Can SOEs Be Prosecuted?

Sovereign-owned enterprises (SOEs) are corporate entities owned or controlled by a State.  While they have been around for a while, their numbers and influence are rising.  As a very recent post in this Blog notes, their activities often challenge legal and administrative norms, thereby raising serious policy questions concerning law enforcement.  A parallel trend is the uneven but noticeable emphasis on corporate criminal prosecution—the development of national procedures to pursue and convict corporate entities for violations of national criminal laws.  As the OECD observed in 2016, ‘The liability of legal persons [corporate entities] is a key feature of the emerging legal infrastructure for the global economy.’

My colleague Cosima Schelfhout and I have just written an article, published by the peer-reviewed Transnational Criminal Law Review, which addresses the predictable consequence of these two developments: what happens when prosecutors in one country pursue an SOE owned/controlled by another and the corporate defendant asserts immunity from prosecution?

The context for our article is a decision last year by the Supreme Court of the United States in Halkbank v United States where the Court was asked to decide whether the prosecution of Turkish government-owned bank Halkbank for money laundering was permissible under the Foreign Sovereign Immunities Act of 1976 (FSIA),  legislation that traditionally has provided the structure for judicial determinations of sovereign immunity issues in federal and state courts of the United States.  Halkbank, and the Republic of Turkey, stoutly insisted that under the FSIA the bank qualified as a ‘sovereign’ and that its prosecution was prohibited, insisting in particular that the bank’s activities reflected the sovereign interests and policies of Turkey.  The United States Department of Justice (DOJ) countered that Halkbank’s acts fell within a well-known exception to sovereign immunity for ‘commercial activities,’ arguing in the alternative that the FSIA did not apply to criminal matters at all and that under any form of ‘common law’ Halkbank could claim no immunity for its acts.

As the case progressed through the federal courts, it turned out that the specific issue of how to interpret the FSIA in this context was far from clear.  A perhaps obvious resolution would be to evaluate if Halkbank’s acts were in fact ‘commercial,’ and apply the ‘commercial activities’ exception of the FSIA to the prosecution.  This is what a panel of the United States Court of Appeals held in the Halkbank case in the decision before the Supreme Court.  The problem is that it was very hard to find a basis for this conclusion in the text of the FSIA: the legislation simply did not discuss how to handle criminal prosecutions (as opposed to civil or administrative suits) at all.  Rather, one perfectly plausible interpretation of Congress’s actual language would lead to the result Halkbank sought but would undoubtedly be viewed as a policy disaster: that no matter how obvious and heinous one country’s assault on another country’s interests, if committed through an SOE, the SOE is absolutely immune from prosecution.  As the Solicitor General of the United States emphasized in oral argument before the Court, this would result in an ‘extraordinary and unprecedented rule under which any foreign government-owned corporation could become a clearinghouse for any federal crime, including interfering in our elections, stealing our nuclear secrets, or something like here, evading our sanctions and funneling billions of dollars to an embargoed nation, using our banks, and lying to our regulators.’

The Court avoided this unpleasant outcome by what might be considered a bit of legerdemain.  Faced with the unambiguous provision in Section 1604 of the FSIA that any SOE ‘shall be immune from the jurisdiction of the courts of the United States and of the States’ unless a specific ‘exception’ to immunity applied, and implicitly recognizing that the ‘commercial activities’ exception, as defined by the FSIA, seems to apply only to a civil ‘case’ or ‘action,’ a majority of the Court ruled that when Congress adopted the notably broad and unlimited language of Section 1604, its intent was only to provide immunity for civil cases.  The Court thus ruled that when Congress engaged in a massive overhaul of sovereign immunity in 1976, it somehow failed to address criminal prosecutions at all.  As a result, going forward all criminal prosecutions of SOEs in the United States will be handled on a case-by-case basis applying non-statutory law, which the Court suggested would be the applicable customary international law (CIL) to the extent applicable in federal courts. The Halkbank case itself was thus remanded to the federal appellate court for a determination under this standard; the parties submitted briefs and arguments on this issue, and oral argument was heard on 28 February 2024; a decision could be issued at any time.

Our article concludes that notwithstanding the sharp limits on any country’s efforts to use its legal procedures to interfere with the sovereign acts of another, there is little support for a proposition that SOEs that engage in true ‘commercial’ activities (which appears to be the case with Halkbank) are immune from criminal prosecution applicable to non-sovereign entities engaging in similar—and often competitive—behaviors.  We thus believe that it is near-inevitable that the appellate court will permit the prosecution of Halkbank to go forward.  We then explore different ways that the reasoning of its decision could guide the development of precedent in this area.

Some of the outstanding issues are peculiar to the United States.  The prosecution of Halkbank was brought by the federal DOJ under federal criminal laws and thus in federal courts.  As one of the Justices on the Supreme Court noted in a concurring opinion, it is oddly not entirely clear whether CIL can be decided as a matter of ‘federal common law’ or whether, as some scholars argue, such law can only be developed by the various States.  We believe that it simply makes no sense to hold that any issue so intimately linked to foreign relations is anything other than ‘federal,’ and that the appellate court will so conclude, but the current Supreme Court might well review that determination.  The peculiar federal structure of the United States also poses a separate problem that is not before the appellate court but was a matter of great interest to several of the Justices during the Supreme Court argument: what happens if a State prosecutor—possibly an ‘elected state prosecutor,’ as noted by one of the Justices—were to prosecute an SOE, or even a true sovereign State, in State court?  Our article explores some of the complex implications of this question.

Other issues before the Second Circuit may result in an opinion with broader applicability.  The most obvious is to develop principles to determine whether the activities of an SOE (or potentially a sovereign itself) are actually ‘commercial.’   A further key question is what degree of ‘deference’ courts faced with a sovereign immunity question owe to the position taken by the prosecutor.  The DOJ has argued that its decision to prosecute an SOE is itself dispositive with respect to whether an SOE’s activities are ‘commercial.’ This is not clear, either as a matter of law or policy: as the appellate court noted during oral argument in February, the whole purpose of the FSIA was to provide a basis for a judicial determination of immunity; the judges further queried whether the DOJ—charged with prosecution—actually speaks for the diplomatic interests of the United States, which is usually articulated by the Department of State.

The authors’ complete article can be accessed here.

Frederick T. Davis is a Lecturer in Law at Columbia Law School, principal of Fred Davis Law Office LLC, and author of American Criminal Justice: An Introduction.  

Cosima Shelfhout is an associate in the Washington, D.C, office of Quinn Emanuel Urquhart & Sullivan, LLP.