US inconsistent in pressing China's banks on secrecy

Staff Writer
Columbus CEO

SHANGHAI (AP) — Counterfeiters use several of China's largest state banks as safe havens, relying on them to process credit card payments or move money beyond the reach of law enforcement in the United States, where many fake products are sold online. But the U.S. government has not taken a clear stand on whether to push Chinese banks to be more cooperative in tracing and seizing counterfeiters' money.

On one hand, the U.S. Justice Department has sued Chinese banks, seizing the assets of counterfeiters under a law that gives the government the power to do so. On the other hand, the Justice Department, under pressure from China, has argued that U.S. courts should more carefully consider China's sovereign interests before ordering Chinese banks to freeze counterfeiters' funds on behalf of private companies.

Geoffrey Potter, a partner at New York's Patterson Belknap Webb & Tyler law firm, said brand owners should lobby Congress to let private companies have greater power to seize counterfeiters' funds, like the government does.

"To state the obvious, criminals manufacture and sell counterfeits to make money," Potter said. "Thus, you will deter the counterfeiters to the extent that you can limit or eliminate their ability to get paid."

The lack of legal cooperation between China and the West has allowed counterfeiters to use Chinese banks as financial shelters, The Associated Press showed in an article last week. Four of China's top five government-controlled banks — the Bank of China, the Industrial and Commercial Bank of China, the Bank of Communications and the Agricultural Bank of China — along with the smaller China Merchants Bank have all been identified in U.S. lawsuits and investigations as facilitating credit card payments for online sales of fake goods or holding accounts for alleged counterfeiters.

China's Foreign Ministry declined to comment Friday, saying the issue did not fall under its remit.

The banks do not dispute that the accused counterfeiters held accounts, but refuse to comply with U.S. court orders to freeze funds or disclose information about accounts in China, saying that would violate bank secrecy laws. The banks say they are committed to fighting counterfeiting, have broken no laws, and are caught in a jurisdictional dispute between China and the United States. Chinese regulators say the only legal ways to freeze funds or get information about accounts in China is through Chinese courts or the Hague Evidence Convention, both of which critics dismiss as too cumbersome.

"It could make a sea change if you could get that type of information and seize those funds," said Robert Barchiesi, the president of the International Anti-Counterfeiting Coalition, a non-profit industry group whose members include Eli Lilly & Co. and DuPont.

In 2012, the U.S. Justice Department seemed to agree.

That year, it filed two separate lawsuits against the Bank of China and the Industrial and Commercial Bank of China (ICBC), seizing $2.3 million in counterfeiting proceeds it said had been wired to accounts at the two banks in China.

Special agents were able to buy counterfeit jerseys for, among others, the New York Yankees, the New York Giants, the Baltimore Orioles, the Pittsburgh Steelers, the New England Patriots, the Boston Red Sox, the New York Knicks, the Philadelphia Phillies and the Chicago Bears.

"We will continue to work with our law enforcement partners to target these unscrupulous operators where it hurts them most — at the bank," U.S. Attorney Ronald Machen said in a statement at the time.

The counterfeiters' money wasn't actually in the United States. It was in China. But the Bank of China and ICBC themselves maintain bank accounts in America. U.S. law allows the government — but not private companies — to seize funds from such correspondent accounts to make up for dirty money a bank may be holding, out-of-reach overseas.

The Bank of China and ICBC showed in court documents that the alleged counterfeiters' accounts had relatively low balances at the time of the lawsuit, so the U.S. Treasury Department had to return most of the funds it had seized. The Treasury was able to keep $130,945.50 of the initial $2.3 million.

Gucci and Tiffany & Co., which have waged years of expensive but ineffective lawsuits against online counterfeiters, have been trying to do a similar thing. They are fighting the Bank of China and ICBC in federal court in New York to force the banks to produce account information and freeze counterfeiters' funds in China. The banks refuse, saying compliance would put them in conflict with China's bank secrecy laws.

Chinese regulators, diplomats and courts have uniformly backed the Chinese banks' position.

In a May 2013 letter, the Chinese Embassy in Washington D.C. urged the U.S. State Department to "take concrete actions to safeguard the overall interest of the judicial and law enforcement cooperation between the two countries." The embassy asked the U.S. to "intervene" in the Gucci and Tiffany cases, by filing a brief admonishing U.S. courts to "respect China's sovereignty and laws."

One year later, the U.S. Justice Department did just that. In a May 2014 friend of the court brief for the Gucci and Tiffany lawsuits, the Justice Department argued that U.S. courts must consider more carefully whether it is reasonable to force Chinese banks to freeze client accounts in violation of Chinese law — despite the fact that the U.S. government itself had seized counterfeiters' money from Chinese banks two years earlier.

Statements by foreign governments on their "sovereign interests are to be respectfully received and evaluated," the Justice Department brief said. The district court, the brief added, was wrong to dismiss the banks' efforts to block asset freeze orders that conflicted with Chinese law without further review.

The Justice Department declined to comment on the inconsistency, or whether it would use its power to file more lawsuits to seize counterfeiters' funds held at Chinese banks.

U.S. law draws a distinction between private and public interests, granting the government more sweeping powers than the private sector. The Justice Department, in coordination with the State Department and the Treasury Department, must evaluate how seizing U.S.-based assets of a foreign bank will impact the relationship with the foreign government before proceeding.

Such cases, "will be approved only if there are no other viable alternative means" of getting the tainted funds, Justice Department policy guidelines say. "It, therefore, should be considered only as a last resort."


Associated Press writer Louise Watt contributed from Beijing.


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