The three banks are not identified, but details in court rulings align with a 2017 civil forfeiture action in which the Justice Department alleged that China’s state-owned Bank of Communications, China Merchants Bank and Shanghai Pudong Development Bank worked with a Hong Kong front company accused of laundering more than $100 million for North Korea’s sanctioned, state-run Foreign Trade Bank.
The bank at risk of losing access to U.S. dollars, the lifeblood of international finance, appears to be SPDB, China’s ninth-largest bank by assets, whose roughly $900 billion makes it comparable in size to Goldman Sachs. Matching details include SPDB’s ownership structure, limited U.S. presence and alleged conduct with the other banks.
SPDB has no U.S. branch but maintains accounts here to handle U.S. dollar transactions. The ruling means that Attorney General William P. Barr or Treasury Secretary Steven Mnuchin can terminate the bank’s U.S. account and ability to process U.S. dollar transactions — a potentially crippling, if not lethal, punishment in global trade.
The threat from U.S. investigators probing whether the banks knowingly helped finance North Korea’s nuclear-proliferation network comes at a time of spiraling U.S.-China economic relations, when the collapse of trade talks this spring triggered retaliatory tariffs and other measures.
For example, Washington has threatened to cut off Huawei — the Chinese telecommunications giant the United States has charged with violating export sanctions related to Iran — from American suppliers and business. Beijing has answered by proposing to block the export of rare-earths minerals crucial to many U.S. industries.
In the case of the three banks, the Hong Kong front company allegedly also had dealings with ZTE, another Chinese telecommunications maker, which in 2017 pleaded guilty and paid $1.19 billion in U.S. fines for selling sanctioned electronics to North Korea and Iran.
The Justice Department referred questions about the bank case to the office of U.S. Attorney Jessie K. Liu of the District, which is leading the investigation. A spokeswoman for Liu’s office declined to comment about whether the government is considering invoking the penalty.
Shanghai Pudong Development Bank officials and the Chinese Embassy in Washington did not respond to requests for comment. U.S.-based attorneys for SPDB and the two other banks declined to comment on the subpoena battle, which will go before a federal appeals court in Washington on July 12.
In the banks’ case, a court opinion by Chief Judge Beryl A. Howell of the U.S. District Court for the District of Columbia unsealed May 15 revealed she had found three banks in contempt for ignoring grand jury demands, and specified for the first time that the third bank violated an administrative subpoena issued under the USA Patriot Act.
In court filings, the third bank has challenged the U.S. court’s jurisdiction to find it in contempt while it appeals the subpoena, even as it has asked Beijing authorities for permission to turn over documents.
Each of the three banks says it acted in good faith under Chinese banking customer privacy laws, arguing the Chinese government requires requests for banking records in U.S. criminal inquiries to be made through a legal assistance pact between the two countries.
Howell dismissed that argument, citing among other reasons China’s dismal compliance record with such requests; Washington’s “critical” national security interest in countering North Korea’s nuclear weapons and ballistic-missile programs; and the “overblown” prospect that the banks would be punished at home because each is partly or wholly owned by the state.
A foreign bank has been ordered by a U.S. court to comply with a subpoena under the same section of the act once before, in 2010, but in that case a small Saudi bank quickly complied in a tax dispute over a single customer cashing $151,000 in unreported traveler’s and cashier’s checks, preempting further government action.
The current case marks the first time a U.S. court has upheld subpoenas to a Chinese bank in a criminal sanctions probe, raising national security stakes in a debate over whether to invoke the financial penalty prosecutors informally refer to as a “death sentence” because of its potential to kill a bank’s business.
Imposing the penalty would send a powerful message to China but carries short- and long-term risks for the global banking system, financial and international legal experts said.
The Patriot Act proceeding shows how the U.S. government and the Justice Department “have taken the gloves off” with Chinese companies, said Julian Ku, a Hofstra University law professor who has studied China’s relationship with international law.
