffering some hardship, and their good faith. Conversely, the importance of the records, the specificity of the subpoenas, the lack of alternatives, and the risk of undermining U.S. national security all favored enforcement. While this alone may have suggested enforcement, she noted that the most important factor, the interests of the states, weighed heavily for enforcement. Judge Howell observed that “national security is at stake on one side; on the other, no national interest is compromised." As such, the comity analysis supported the enforcement of the subpoenas.

4

Implications for Chinese Businesses

This ruling has several important implications for Chinese companies, state-owned or private, that are doing business that is in somewhat connected to the United States.

First, Chinese companies are unlikely to be able to rely on the introduction of Chinese laws and regulations such as the Guidelines or the ILACM to avoid cooperating with U.S. investigations. The balancing process will generally result in American courts finding that the relatively minor penalties and low rates of enforcement by the Chinese authorities will not create unacceptable hardship to cooperation. The general presumption of American courts that Chinese laws do not seek to protect unlawful behavior also weighs heavily against arguments for not cooperating with U.S. investigations. Furthermore, American extraterritorial cases which involve Chinese companies tend focus on anti-money launder, anti-corruption, and anti-sanction laws. The seriousness of crimes relating to these three subject areas and the impact they have on U.S. national interests will likely be considered by U.S. courts to trump China’s national interests. As such, we strongly advise Chinese companies to implement comprehensive compliance systems, especially in highly regulated sectors, such as banking. Taking a proactive stance on compliance can save companies considerable stress and resources while ensuring the integrity of their reputation.

Second, Judge Howell made repeated comments about the misapplication or misunderstanding of American laws and legal procedures by the Banks’ lawyers. These failures resulted in the waste of valuable opportunities to pursue the Banks’ legal interests. Based on the factual circumstances, the Banks were starting from a difficult position. Simple errors made by their lawyers only exacerbated the situation.  It is important that companies who find themselves caught up in similar foreign investigations engage Chinese lawyers who can competently direct, cooperate, and coordinate with foreign lawyers.

Third, there were a couple of instances were evidence was submitted by the Banks’ counsel that was interpreted by Judge Howell as hindering their case. This was notable with the MOJ letters that led Judge Howell to conclude that Chinese authorities did not have a strong grasp of the factual circumstances of the case. This in turn undermined the Banks arguments that Chinese authorities were prepared to act seriously if the Banks complied with the subpoenas. Once again, the need to find competent lawyers cannot be emphasized enough. Having a team in China that can obtain and effectively marshal domestic evidence for foreign proceedings is crucial for having even a chance of a successful outcome.

This case highlights the risks that Chinese companies face when they do business in the United States. It’s increasingly clear that Chinese companies are being targeted by the current U.S. administration and are more likely than their foreign counterparts to end up in American legal proceedings. Although Chinese companies can reasonably expect to be treated fairly by U.S. courts, they cannot rely on Chinse legislation for assistance and need to be better prepared to vigorously protect their legal interests.

【注] 

[1] 482 U.S. 522 (1987)

[2] 706 F.3d 92 (2013)

[3] 825 F.2d 494 (1987)