A U.S. appeals court on Tuesday ordered heavy contempt fines to begin against three large Chinese banks locked in a battle over customer financial records with U.S. prosecutors investigating possible North Korean sanctions violations.
It remained unclear whether the firms, unnamed in court papers but previously reported to be the Bank of Communications, China Merchants Bank and Shanghai Pudong Development Bank, will comply with the U.S. subpoenas, the first upheld by a U.S. appeals court in a criminal sanctions probe involving Chinese banks.
In a unanimous ruling, a U.S. Court of Appeals for the D.C. Circuit panel rejected the banks’ arguments in written pleadings that Chinese banking privacy rules and other laws require that requests for customer records in U.S. criminal inquiries be made through a legal assistance pact between the two countries.
The three-judge panel upheld a lower court’s contempt finding. The initial finding, issued April 10, imposed $50,000-a-day fines on each bank beginning seven business days after an appellate decision, or Aug. 8. The contempt order also allows for one of the banks — which is refusing a request under a provision of the USA Patriot Act — to be cut off from the U.S. banking system if that penalty is ordered by the U.S. attorney general or treasury secretary.
“The District Court’s contempt orders against all three Banks appealed from in these causes is hereby affirmed, for the reasons in the accompanying opinion,” the appeals court said.
The 44-page opinion by U.S. appellate Judges David S. Tatel, Patricia A. Millett and Cornelia T.L. Pillard, written for the court by Tatel, remains under seal pending redactions proposed by each side.
Lawyers for the three banks did not respond to requests for comment or declined to comment, as did a spokeswoman for the U.S. attorney’s office of the District, whose national security section is handling the case.
The ruling comes at a delicate time in U.S.-China relations. The Washington Post reported last week that Huawei Technologies Co., the Chinese tech giant embroiled in President Trump’s trade war with China and blacklisted as a national security threat, secretly helped the North Korean government build and maintain the country’s commercial wireless network in potential breach of U.S. restrictions aimed at North Korea’s nuclear weapons development program.
Separately, U.S. and Chinese representatives met Tuesday in Shanghai to begin the first in-person trade talks since negotiations broke down in May followed by an exchange of retaliatory tariffs.
Joshua Stanton, who runs the website One Free Korea and has advised House and Senate staffers on North Korea sanctions law, said the three banks could appeal to the U.S. Supreme Court, but the swift and unanimous decision against them and the imminent launching of fines increased pressure to comply.
“What this ruling means is if [Chinese banks] are going to run these transactions through our financial system, they have to play by the house rules. They’re not exempt, and they’re not immune” from U.S. anti-money-laundering and sanctions controls, Stanton said.
The Post reported last month that three Chinese banks were fined $50,000 a day on April 10 by U.S. District Chief Judge Beryl A. Howell of Washington, who stayed the fines from accruing until after an appeals court decision. The banks were identified only as Bank One, Bank Two and Bank Three in opinions unsealed by Howell. Details in her rulings aligned with a 2017 civil forfeiture case in which U.S. prosecutors named the Bank of Communications, China Merchants Bank and Shanghai Pudong Development Bank (SPDB).
Prosecutors contend the banks worked with a sanctioned Hong Kong firm — the now-defunct Mingzheng International Trading Limited — to launder money through the U.S. banking system for another designated entity, North Korea’s state-run Foreign Trade Bank, to finance the country’s nuclear weapons and ballistic-missile program.
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.
In seeking subpoenas, the U.S. government alleges the three banks used the Hong Kong-registered front company to conduct more than $100 million in illicit U.S. financial transactions.
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 in court filings include SPDB’s ownership structure, limited U.S. presence and alleged conduct with the other banks.
Each of the banks responded after Howell’s opinions became public by telling Chinese media they were not under investigation for sanctions breaches themselves, and indicated along with a spokesman for China’s foreign ministry that “cross-border information sharing” should be handled via bilateral agreement.
Howell’s opinions said that based on the financial transactions in question, prosecutors are investigating potential violations of U.S. money laundering, sanctions and bank disclosure laws.
Howell in her opinions dismissed the banks’ arguments about relying on existing legal assistance pacts, citing China’s dismal compliance record with bilateral requests and also noting U.S. national security interests in halting the proliferation of nuclear weapons.
Lanier Saperstein, a banking specialist who co-chairs law firm Dorsey & Whitney’s U.S.-China practice group, cautioned that banks often cannot simply turn over subpoenaed documents because of regulatory obligations. While “fighting grabs the headlines,” he said, combating sanctions evasion and money laundering more often requires cooperation to be effective, and Beijing and Washington should improve assistance agreements rather than turn to adversarial court action.