“The U.S. government is no longer afraid or reluctant to bring its most aggressive legal authorities against Chinese banks and companies,” said Ku. “I doubt this kind of action would have been brought even two years ago, but it is a sign of the new U.S.-China relationship that this kind of law-enforcement action may become the norm in the future.”
But Lanier Saperstein, an international banking expert who co-chairs law firm Dorsey & Whitney’s U.S.-China practice group, cautioned, “There definitely is a home-field advantage in terms of U.S. courts forcing foreign banks to turn over documents, and that undermines the credibility of our court system, while increasing the risk of U.S. companies facing reciprocal treatment” abroad.
More broadly, he said, “it could deter financial institutions from coming to the United States. That would make it even harder to follow the flow of money,” and complicate the international cooperation needed to battle money laundering and terrorism financing globally.
Former U.S. officials said the Justice Department in the banking case appears to be crafting a new set of its own tools to apply escalating pressure against entire economic sectors through key players, much as it is doing with Huawei and telecommunications.
Although it may be possible to threaten to take a scalpel to cut Shanghai Pudong Development’s bank account access in the United States, excising larger Chinese banks from the U.S. marketplace over sanctions violations would be a much trickier prospect and require new measures, said Michael Greenwald, a senior Treasury diplomatic attache and policy adviser who worked on terrorism sanctions from 2010 to 2017, including against Russia.
The Shanghai bank, while large at home, has a negligible global footprint, he said. Yet many of China’s larger banks are bigger than U.S. banks deemed “too big to fail,” and cutting them off from dollar transactions could trigger a cascade of effects that would disrupt the world economy.
In the latest case, prosecutors with the U.S. attorney’s office for the District of Columbia obtained a court order April 10 fining each of the three banks $50,000 a day. The fines are stayed pending an expedited appeal by the banks.
The parties “here are multibillion-dollar banks disregarding an order to produce records or a witness essential to an investigation into a state-sponsor of terrorism’s proliferation of nuclear weapons,” Howell said. “Minor fines would hardly be felt,” she warned, adding that if $50,000 a day “does not induce compliance, sanctions may be increased.”
Howell’s two opinions do not identify the banks, but in the 2017 civil forfeiture case, U.S. prosecutors named the trio that worked with a sanctioned Hong Kong firm — the now-defunct Mingzheng International Trading Limited.
A federal judge in 2018 granted prosecutors’ request and turned over $1.9 million in seized accounts to the U.S. government after Mingzheng and its transaction partners failed to reply in court.
Howell, a Patriot Act specialist, underscored that despite Chinese warnings of potential “reciprocal” economic and security consequences for American interests, “the requested records are essential to an investigation into a matter of national security,” andnot producing them “threatens tremendous harm.”
The Beijing government has consistently held the position taken by the three banks that Chinese banking customer privacy laws prohibit compliance with Justice Department demands for financial records. SPDB argued that the mere confirmation of a U.S. court’s contempt finding would trigger higher regulatory scrutiny from other countries and irreparably harm its reputation.
Joshua Stanton, who runs the site One Free Korea and has advised House and Senate staffers on North Korea sanctions law, said it was striking that the Chinese banks continue to fight the U.S. subpoenas, unlike American or European counterparts, which typically quickly comply.
“These things usually don’t go this far . . . so why are the banks fighting this?” he said, risking litigation and reputational costs for failing to turn over records in a money-laundering probe. “My guess is that they have calculated there’s something in those documents they don’t want the feds to see.”
For example, he said, if records were to show the banks knew or should have known that Mingzheng was involved in sanctions violations, or that elements of the Chinese government looked the other way, the banks could face civil and criminal penalties like European banks, from which the U.S. government has collected billions in fines and forfeitures in recent years for allegedly facilitating violations of sanctions by Iran, Sudan or Cuba.
Whatever the outcome, Stanton said, the fight almost certainly signals a further disengagement between the U.S. and Chinese economies.
“We have a big clash of two very different business cultures here,” and Chinese business compliance with U.S. financial laws “is where these two tectonic plates grind against each other,” said Stanton.