FOREIGN BANKING:
THE IMPACT OF THE
USA PATRIOT ACT of 2001
[Part One]

On October 26, 2001, just weeks after the terrorist attacks on the World Trade Center and the Pentagon, President George W. Bush signed into law the “Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act” (USA PATRIOT Act.). This Act was long, some 342 pages, and all encompassing. In one stroke of the pen, the USA PATRIOT Act made several significant changes to 15 different statutes. Many scholars and commentators have criticized the Act as being over reaching, not well vetted, trampling constitutional rights far and wide. Having been rushed through the United States Congress during the hours following the greatest terrorist act ever witnessed on American soil, the USA PATRIOT Act may well prove to be more problematic that many can imagine. Some say that the US Congress, who at the time had themselves been driven from their own offices due to the Anthrax Scare, wanted to show the world that they were not impotent. To demonstrate that Congress could still govern they quickly drafted and rushed to the President this all-encompassing piece of legislation.  However, as all scholars know haste most often leads to bad law. Could this be the case once again?

FOREIGN BANKS

One can only speculate the overall impact the Act will have on foreign banking. Will the USA PATRIOT Act lead to further erosion of the true independence of foreign banks and the confidentiality granted to the customers of such banks? Whether this was the intended result or not, it is clear that the Act has clearly affected the offshore financial industry. 

One of the stated purposes of the Act is to strengthen the disclosure requirements for foreign banks that have correspondent relationships with banks in the United States. An interesting point of the Act is the direction now being given by correspondent banks situated in the United States to their downstream banks that the Act requires that foreign banks with a correspondent relationship must maintain a registered agent for service in the United States. This registered agent shall be the foreign bank’s authorized recipient of legal summons or subpoenas.

In pertinent parts, Section 319 of the USA PATRIOT Act provides:

3) FOREIGN BANK RECORDS-

(A) SUMMONS OR SUBPOENA OF RECORDS-

(i) IN GENERAL- The Secretary of the Treasury or the Attorney General may issue a summons or subpoena to any foreign bank maintains that a correspondent account in the United States and request records related to such correspondent account, including records maintained outside of the United States relating to the deposit of funds into the foreign bank.

(ii) SERVICE OF SUMMONS OR SUBPOENA- A summons or subpoena referred to in clause (i) may be served on the foreign bank in the United States if the foreign bank has a representative in the United States, or in a foreign country pursuant to any mutual legal assistance treaty, multilateral agreement, or other request for international law enforcement assistance.

(B) ACCEPTANCE OF SERVICE-

(i) MAINTAINING RECORDS IN THE UNITED STATES- Any covered financial institution which maintains a correspondent account in the United States for a foreign bank shall maintain records in the United States identifying the owners of such foreign bank and the name and address of a person who resides in the United States and is authorised to accept service of legal process for records regarding the correspondent account.

(ii) LAW ENFORCEMENT REQUEST- Upon receipt of a written request from a Federal law enforcement officer for information required to be maintained under this paragraph, the covered financial institution shall provide the information to the requesting officer not later than 7 days after receipt of the request.

(C) TERMINATION OF CORRESPONDENT RELATIONSHIP –

              (I)TERMINATION UPON RECEIPT OF NOTICE – A covered financial institution shall terminate any correspondent relationship with a foreign bank not later than 10 business days after receipt of written notice from the secretary or Attorney General (in each case, after consultation with the other) that the bank has failed – 

(I)                  to comply with a summons or subpoena issued under subparagraph (A); or

(II)                to initiate proceedings in a United States court contesting such summons or subpoena.

A question that arises is whether the appointment of a registered agent for service of process in the United States, as required by the USA PATRIOT Act, submits the foreign bank to the jurisdiction of courts in the United States. Surly this was not the intent of the drafters, but was it the effect? In a rush to act many mistakes are often made, making a law have unintended consequences. To illustrate the jurisdictional issue, one merely needs to look at the divergent outcomes of two separate cases out of courts in the United States.

In the case of Knowelton v. Allied Van Lines, 900 F. 2d 1196 (8^th Cir. 1990), the appellate court found that Allied Van Lines had consented to the jurisdiction of the Minnesota courts by its appointment of an agent for process in Minnesota. It was the court’s conclusion that the appointment of an agent for service of processes is a form of general consent to jurisdiction by which a non-resident corporation waives a due-process inquiry. 

We conclude that appointment of an agent for service of process…gives consent to the jurisdiction…for any cause of action, whether or not arising out of activities within the state.

Id. At 1200.

In reaching its conclusion, the appellate court relied on Insurance Corp. of Ireland, Ltd. v. Compagnie ds Bauxites de Guinee, 456 U.S. 694, 102 S. Ct. 2099 (1982), where the United States Supreme Court listed several ways in which a defendant might consent to personal jurisdiction. (It is note worthy to point out that the Supreme Court list did not include the appointment of an agent for service) The 8^th Circuit Court in its opinion simply assumed that the Supreme Court had not included the appointment of agent for service of process on the list as a means of consent because it took it “for granted.” Id. at 1200.

Appointment of a registered agent for service is not one of the specific types of consent listed by the Supreme Court… but it is nevertheless a traditionally recognized and well-accepted species of general consent, possibly omitted from the Supreme Court’s list as to be taken for granted.

Id. at 1200.

In a better reasoned opinion, a United States District Court in the Southern District of Texas, found that the appointment of an agent for service of process did not in and of itself constitute consent to exercise of personal jurisdiction. Leonard v. USA Petroleum Corp., 829 F. Supp. 882 (S.D.Tex. 1993) Judge Lynn Hughes noted:

”The designation of an agent simply gives the company more efficient notice than service through the secretary of state. In complying with the Texas registration statute, USA Petroleum consented to personal jurisdiction in Texas only if the jurisdiction was constitutional. See Siemer, 966 F. 2d at 

183; Ratliff, 442 F. 2d at 746.”

