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Recent legislation signals the US government’s determination to root out financial crime, regardless of where it may originate.

Recent US legislation and an important ruling by the UK Supreme Court highlight the contrasting powers given to American and British law enforcement to subpoena materials held by companies overseas. These developments have implications for international banks doing business in either country.

In February, the UK Supreme Court issued a ruling that significantly curtailed the ability of Britain’s premier financial crime regulator, the Serious Fraud Office (SFO), to obtain materials held by banks and other business in locations overseas.

The case involved a so-called ‘Section 2’ notice demanding documents and other information served on an executive at the US engineering services company KBR.

While KBR has no physical presence or operations in the UK, one of its subsidiaries, KBR UK, was under SFO investigation. The Section 2 notice to KBR sought documents related to this investigation that the SFO believed were held by the parent company in America.

Under the new law, the DoJ and US Treasury can require foreign banks to turn over information on any accounts they have anywhere in the world

KBR challenged the SFO in the UK High Court, arguing that the SFO had stepped outside the bounds of its statutory powers. In KBR’s view, the SFO could require documents only from KBR UK, which did not have the documents sought from its American parent company within its “possession or control”.

While the UK High Court rejected KBR’s position, an unanimous US Supreme Court reversed the High Court and sided with KBR. Starting from the presumption that acts of parliament do not apply extraterritorially except where there is an express or implied intention to the contrary; the Supreme Court concluded that the statute at issue — the UK Criminal Justice Act 2003 — was intended to only have force within the UK.

Following this ruling, it is now clear that the SFO lacks the authority to require non-UK companies to produce documents held outside of the UK, even if such companies have a related UK entity. As such, the KBR decision places a critical limit on the SFO’s capacity to investigate and prosecute transnational wrongdoing.

The NDAA

Shortly before the KBR ruling was handed down, the US Congress pushed US law in the opposite direction by passing the National Defence Authorisation Act (NDAA). The NDAA grants the Department of Justice (DoJ) and the Treasury Department to subpoena bank records held overseas by a foreign bank as long as the foreign bank has a correspondent account in the US, irrespective of whether the correspondent account was used as part of a potential violation of US law.

Correspondent accounts are used by foreign banks in order to process financial transactions within the US financial system and have long been considered one of the primary mechanisms for foreign banks to launder illicit funds in the US. Because of this, special provisions were built into the Patriot Act, passed in the wake of the attacks in September 11, 2001, that imposed special due diligence and other requirements on correspondence accounts.

But under the Patriot Act, law enforcement in the US could only subpoena a foreign bank for “records related to [its] correspondent account, including records maintained outside of the US relating to the deposit of funds into the foreign bank”.

Under the new law, however, the DoJ and US Treasury can now require foreign banks to turn over information on any accounts they have anywhere in the world, regardless of whether they relate to use of a correspondent account. This authority can be used in connection with an investigation of any federal criminal law, in civil asset forfeiture proceedings, and with respect to violations of anti-money laundering rules and regulations. Moreover, foreign banks may be required to comply with the NDAA even if providing the requested records would violate the laws of the country where such records are located.

The NDAA therefore marks a significant expansion of the powers available to US law enforcement to require foreign banks to disclose banking records and other documents held outside of the US. Failure to comply with its provisions can subject a non-complying bank to civil contempt and a fine of up to $50,000 per day. The NDAA also allows the leaders of the DoJ and Treasury to force a US bank to shut down access to correspondent accounts held for a non-complying foreign bank.

Wider implications

Whereas British courts are clearly reluctant to extend the SFO’s enforcement powers to entities located abroad, the NDAA signals the US government’s determination to root out financial crime, regardless of where it may originate. While foreign banks may shield foreign banking records from the SFO, the same is not true with respect to investigations launched by the DoJ or US Treasury. This is an important distinction that foreign banks must consider as the powers conferred by the NDAA begin to be employed by US authorities more regularly.

Josh Ray is a partner at UK-based law firm, Rahman Ravelli.

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