Noted with Interest - The Game Ain’t Over: Remaining Questions on Common Law Sovereign Immunity After Halkbank

The limits of sovereign immunity have recently been tested by the Department of Justice, through its efforts to seek more indictments against foreign states and state-backed entities. For example, the U.S. Court of Appeals for the Second Circuit recently interpreted the extent of the common-law foreign sovereign immunity doctrine in Turkiye Halk Bankasi A.S. v. United States, ___ F.4th ___, 2024 WL 4536795 (2d Cir. Oct. 22, 2024). This case involved a criminal indictment for money laundering and evading U.S. sanctions against Türkiye Halk Bankasi (“Halkbank”), which is majority-owned by the Turkish state. Halkbank challenged the indictment, arguing it was entitled to immunity under the Foreign Sovereign Immunities Act (the “FSIA”), which confers immunity upon foreign states and their instrumentalities (i.e., companies that are majority state-owned) except under specific circumstances, including when the case is based upon the foreign state’s (1) “commercial activity . . . in the United States,” (2) “act performed in the United States in connection with” commercial activity abroad, or (3) “act outside” the United States in connection with commercial activity that “causes a direct effect in the United States.” 28 U.S.C. §1605(a)(2). Halkbank lost that argument before the district court, the Second Circuit, and ultimately the Supreme Court, which remanded the case to the Second Circuit to consider specifically whether common-law foreign sovereign immunity barred prosecution.

            On remand, the Second Circuit determined that common-law foreign sovereign immunity did not bar the prosecution because there was “no basis in the common-law to conclude that a foreign state-owned corporation is absolutely immune from prosecution by a separate sovereign for alleged criminal conduct related to its commercial activities, and not to governmental functions,” and, in this case, the “gravamen” of the indictment against Halkbank showed “commercial activity.” This ruling, which is limited to the Second Circuit and will likely be appealed again, left open significant questions about the contours of common-law immunity. These as-of-yet unanswered questions may provide bases to challenge indictments within and without the Second Circuit.

1. Background

            Halkbank is 75% owned by the Turkish Wealth Fund, which is part of and owned by the state of Turkey. The indictment, which was filed in the U.S. District Court for the Southern District of New York, alleged that Halkbank was part of a conspiracy to (i) evade sanctions issued by the United States against Iran, and (ii) violate U.S. anti-money laundering laws. This conspiracy purportedly involved Halkbank’s executives, one of whom had already been convicted for his role in the conspiracy at the time of the indictment.

            Halkbank moved to dismiss the indictment on three grounds. First, Halkbank argued that 18 U.S.C. § 3231, which provides general jurisdiction over federal criminal cases, does not extend to prosecutions against instrumentalities of foreign states. Second, Halkbank argued that the FSIA provided absolute immunity to majority state-owned entities, and disputed that the commercial activity exceptions to the FSIA applied. Third, Halkbank argued that common-law foreign sovereign immunity would apply even if the FSIA did not.

            The district court rejected Halkbank’s arguments and the Second Circuit affirmed. The Court recognized that 18 U.S.C. § 3231 provides a general grant of subject matter jurisdiction for “all offenses against the laws of the United States.” For purposes of the decision, the Court assumed without deciding that the FSIA confers immunity in criminal proceedings to foreign states and their instrumentalities. It then held that the FSIA’s specifically delineated exceptions limit immunity, and that the indictment alleged that Halkbank’s activities within the U.S. were “commercial” and thus fell under that exception to immunity. Finally, the court determined that foreign states and entities do not have immunity from criminal suit under common-law where the Executive Branch had initiated a prosecution, because doing so had clearly established its determination that there was no sovereign immunity. Halkbank filed a petition for a writ of certiorari, and the Supreme Court agreed to hear the case during its October 2022 term.

            The Supreme Court affirmed the Second Circuit’s opinion. The Court agreed that 18 U.S.C. § 3231 provides general jurisdiction over criminal prosecutions against foreign states and foreign state-backed entities, citing the “sweeping language” of the statute that granted district courts jurisdiction over “the full range of federal prosecutions for violations of criminal law.” The Court then turned to the central issue in the case and held that FSIA immunity does not extend to criminal proceedings; rather, the FSIA’s “comprehensive scheme” was limited to civil actions against foreign states and their instrumentalities. However, the Court remanded the case for the Second Circuit to “fully consider” whether common-law foreign sovereign immunity would protect Halkbank from criminal prosecution.

1. Remaining Questions Following Remand

            On remand, the Second Circuit determined that Halkbank was not entitled to common-law foreign sovereign immunity. The court held that, under the common law, foreign sovereign immunity was traditionally considered absolute and subject to the sole discretion of the Executive Branch. But in 1976, Congress enacted the FSIA, which provided the judiciary with authority to determine whether immunity would apply in lawsuits based upon a foreign state’s or instrumentality’s commercial acts, but not acts that were political or public. In that respect, the FSIA did not negate common-law foreign sovereign immunity because the common-law doctrine would still apply when a suit challenged acts that were not of a commercial nature.

            Applying this framework to the Halkbank indictment, the Second Circuit began by explaining that the Department of Justice’s decision to bring charges against a majority-state-owned entity meant that the Executive Branch had determined that Halkbank was not entitled to sovereign immunity. Without deciding whether the Executive Branch’s decision was fully conclusive on this issue, the Court then assessed Halbank’s alleged criminal conduct as laid out in the indictment and determined that the conduct was not connected to an established aim or “public purpose” of the state of Turkey. Rather, the indictment alleged that Halkbank had acted “for the benefit of Iran” and that the alleged banking transactions were commercial, not public or political, and therefore would not be entitled to common-law foreign sovereign immunity. The Second Circuit again affirmed.

            However, the Second Circuit’s decision—which has not yet been adopted by any other circuit court—left open questions. First, the court declined to determine the full scope of the common-law rule governing commercial activity. For example, the court did not decide whether it would be proper to consider the “purpose of the alleged conduct” when determining whether an activity is “commercial.” Second, the Second Circuit also declined to determine whether courts are required to defer to an Executive decision to prosecute a foreign government instrumentality (like Halkbank) for acts that are political or public, rather than commercial. Finally, the Court did not address how other limitations on prosecutions could apply, including whether constitutional limitations would apply: as one example, how or whether the Fifth Amendment’s Due Process Clause  applies to a foreign state or instrumentality’s contacts with a jurisdiction (a question that will come before the Supreme Court in the October 2024 term). These open questions provide foreign states and state-backed entities with potential arguments to challenge indictments in future proceedings.