Most of the world's dollar transactions flow through correspondent bank accounts in New York. Thus, it is important to understand how using a New York correspondent account can subject a non-U.S. defendant to the jurisdiction of a New York court.
Indeed, in many cases involving banks and commercial enterprises, the defendant's only connection to the United States will be its use of a U.S. correspondent bank account. Plaintiffs often try to exploit the non-U.S. defendant's use of a New York correspondent account to support jurisdiction over the non-U.S. defendant in civil suits arising from largely (if not entirely) non-U.S. criminal conduct. For example, plaintiffs may allege that the defendant was involved in fraud, corruption, money laundering, or terror financing that has nothing to do with the United States, except that certain payments were in dollars and thus cleared through a New York correspondent account.
A key threshold question in these cases is whether the United States can exercise jurisdiction over the non-U.S. defendant. Below, we examine the approach of New York courts to this question—i.e., can jurisdiction rest on the defendant's alleged use of an in-state correspondent account?
The U.S. District Court for the Southern District of New York addressed this question in United States v. Lloyds TSB Bank PLC , 639 F. Supp 2d 314 (S.D.N.Y. 2009). There, the U.S. government brought a civil money laundering case against the Geneva branch of Lloyds, a UK bank. Acknowledging that the bank was a non-U.S. person and had no U.S. presence, the government nevertheless contended that jurisdiction was proper under the Anti-Money Launder Act, 18 U.S.C. §1956(f), relying on, among other things, the argument that jurisdiction could rest on Lloyd's use of a New York correspondent account. The court, however, rejected the government's "faint reliance on the fact that some of the proceeds [of the underlying crimes committed by parties other than Lloyds] eventually transferred to or from the Bank's accounts may or did pass electronically through the New York banking system." The court held that "[t]his peripheral and transitory contact with the United States counts for nothing."
Similarly, New York courts have long held that merely maintaining a correspondent bank account is not enough to support jurisdiction under New York's long-arm statute. The earliest New York Court of Appeals decision to address "whether, under the governing long-arm jurisdiction statute … a showing that a New York bank is the correspondent of an out-of-State bank provides a sufficient basis upon which New York courts may exercise jurisdiction over the out-of-State bank" was Amigo Foods v. Marine Midland Bank-New York , 39 N.Y.2d 391, 393 (1976). In that case, the Court of Appeals held that, "standing by itself, a correspondent bank relationship, without any other indicia or evidence to explain its essence, may not form the basis for long-arm jurisdiction under" CPLR 302(a)(1).
In Licci v. Lebanese Can. Bank SAL , 20 N.Y.3d 327 (2012), the Court of Appeals addressed far more substantial allegations of contact with New York. The First Amended Complaint filed in Licci set forth that Hizbollah was prohibited under U.S. law from conducting banking activities through any U.S. financial institutions, but alleged that the foreign bank nonetheless unlawfully provided wire transfer services on behalf of Hizbollah. The plaintiffs in that case also alleged that "Hizbollah made and received dozens of dollar wire transfers via defendants." In other words, the foreign bank in Licci, on numerous occasions, was alleged itself to have intentionally and purposefully initiated payments through the U.S. banking system that were alleged to have been illegal in themselves as well as being relevant to the underlying tort claims. Based on those facts, the court held that New York's jurisdictional statute was satisfied.
By contrast, a recent decision demonstrates how the New York Court of Appeals risks taking jurisdiction too far, particularly when it does not reflect a wholly accurate understanding of the mechanics of correspondent banking. In Al Rushaid v. Pictet , 2016 Slip. Op. 07834, the defendant non-U.S. bank, Pictet was alleged to have employed a banker who supposedly was part of a kickback scheme that the bank's customers masterminded and committed against the plaintiff. The bank's jurisdictional connection to the United States was alleged to be its receipt of dollar-denominated payments into an account it maintained with its New York correspondent bank. There was no allegation that the non-U.S. bank did anything in New York or took any action directed at New York, other than maintain the correspondent accounts through which the dollar-denominated payments (initiated from other financial institutions) were cleared and settled. Nevertheless, the court held that the New York long-arm statute was satisfied and thus, that the exercise of jurisdiction was appropriate.
Unfortunately, the court's holding appeared to be based, in part, on a misunderstanding of how correspondent banking transactions operate. Judge Michael Garcia, for example, in his concurrence observed in error that "there can be no dispute that once the money was in the correspondent account [in New York] … the bank [Pictet] affirmatively and deliberately transferred the money to Switzerland." But Pictet, as the alleged recipient of a U.S. dollar transfer that cleared through its New York correspondent account, need not have taken any "affirmative" or "deliberate" action in New York to cause funds to leave New York (indeed, the funds would not leave New York, they would remain in Pictet's New York correspondent account). The majority opinion also appears to have labored under the same misconception, although it is less clear on this point.
Contrary to what the Court of Appeals described, international interbank dollar payments proceed as follows. First, the party that wishes to wire U.S. dollars (the originator) instructs its bank (the originating bank) on how much money it wishes to send, who should benefit from the transfer (the beneficiary), and where the beneficiary has an account to receive the funds (the beneficiary bank). Second, the originating bank selects an appropriate U.S. correspondent bank (one where the originating bank has a correspondent account) and sends a SWIFT message relaying the foregoing information. Third, the U.S. correspondent bank, acting pursuant to the instructions in the SWIFT message, debits dollars from the originating bank's account, and sends the money (typically by FedWire or CHIPS) to another U.S. bank, where the foreign beneficiary bank has a correspondent account. Fourth, the beneficiary bank's U.S. correspondent then credits the correspondent account that it maintains for the beneficiary bank. At this point, the non-U.S. beneficiary bank need not have done anything, let alone taking any action in the New York forum. Moreover, there is no further movement of funds involved in this transaction. Rather, the U.S. dollars stay in the New York correspondent account, and are not "transferred" abroad. The U.S. correspondent bank then informs the non-U.S. beneficiary bank of the transfer, again typically using the SWIFT system. Finally, the beneficiary bank follows the instructions in the SWIFT message to make a book entry crediting its customer's (the beneficiary's) account for the relevant amount. The non-U.S. beneficiary bank acts only in its home country when crediting the account and does not receive any funds from New York in connection with the book entry.
When New York courts take an extremely broad view of jurisdiction, as the Court of Appeals did in Al Rushaid, it creates an unwelcome that risk that non-U.S. banks and their customers will be swept into actions involving alleged criminal conduct with no meaningful connection to New York. This is more than just unfair to defendants, it is bad policy for New York. Such cases require the expenditure of scarce judicial resources better invested into truly domestic disputes. Moreover, the more that non-U.S. banks and their customers are driven to clear transactions in currencies other than U.S. dollars to avoid the U.S. jurisdictional dragnet, the more New York will lose tax revenues, and eventually, jobs. Further, disincentivizing U.S. dollar transactions also closes the window into international money flows that U.S. law enforcement now utilizes for important policy objectives, up to and including the fight against terrorism and its funding.
Reprinted with permission from the July 31, 2017 edition of New York Law Journal © 2017 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.