Id. at 889.

Utilizing the strict due process analysis, this Texas court pointed out that the non-resident corporation must have enough contacts with the jurisdiction in question to generate a reasonable expectation that the jurisdiction might constitutionally wield its judicial power over it. Where a foreign corporation has contacts with a jurisdiction, the courts thereof only obtain jurisdiction over the defendant corporation if the contacts are sufficiently meaningful to meet the minimum standards required by due process. Due process demands that a non-resident have fair warning that the nature and extent of its contacts with the jurisdiction may reasonably oblige it to submit to that jurisdiction’s judicial power. Id. at 889

“The idea that a foreign corporation consents to jurisdiction…by completing a state-required form, without having contact with Texas, is entirely fictional. Due process is central to consent; it is not waived lightly. A waiver through consent must be wilful, thoughtful, and fair. ‘Extorted actual consent’ and ‘equally unwilling implied consent’ are not the stuff of due process. See, Cound, et al., Civil Procedure, Ch. 2, p. 71 (3d Ed. 1981).”

Id. at 889.

As Judge Hughes pointed out in his judgment, due process is the very cornerstone of personal jurisdiction. Courts cannot be permitted to haul non-resident corporations into their nets on the fiction that they have somehow consented to jurisdiction.

“Consent requires more that legislative mandated compliance with state laws. Routine paperwork to avoid problems with a state’s procedures is not a wholesale submission to its power.”

Id at 891

One can only assume that when a due process approach to the question of jurisdiction is taken, that the courts in the United States will find that the foreign banks mandated compliance with the provisions of the USA PATRIOT Act is not a consent to jurisdiction in the United States. But it can likewise be presumed that efforts will be made by aggressive trial counsel to argue to the contrary.

FORFEITURE OF FUNDS IN UNITED STATES INTERBANK ACCOUNTS

Where the foreign bank may find itself compelled to “voluntarily” enter into a United States courthouse is in the event the United States Secretary of Treasury or Attorney General commences a Forfeiture Action regarding funds of the foreign bank. Here is where the foreign bank finds a slippery slope. The USA PATRIOT Act provides that:

If funds are deposited into an account at an foreign bank, and that foreign bank has an interbank account in the United States with a covered financial institution, such funds will be deemed to have been deposited into the interbank account in the United States, and any restraining order, seizure warrant, or arrest warrant in rem regarding the funds may be served on the covered financial institution and the funds in the interbank account. 

The Act does authorize the Attorney General, in consultation with the Secretary of Treasury, to suspend or terminate such forfeiture action it the Attorney General determines that a conflict of law exists between the laws of the foreign jurisdiction and the laws of the United States. The importance here is who is deemed the “Owner” of the funds. Do the funds under attack belong to the offshore customer or the foreign bank? The foreign bank may be considered the owner of the subject funds if:

 The foreign bank establishes, by a preponderance of the evidence, that prior to the restraint, seizure, or arrest of the funds, the foreign bank had discharged all or part of its obligations to the prior owner of the funds, in which case the foreign bank shall be deemed the owner of the funds to the extent of such discharged obligation.

Section 319 of the Act makes it clear that once a forfeiture action is brought against funds that are restrained, seized, or arrested, it shall not be necessary for the United States Government to establish that the funds are directly traceable to the funds that were deposited into the foreign bank. Instead, the funds owner must contest the forfeiture by filing a claim under 18 U.S.C. 983. The ensuing litigation over forfeiture is highly complicated, full of many legal pitfalls for the unwary. There are many highly technical procedural steps that must be mastered before proceeding in the contest.

While Section 983 set out the general rules for civil forfeiture proceedings, understanding the nuances of the statute is critical. Of significant importance to the foreign bank are the procedural steps to contest forfeiture of funds that the foreign bank claims as its own:

(4) (A) In any case in which the Government files in the appropriate United States district court a complaint for forfeiture of property, any person claiming an interest in the seized property may file a claim asserting such person's interest in the property in the manner set forth in the Supplemental Rules for Certain Admiralty and Maritime Claims, except that such claim may be filed not later than 30 days after the date of service of the Government's complaint or, as applicable, not later than 30 days after the date of final publication of notice of the filing of the complaint. 

   (B) A person asserting an interest in seized property, in accordance with subparagraph (A), shall file an answer to the Government's complaint for forfeiture not later than 20 days after the date of the filing of the claim. 

…………. 

(d) Innocent Owner Defense. - 

(1) An innocent owner's interest in property shall not be forfeited under any civil forfeiture statute. The claimant shall have the burden of proving that the claimant is an innocent owner by a preponderance of the evidence. 

………….

(3) (A) With respect to a property interest acquired after the conduct giving rise to the forfeiture has taken place, the term ''innocent owner'' means a person who, at the time that person acquired the interest in the property - 

(i) was a bona fide purchaser or seller for value (including a purchaser or seller of goods or services for value); and 

(ii) did not know and was reasonably without cause to believe that the property was subject to forfeiture.

In order to adequately protect itself the foreign bank must have legal counsel well versed in not only the USA PATRIOT Act, but also the forfeiture statutes. For one cannot go lightly into the night when confronted by a forfeiture action. And again, the foreign bank finds itself confronted with the possible submission to the jurisdiction of the courts of the United States. To contest the forfeiture of funds in the interbank account the foreign bank may be compelled to litigate the forfeiture in the courts of the United States.  It is for this reason that foreign banks must chose their legal counsel wisely and have made arrangements with such counsel long before needing their assistance. Time is imperative in doing battle in any courthouse. One cannot and should not spend it looking for legal counsel, for the clock runs fast at the courthouse when one’s rights are under attack.