Second Circuit defers to executive will on application of sovereign immunity

The Second Circuit recently held that federal common law protections of sovereign immunity—the legal doctrine which bars proceedings brought against governments and their instrumentalities—did not preclude prosecution of a state-owned foreign corporation. The decision limits the sovereign immunity protections for any state-owned company facing criminal prosecution for commercial activities as it vests the discretion on whether those protections apply with the Department of Justice (DOJ).

Background

The October 22, 2024 decision in United States v. Türkiye Halk Bankasi A.S., a/k/a Halkbank, is the latest development in the prosecution of Türkiye Halk Bankasi A.S. (Halkbank), a commercial bank owned by the Republic of Türkiye. In 2019, a federal Grand Jury indicted Halkbank for crimes connected to evading and violating sanctions against Iran, including money laundering and bank fraud. Halkbank asserted sovereign immunity against prosecution under the Foreign Sovereign Immunities Act (FSIA) and under common law, which was rejected by the District Court and the Second Circuit. In 2023, the Supreme Court affirmed the ruling that Halkbank was not entitled to sovereign immunity under FSIA because the statute does not prevent criminal proceedings from being brought against foreign states and their instrumentalities. However, the Supreme Court sent the case back to the Second Circuit to reconsider whether Halkbank was entitled to sovereign immunity under common law. In particular, the Supreme Court directed the Second Circuit to further consider “whether and to what extent foreign states and their instrumentalities are differently situated for purposes of common-law immunity in the criminal context.”

The Second Circuit’s Halkbank decision

On remand, the Second Circuit determined that common law foreign sovereign immunity did not prevent Halkbank from being prosecuted. The Second Circuit held that it would defer to an executive branch determination—here, by the US Department of Justice—on the decision of whether sovereign immunity is or is not warranted in a criminal case where the commercial activity of the state-owned company is at issue. 

In its analysis, the Second Circuit rejected Halkbank’s argument that deference to the executive in determining common law sovereign immunity questions only applies to civil cases. Instead, the Second Circuit held that such deference applies to criminal cases as well. 

The Court also denied Halkbank’s argument that because the government of Türkiye itself would indisputably be afforded sovereign immunity under common law that Halkbank, as a state-owned company, should also enjoy the same protections. The Court explained that “when a foreign state-owned corporation is prosecuted for its commercial, non-governmental activity” that courts will defer to the executive’s determination if sovereign immunity exists. Because the Court determined the alleged conduct by Halkbank was commercial in nature and not governmental, it would defer to the executive’s determination that it should not be afforded sovereign immunity.

The Second Circuit left open, however, the limits of its deference and whether it would, for example, defer to the DOJ on the prosecution of a state acting in its capacity as a state.

Takeaways

Going forward, foreign state-owned corporations should operate knowing that their commercial activities are likely not protected from federal criminal prosecution under the sovereign immunity doctrine. They should know that discretion as to their prosecution is left fully to the DOJ, and that any appeal to the courts to overturn that discretion will be highly circumscribed – to that end, the Second Circuit appeared to limit the scope of a court’s deference to executive determinations of sovereign immunity to such instances, for example, where the DOJ indicted a state entity itself for non-commercial conduct.

While the decision is limited to the Second Circuit, the decision is likely to be relied upon by the DOJ, and trial courts, in cases brought elsewhere.

Special thanks to Law Clerk Meredith Berger (New York) for her assistance in the preparation of this content.