The United States Is Going After China’s Banks

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A investor monitors stock prices at a securities company in Hangzhou in China's eastern Zhejiang province on October 18, 2018. - Shares in Shanghai plunged almost three percent on October 18 as the yuan weakened and the Federal Reserve flagged more US interest rate hikes. (Photo by STR / AFP) / China OUT (Photo credit should read STR/AFP/Getty Images)

In the ongoing U.S.-China trade war, the treatment of Chinese tech giants such as Huawei and the plight of U.S. soybean farmers headlines the news. But the impact of a recent court ruling in Washington could open an expansive new front: China’s banks, and the thousands of businesses that depend on them.

On March 18, a federal court in Washington ordered Chinese financial giant Shanghai Pudong Development (SPD) Bank and two other Chinese banks to comply with a subpoena issued under the USA Patriot Act, and hand over to U.S. authorities bank records of a Hong Kong company linked to violations of U.S. sanctions on North Korea.

On June 25, the court found the banks in contempt for refusing to comply. The contempt order empowers the U.S. treasury secretary and the attorney general to terminate SPD Bank’s U.S. correspondent accounts. That step, pursuant to Section 319 of the Patriot Act, would end SPD Bank’s ability to conduct U.S. dollar-denominated transactions. In a global financial system still dominated by the almighty U.S. dollar, that sanction is known as a financial “death penalty.”

This wouldn’t be the first time the United States has used its financial dominance against a rival. Iran was cut off from the Society for Worldwide Interbank Financial Telecommunication (SWIFT), the international transfer system, as part of U.S. sanctions. But this time, the fallout will not be limited to SPD Bank or the financial sector. The ruling has given the administration of U.S. President Donald Trump a powerful new weapon for its all-tools approach to China policy—leveraging all available authorities, including law enforcement, regulatory, and diplomatic means, to advance U.S. national-security and foreign-policy interests.

In February 2018, FBI Director Christopher Wray summed up the spirit behind the all-tools approach when he described China as a “whole-of-society threat” that requires a “whole-of-society response” from the United States. The idea behind this strategy, also referred to as “whole-of-government,” is that executive-branch agencies should get out of their silos and look beyond their own agency’s authorities and interests in resolving national-security problems beyond U.S. borders.

For example, in order to reach a Chinese company alleged to have violated U.S. laws, the Department of Justice would normally resort to a process known as “mutual legal assistance” to request assistance from the Chinese authorities to conduct the investigation and hope that the Chinese company might someday appear in a U.S. court. But the all-tools approach provides new angles of attack by blurring the distinction between different functions of the government: National security is trade is technology controls is financial regulation is law enforcement.

One of the most powerful tools to date has been the Commerce Department’s Entity List, an export control tool that prohibits exports of U.S. goods and technology to an entity that Commerce believes has or may act “contrary to the national security or foreign policy interests of the United States.” Consider Chinese telecom giant ZTE, an early example of the strategy in action. In March 2016, the Commerce Department placed ZTE on the Entity List based on its pattern of shipping goods of U.S. origin to Iran and North Korea in violation of U.S. sanctions and export control laws. The listing severed ZTE’s access to badly needed U.S .equipment and supplies, quickly bringing the company to the negotiating table.

The Commerce Department lifted the Entity List restrictions only after ZTE cooperated with a broad U.S. government investigation, eventually resulting in a $892 million settlement that combined penalties by the departments of Commerce, Treasury, and Justice. (The Commerce Department added an additional penalty of $1 billion and an intrusive compliance-monitoring arrangement in a second episode after ZTE violated terms of its plea agreement.) Using a regulatory mechanism like the Entity List to compel a foreign company to cooperate with a criminal investigation was virtually unheard of prior to ZTE, but it has since become de rigueur.

China has been the most frequent target of this silo-breaking approach. In support of U.S. national-security and economic goals, the Justice Department announced its China Initiative in November 2018, prioritizing the investigation and prosecution of Chinese companies’ theft of trade secrets, overseas corrupt practices, and potential threats posed by the Chinese sections of U.S. supply chains. In addition to the Entity List—which was also used against other Chinese tech giants such as Huawei and Fujian Jinhua—the Commerce Department has also increasingly employed the “Unverified List” (another export control tool that imposes strict licensing requirements on certain recipients of U.S.-origin goods and technology) to closely scrutinize how Chinese entities use U.S. goods. At the same time, the Commerce Department is overhauling U.S. export controls for “emerging and foundational technologies,” an effort likely to impose significant new limits on Chinese access to U.S. technology, and a multiagency committee has new powers to stringently review Chinese investments in the United States and block those that raise national-security concerns.

The Treasury Department is also an important player, given its authority to enforce sanctions regimes. The department employs a variety of means to force closure of U.S. correspondent accounts for foreign banks—in other words, impose the financial “death penalty.” It can apply so-called secondary sanctions on foreign banks for doing business with sanctioned entities. It can also designate a foreign bank as a “primary money laundering concern” under Section 311 of the Patriot Act, as it did in 2005 for Banco Delta Asia and in 2017 for Bank of Dandong, two smaller Chinese banks found to be facilitating transactions with North Korea. As China accounts for up to 90 percent of North Korea’s limited trade with the outside world, the Treasury Department’s enforcement of North Korean sanctions violations regularly entangles Chinese entities—as can be seen with SPD Bank.

But imposing the “death penalty” under these measures requires a reasonable basis for the action: for example, showing that the foreign bank was knowingly involved in the underlying violation or facilitated it. The recent Washington court ruling opens a more direct and expedient path and dramatically increases the breadth, reach and potential frequency of using this tool. Under Section 319 of the Patriot Act, it is not necessary to show the company knew it was violating sanctions; any foreign bank could lose its access to U.S. dollar end transactions when its only transgression is refusal to comply with a Patriot Act subpoena.

BY BEAU BARNES, S. NATHAN PARK, WADE WEEMS
Foreign Policy

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