Second Circuit Clarifies the Scope of Common Law Sovereign Immunity in Criminal Actions

On October 22, 2024, the Second Circuit Court of Appeals affirmed the Southern District of New York’s decision denying the motion of Turkiye Halk Bankasi A.S. (“Halkbank”), a commercial bank that is majority owned by the Republic of Turkey, to dismiss the U.S. government’s indictment, holding that federal common law foreign sovereign immunity does not protect Halkbank from criminal prosecution.[1] The Second Circuit’s holding follows the Supreme Court’s April 19, 2023 decision holding that the Foreign Sovereign Immunities Act (“FSIA”) does not provide Halkbank with sovereign immunity, but remanding the case back to the Second Circuit to decide whether such immunity could be found under the common law.[2] On remand, the Second Circuit held that Halkbank is not immune from criminal prosecution under the common law. 

The Second Circuit held that under the common law, in cases involving a sovereign’s commercial activities, a court must defer to the Executive Branch’s determination as to whether a party should be afforded foreign sovereign immunity. That deference applies regardless of whether the Executive seeks to grant or, as in this case, deny immunity, and also applies equally to criminal and civil cases. Specifically, the Second Circuit held that there is no basis in the common law to conclude that a foreign state-owned corporation is absolutely immune from prosecution for alleged criminal conduct related to its commercial activities.[3] 

Foreign Sovereign Immunity Background

The Second Circuit began its analysis with the principle established in the Supreme Court’s 1812 opinion in Schooner Exchange that common law sovereign immunity is based on the Executive’s consent to waive part of its complete exclusive territorial jurisdiction.[4] Recognizing that foreign sovereign immunity was a “matter of grace and comity on the part of the United States,” courts consistently deferred immunity decisions to the political branches—in particular the Executive Branch—and for many years the Executive Branch followed a policy of requesting immunity in all actions against friendly sovereigns.[5] 

That policy changed in 1952 when the State Department announced that it would begin to follow the “restrictive” theory of foreign sovereign immunity, which was confined to suits involving the foreign sovereign’s public acts and did not extend to a foreign state’s “strictly commercial acts.”[6] The Supreme Court recognized the change in the State Department’s policy “had little, if any, impact on federal courts’ approach to immunity analyses.” The Executive Branch continued to bear the initial responsibility of deciding questions of sovereign immunity and courts continued to abide by suggestions of immunity from the Executive Branch.[7] And where there was no communication from the Executive about a particular case, the court would decide whether it was the established policy of the Executive to recognize claims of immunity of this type.[8]

The Executive Declined to Grant Halkbank Sovereign Immunity

With these principles in mind, the Second Circuit held that the federal criminal prosecution of Halkbank reflected the Executive’s determination that foreign sovereign immunity is not warranted in this case.[9] In deciding to bring federal criminal charges against Halkbank, whose majority shareholder is the Government of Turkey, the Executive Branch assessed the prosecution’s impact on the United States’ relationship with Turkey, concluded that foreign policy concerns should not bar the action, and determined that Halkbank is not entitled to sovereign immunity for the conduct at issue. The Second Circuit held that the deference afforded at common law applies to decisions to grant and deny sovereign immunity and extends to both civil and criminal cases.[10]  

In short, here, by the indictment of Halkbank by the Department of Justice, the Executive made a decision to deny Halkbank sovereign immunity, and the courts must defer to the Executive’s determination, in this case where its commercial activities are at issue. 

Common Law Criminal Immunity of State-Owned Corporations

The Second Circuit rejected Halkbank’s argument that corporations owned and controlled by a foreign state are absolutely immune from prosecution under common law, noting that courts applying common law sovereign immunity have long distinguished between the immunity afforded to the foreign state and to the entities that it owns.[11] Where courts extended immunity to state-owned corporations, they emphasized that those entities typically performed governmental functions. And after the Executive Branch adopted the restrictive theory, the immunity inquiry focused on whether the “activity in question” was a “strictly public or political act” or “more of the character of a private commercial act.”[12] The Second Circuit found that the criminal cases upon which Halkbank relied did not address the issue of common law immunity for a state-owned corporation for its commercial activity, and Halkbank failed to cite any cases holding that immunity exists for such activity.[13] 

