The extra-territorial effect of the USA PATRIOT Act is generally limited. However, when the U.S. government pursues funds deposited in a foreign bank on foreign soil, it can achieve its objective by seizing an equivalent amount from the foreign bank’s accounts in the U.S. at a U.S. bank.1/ Moreover, the foreign bank’s lack of knowledge of or participation in any illegal activities of its customers does not necessarily give it the ability to challenge the seizure in U.S. courts. A recent decision by the U.S. Court of Appeals for the First Circuit illustrates how this law operates, the peril it creates for foreign banks, and the obligations of domestic banks.2/
On October 18, 2002 and November 19, 2003, the United States seized a total of more than $2.8 million from an interbank account held at The Bank of New York, New York, NY (“BoNY”) by the Amman, Jordan headquartered Union Bank for Savings and Investment (“Union Bank”).3/ The case arose out of a telemarketing fraud. The perpetrators, based in Canada, induced their victims to draw a total of 124 cashier’s checks on U.S. banks to cover expenses for the prizes the victims were told they had won. Those checks changed hands several times and made their way eventually to a money exchange business in the West Bank of Israel. The money exchange business did not have an account at Union Bank; rather, the cashier’s checks were deposited by two of the three brothers who operated the business in their own accounts at Union Bank in Israel. All the checks were honored, and Union Bank provided final credit for them to the brothers’ accounts. None of the brothers’ funds or the money exchange business’ funds were transferred at any time to an account in the United States.
In February 2003 and January 2004, Union Bank filed a claim in U.S. district court in New Hampshire for the return of the seized funds, asserting its status as an innocent owner of the funds in its interbank account at BoNY. The government argued successfully that Union Bank was not the owner of the lion’s share of the seized funds for purposes of the forfeiture statute, and the district court agreed that Union Bank lacked standing to bring the case to recover any but a small portion thereof. Both parties appealed.
The Foreign Bank Could Not Challenge the Forfeiture
The USA PATRIOT Act treats any forfeitable funds deposited at a foreign bank as if the foreign bank has deposited those funds into any interbank account that the foreign bank holds at a U.S. bank. The Act does not require that any funds in an interbank account be traced to forfeitable funds deposited at the foreign bank.4/ The law also provides that any restraining order, seizure warrant, or arrest warrant in rem against the funds deposited at the foreign bank may be served on a U.S. bank holding an interbank account for the foreign bank, and that the funds in the interbank account may be restrained, seized, or arrested up to the value of the funds deposited at the foreign bank. In other words, the deposit of forfeitable funds at a foreign bank triggers the forfeiture of an equivalent amount of funds from the foreign bank’s interbank account at a U.S. bank.
The owner of the funds in an interbank account may contest their seizure, but the foreign bank that holds the account is not considered to be the owner of the seized funds unless it establishes, by a preponderance of the evidence, that it had discharged all or part of its obligation to the depositor of the funds before the seizure occurred.5/ In other words, in order for a foreign bank to recover any funds seized from its interbank account, the aggregate balance in all the accounts of its depositor at the time of seizure must be less than the amount of forfeitable funds originally deposited by the depositor at the foreign bank. Fluctuations in the amount held by the depositor at the foreign bank (for example, as a result of periodic withdrawals and additional deposits from other sources) do not affect the ability of the United States to seize funds from the foreign bank’s interbank account, up to an amount equivalent to what the foreign bank owes to the depositor at the time of the seizure.
In this case, the court found that the cashier’s checks were owned by the money changing business at the time they were deposited at Union Bank. The money changing business did not have an account at Union Bank, but the business was operated by the brothers who owned it as a joint venture and used the brothers’ accounts at the bank in the ordinary conduct of its operations.
