OFK Exclusive: Court orders three Chinese banks to comply with subpoenas for North Korea-related records

There is (or should be) a modern Chinese curse that goes something like this: “May the subpoenas fall like rain on your New York correspondents.” In December 2017, that curse afflicted three Chinese banks that now find themselves enmeshed in an expensive and legally perilous FBI investigation into the laundering of large amounts of Kim Jong-un’s lucre.

With today’s unsealing of Chief Judge Beryl Howell’s opinion, ordering the banks to comply with the subpoenas, the story can be told. You can read Chief Judge Howell’s full opinion here:

FINAL_18mc175_176_177_Mar_18_2019_Mem_Op_redacted

The FBI and DOJ prosecutors are investigating possible violations of at least three statutes:

• 18 U.S.C. 1956, money laundering;
• 50 U.S.C. 1705, the International Emergency Economic Powers Act, which criminalizes violations of Treasury Department sanctions regulations; and
• The Bank Secrecy Act, which requires banks doing business in U.S. jurisdiction to exercise certain due diligence procedures, particularly Know-Your-Customer requirements, to prevent money laundering. It carries both criminal and civil penalties.

A grand jury in the District of Columbia issued two of the subpoenas, to two of the banks. The local U.S. Attorney’s office issued the third subpoena to a third bank under 31 U.S.C. 5318(k). The U.S. Attorney’s office served all three subpoenas in December 2017. The banks have been resisting the subpoenas in court ever since. All the while, the court sealed the cases to protect an ongoing investigation. The fact that the case can now be unsealed suggests that the investigation no longer needs protecting, and might mean that another shoe is about to drop. The court’s order does not say that the banks are targets or defendants—in fact, the opinion says that “the banks have acted in good faith and the sincerity of their willingness to comply is not questioned”—but they were also worried enough to have paid lawyers to litigate this for more than a year. That language may be small comfort to the banks. Depending on what those records show and what the Justice Department decides to do about it, the effects of this order could be as significant as the effects of DOJ’s actions against ZTE and Huawei.

The banks are not named because of standard Justice Department policy against naming unindicted parties in criminal filings. The fact that the suspected North Korean money launderer is now defunct, however, implies that it is not the only target of the investigation. Its name is redacted, but anyone with access to the SDN list or C4ADS’s Sanctions Explorer could narrow it down very quickly by searching for Hong Kong-based designees under Executive Order 13,382 (code NPWMD).

No, I’m not going to do that for you.

The banks argued that the Chinese government had threatened them with fines or prosecution for cooperating with the Justice Department. They also argued that the U.S.-China Mutual Legal Assistance Treaty was the proper way to obtain records created and maintained in China. DOJ answered that—

(1) when the three banks set up branches in New York, they specifically told the FDIC that they were submitting to U.S. jurisdiction;

(2) the Chinese government had frustrated DOJ’s past efforts to use the MLAT to obtain bank records, notably in the Dandong Hongxiang case (where major Chinese banks helped a sanctioned North Korean bank hide vast sums of money and got away with it);

(3) the actual risk that China would fine or prosecute its own (partially state-owned) banks was small and remote; and

(4) the Chinese government’s interests aren’t the same as the compelling U.S. national interest in stopping North Korean proliferation financing.

After balancing a list of factors, the court held that the U.S. interest in enforcing the law against sanctions violations in the U.S. was greater than the Chinese interest in not enforcing the law against sanctions violations in China. Needless to say, those documents will make for fascinating reading for FBI agents, intel analysts, prosecutors, and the UN Panel of Experts.

This is the first time I’m aware of that a U.S. federal court has ordered Chinese banks to comply with subpoenas issued by a U.S. federal agency to get records about North Korean money laundering. Any North Korean agents and enablers who might have assumed that their dollars were hidden safely behind the Great Wall just got a big shock. This decision will certainly reverberate within China’s financial industry, which was already under rising pressure to step up its Anti-Money Laundering compliance. I’d expect the three Chinese banks to appeal this ruling,¹ but whether they can stay compliance with the subpoena while they try their luck at the D.C. Circuit is another story.

Meanwhile, the big Chinese banks—the same banks that Steve Mnuchin had effectively immunized until now—will now feel exposed to the full range of legal consequences I described at that last link. Depending on what the evidence ultimately shows, those risks include the burden and embarrassment of responding to grand jury subpoenas, civil penalties (which could be colossal if the records turned over yield evidence of willful sanctions violations), criminal or civil forfeitures of customer funds and potential litigation with those customers, criminal prosecution, and Special Measures under the Patriot Act. Any of those consequences is also bad news for a bank’s credit rating and shareholders, at a time when China’s economy and stock market are already wobbly.

That is to say, Judge Howell’s decision just closed a gaping hole in U.S. sanctions enforcement by scaring China’s big banks into “enhanced due diligence” to keep North Korea out of the financial system. For the first time ever, they face serious legal risks for doing anything less. The Chinese government’s reaction will be furious and blustery, but for the reasons I stated here, China’s banks are about to embark on the most furious scrub of their customer lists since September 2005. So if you’re an out-of-work compliance officer, definitely go for that intensive Mandarin study night course.

The unsealing of this case may also explain something else. Just over a week ago, I published a chronology and analysis concluding that U.S. and UN sanctions are crippling North Korea’s military-industrial complex. My qualified crediting of the Trump administration’s sanctions strategy also grumbled about its lack of focus on Pyongyang’s bank accounts and considered the possibility that “Treasury is doing more to get Chinese banks to comply than is known publicly.” The unsealing of this order lends some weight to my speculation, although it’s not clear how much of a role Treasury played in this.

Admittedly, the timing doesn’t match up perfectly. The Justice Department served its subpoenas in December 2017, the same month I published several months’ worth of evidence that some Chinese banks were cracking down on North Korean traders. Even then, grand jury subpoenas are supposed to be secret, and courts are very serious about enforcing those secrecy rules. But is it possible that earlier in 2017, at least one government agency had asked the correspondents for records of North Korea-related transactions? And of course, the effects of a polite request for records in mid-2017 would have dissipated by 2019 if some more serious threat did not arise later. I would be surprised if, Rule 6(e) notwithstanding, word of the U.S. government’s interest in records of North Korea’s bank transactions did not spread quickly through Beijing and Dandong.

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1. I can’t confirm that until PACER lets me see the docket. It still reflects that the cases are sealed, although the opinion is not.