Accordingly, the Second Circuit concluded that (i) Halkbank’s activity charged in the indictment is commercial in nature and (ii) the Executive Branch’s position is consistent with the scope of immunity extended to foreign state-owned corporations at common law. The Court analyzed the five “strictly political or public acts” that were entitled to immunity: (1) “internal administrative acts, such as expulsion of an alien”; (2) “legislative acts, such as nationalization”; (3) “acts concerning the armed forces”; (4) “acts concerning diplomatic activity”; and (5) “public loans.” Victory Transp. Inc. v. Comisaria Gen. de Abastecimientos y Transportes, 336 F.2d 354, 360 (2d. Cir. 1964). The Court rejected Halkbank’s argument that its conduct constituted political or public acts. The gravamen of the indictment was Halkbank’s “participation in money laundering and other fraudulent schemes designed to evade U.S. sanctions,” which were conducted via private, commercial banking channels and thus were far more of a private commercial act than public or political act.[14] The Second Circuit further stated that although there are allegations that the charged schemes benefitted Turkey’s government, such allegations do not transform such commercial activity into “internal administrative acts,” even if the schemes involved certain government officials or were authorized by the government of Turkey.[15] Therefore, the indictment concerns Halkbank’s commercial activity, which is not protected by sovereign immunity, and the Executive’s position is consistent with the scope of foreign sovereign immunity recognized at common law.

Finally, in rejecting Halkbank’s policy arguments in advocating for a different result, the Court found that sovereign immunity raises questions of policy rather than law, and are for diplomatic, rather than legal discussion. “Thus, the decision to initiate a federal criminal prosecution against a foreign state-owned corporation rather than, for example, impose tariffs or deny military aid is not one for the judiciary to second guess.”[16]

In reaching its decision, the Second Circuit did not reach and left for another day “whether deference to the Executive in this context should be cabined if, unlike here, the Executive’s denial of immunity to a foreign sovereign derogated from the common law—for instance, if the Executive indicted a state [acting as a] state.”[17]

Conclusion

The Second Circuit’s opinion clarifies the availability of sovereign immunity as a defense to criminal prosecution for foreign sovereigns and their instrumentalities. Notably, the Second Circuit found that where the (i) Executive has decided to initiate criminal proceedings against a foreign sovereign and (ii) criminal proceedings are premised on commercial activity, sovereign immunity is not available as a defense to the criminal proceedings in federal court. 

Accordingly, the Second Circuit remanded the case back down to the district court for further proceedings. As of the date of this client alert, it is unclear if Halkbank is once again going to seek Supreme Court review of the Second Circuit’s decision.

[1] United States v. Turkiye Halk Bankasi A.S., No. 20-3499-cr, --- F.4th ---, 2024 WL 4536795 (2d Cir. Oct. 22, 2024).

[2] For a more in-depth discussion of the background of the case and the lower court decisions, please see our prior client alert, which is available here.

[3] Id. at *3. The Court, however, did not decide whether deference extends to the Executive Branch’s determination to deny immunity if that determination is in derogation of common law because that situation was not before the Court.

[4] Id. at*4.

[5] Id.

[6] Id. at *5.

[7] Id.

[8] Id. The FSIA did not alter the court’s analysis in the common-law context: courts still defer to the Executive’s determination of the scope of immunity. Id.

[9] The Court rejected Halkbank’s argument that the Executive’s position is less authoritative because it was expressed by federal prosecutors rather than the State Department. Id. at *5 n.6. 

[10] Id. at *6-8.

[11] Id. at *9, 10.

[12] Id. at *9 (citation omitted).

[13] Id. at *10. The Court noted that the Supreme Court has stated that Berizzi Brothers Co. v. The Pesaro, 271 U.S. 562 (1926), “no longer correctly states the law” with respect to sovereign immunity “in cases arising out of purely commercial transactions.” Id. n.11 (citing Alfred Dunhill of London, Inc. v. Republic of Cuba, 425 U.S. 682, 703 (1976)).

[14] Id. at *11-12.

[15] Id. at *12.

[16] Id. at *13.

[17] Id. at *14.