When does maintaining a correspondent bank account in New York correspond to jurisdiction?

February 2017 | PROFESSIONAL INSIGHT | BANKING & FINANCE

Financier Worldwide Magazine

When does maintaining a correspondent banking relationship in New York by a foreign bank lead to jurisdiction over the foreign bank in New York? The New York Court of Appeals addressed this precise question in November 2016 in a 4-3 decision, in which Judge Pigott asserted in his dissent that the majority’s decision – finding a Swiss bank subject to jurisdiction in New York – “risks upending over 40 years of precedent that holds the mere maintenance of a New York correspondent account is insufficient to assert jurisdiction over a foreign bank”. But in a concurring opinion Judge Garcia noted that the majority’s opinion stands for the rather unremarkable proposition that where officers of a foreign bank aid and abet fraud and corruption by knowingly accepting payments funnelled through New York correspondent bank accounts, jurisdiction against the foreign bank will lie in New York.

In Rushaid v. Pictet & Cie, the plaintiff, a Saudi resident and co-owner of an investment company that, in turn, owned an oil drilling company, filed a complaint in New York State Supreme Court against Geneva-based bank Pictet & Cie, its manager and general partners seeking to hold them liable for their complicity in a bribery, kickback and money-laundering scheme involving three employees of the drilling company. Key to the Court’s decision is that it arose in the context of a motion to dismiss where allegations in a complaint are accepted as true for purposes of deciding personal jurisdiction.

According to the complaint, the bank manager actively aided and abetted the rogue employees by, among other things, setting up a secret company in the British Virgin Islands and establishing an account for the company at the bank. With the manager’s knowledge, the employees directed that bribe money be wired to Citibank NA in New York, Pictet’s correspondent bank, “in favour of Pictet and Co. Bankers Geneva”. Plaintiffs alleged the manager knew the BVI company and bank account would be used by the scheming employees to launder bribes and kickbacks, with the money then divided among the employees and transferred to the employees’ individual accounts at the bank. Evidence submitted in opposition to the motion to dismiss also included copies of documents tracing wire transfers to Pictet’s other New York correspondent accounts, including at HSBC Bank USA, N.A., Deutsche Bank Trust Company and JPMorgan Chase, all of which were credited to the BVI company and traced to the employees’ personal accounts.

Despite a mountain of evidence showing the bank manager’s complicity in the money laundering scheme, the Supreme Court granted the bank’s motion to dismiss for lack of personal jurisdiction, characterising the defendants’ use of the correspondent bank accounts as passive not purposeful. The Appellate Division, First Department, affirmed finding that the defendants merely carried out their client’s instructions and did not “purposefully avail[] [themselves] of the privilege of conducting activities in New York”. The Court of Appeals granted leave and reversed.

A defendant is subject to personal jurisdiction in New York under the state’s long-arm statute when it transacts business within the state, and the claim “arises from” those specific transactions. As the Court of Appeals noted in Rushaid, “jurisdiction is proper even though the defendant never enters New York, so long as the defendants’ activities were purposeful and there is a substantial relationship between the transaction and the claim asserted”. Purposeful activities, the Court explained, “are those with which a defendant through volitional acts, avails itself of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its laws”.

The dissent viewed the bank’s activity as nothing more than the passive receipt of payments into a correspondent account, done at the unilateral direction of third parties. Relying in part on the Court of Appeals’ 1976 decision in Amigo Foods Corp. v. Marine Midland Bank, the dissent characterised Pictet as “merely” maintaining a New York correspondent account for the “adventitious” receipt of money directed by the bank’s customers, which was not purposeful.

Although the decision in Amigo Foods noted 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)”, the Court of Appeals clarified that the jurisdictional inquiry “necessarily requires examination of the particular facts in each case” to determine the “quality” of a defendant’s activity to determine if the defendant purposely availed itself of contacts with New York.

In view of this standard, and the requirement that allegations in Rushaid’s complaint be accepted as true when deciding a motion to dismiss the complaint, it was not a huge leap for the majority of the Court to deem Pictet subject to personal jurisdiction in New York. The allegations established that Pictet, through its manager, repeatedly and deliberately approved the use of New York correspondent accounts to knowingly wire kickback funds into the account of a BVI dummy corporation, which itself was set up by the bank’s manager, and then transferred the funds into the personal accounts of the rogue employees. This was not “banking by happenstance”, or the “mere maintenance” of a New York correspondent bank account as characterised by the dissent, but rather a deliberate and purposeful course of dealing that was integral to the money laundering scheme. Indeed, the defendants’ served not only as the employees’ bankers, but designed and orchestrated the scheme relying precisely on the existence of bank accounts in different jurisdictions through which money would pass to accounts set up for the rogue employees at the bank. In view of these alleged facts, taken as true, the dissent’s dire prediction that the majority’s decision “will have grave implications for correspondent banking relationships” appears unnecessarily apocalyptic.

Judge Garcia penned a concurring opinion precisely to dispel the dissent’s prediction of doom. Rather than up-end correspondent banking relationships, Judge Garcia noted the Court’s conclusion “may well chill foreign banks from taking advantage of this State’s banking system to knowingly forward money for terrorist purposes, or to knowingly launder the proceeds of illegal activity”. According to Judge Garcia, if that be the case, “so be it”.

Subjecting Pictet to jurisdiction in New York under the alleged facts is not a sea-change in the law, but rather a foreseeable outcome in line with New York jurisprudence and the purposeful availment test under its long-arm statute. While the mere maintenance of a correspondent bank account in New York, standing alone, remains insufficient to confer personal jurisdiction over a foreign defendant, the repeated and deliberate use of the correspondent banking relationship to intentionally accomplish the transaction at issue will likely establish the predicate of “transacting business” in New York sufficient to subject a foreign defendant to personal jurisdiction in New York.

Daniel J. Buzzetta is a partner at Baker Hostetler LLP. He can be contacted on +1 (212) 589 4236 or by email: dbuzzetta@bakerlaw.com.

Daniel J. Buzzetta

Baker Hostetler LLP