Therefore, the checks remained the property of the money changing business even after they were deposited by the brothers into their individual accounts. The crux of the defense for Union Bank was whether it had discharged all or part of its obligations to the brothers at the time the seizure occurred, in order that the bank would have standing as owner of all or part of the funds seized from its interbank account at BoNY. Union Bank’s obligations to the brothers were represented by the aggregate amount they held on deposit at the bank. When an account held by the third brother, into which no cashier’s checks had been deposited, was included, the bank’s obligations to the three brothers in the aggregate at the time of the seizure exceeded the amount of the forfeitable cashier’s checks. Therefore, Union Bank was deemed to have an obligation to the money changing business (through the business’ use of the brothers’ accounts) that was greater than the amount of funds seized, and the bank had no standing with regard to any of the seized funds.
Union Bank also argued that it should be able to contest the seizure because the intent of Congress was to equalize the treatment of foreign and domestic banks, and a domestic bank would have the opportunity to assert its defenses in a similar situation. The court disagreed and stated that the legislative history of section 319(a) suggested that the intent was to treat foreign and domestic deposits, rather than foreign and domestic banks, identically. If the cashier’s checks had been deposited directly in a domestic bank, any proceeds thereof remaining in the bank would have been subject to seizure, and the foreign bank’s innocence was not a reason to allow a foreign depositor to escape seizure.
Other arguments of Union Bank also were unavailing. The bank argued that, under its depository relationship with the brothers and applicable law, it had no recourse or setoff rights against them to recover for the loss the bank would suffer through the seizure, and that the seizure was inappropriate if it did not have the ability to induce the depositor to appear in the seizure proceeding. The court disagreed and noted that there was no evidence in the record why foreign banks in general and Union Bank in particular could not protect themselves from seizure by agreement with their customers or otherwise. The court also rejected the analysis of the lower court, which held that the deposit of the cashier’s checks were the only relevant deposits made by the brothers at Union Bank, which required that the checks or the proceeds thereof be traced in some manner to a specific account before any part of that account could be included as part of the bank’s obligation to the money exchange business. According to the court, section 319(a) reached particular depositors, not particular accounts, and it was not necessary for forfeitable funds to be deposited in a particular account in order to make the equivalent value of that account subject to seizure from the interbank account.
Title III of the USA PATRIOT Act is not drafted to have a direct extraterritorial effect, but U.S. v. Union Bank illustrates that section 319(a) comes close to operating in precisely that manner. Union Bank was far removed from the original telemarketing fraud and its U.S. victims. However, it had funds in an interbank account in the United States, and, given the fungibility of money, those funds were treated as if they were proceeds of the cashier’s checks deposited offshore. Foreign banks that have direct correspondent relationships with U.S. banks thus find their funds in the United States subject to seizure if their customer base includes persons who, among other unlawful activities, transfer funds or a monetary instrument into or out of the United States with the intent to promote the conduct of any unlawful activity or with knowledge that they are helping to conceal the proceeds of any unlawful activity.6/ Those foreign banks must decide whether the risk of seizure in the United States, the difficulty of recovering for any U.S. seizure from their customers, or the risk of being dropped by their U.S. correspondents necessitates that they employ customer identification, anti-money laundering, and antifraud programs over and above what they might choose to use to conduct their business in light of their home country requirements.
In some cases, the ability of foreign banks to adopt programs that would reduce the risk of forfeiture under U.S. law may be limited by their home country banking or privacy laws. Section 319(a) provides that the U.S. Attorney General, after consultation with the U.S. Secretary of the Treasury, may suspend or terminate a forfeiture proceeding based on a conflict of law between the United States and the jurisdiction where the foreign bank is located, if it is in the interest of justice to do so and provided that U.S. national interests are not harmed.7/ Another approach that may be more effective to anticipate the problem is for the foreign bank’s home country supervisor or central bank, through diplomatic or supervisory contacts with the United States, to seek to establish that reciprocity arrangements and local enforcement in the home country will be relied on first to enforce U.S. laws. Otherwise, short of limiting their contact with the United States (which may not be feasible), foreign banks run the risk of what befell Union Bank— paying out of its own pocket for its customer’s participation in wrongdoing with little chance of recovery.