It is an extremely complicated question in today’s world of international finance: In our cash-less society, where exactly is money held?
This is the key question facing a U.S. judge, who could require the Frankfurt-based stock exchange operator Deutsche Börse to hand over to U.S. authorities some $1.67 billion in funds it is holding for Iran’s central bank.
“It’s interesting because probably 200 years ago this would be a fact question, and now it is a law question,” Judge Katherine B. Forrest of the Southern District of New York, said in a transcript of the case seen by Handelsblatt Global Edition.
The ongoing court case, originally reported by the news agency Reuters, marks a major new test of the reach of U.S. laws abroad. The money in question is held by Clearstream, a clearing and settlement house wholly owned by Deutsche Börse, in Luxembourg.
Experts suggest Deutsche Börse may have no choice but to settle the case. Even if it could challenge the U.S. decision in European courts, it may not be worth the effort.
“Clearstream may want to protect its commercial interests in the United States," Gilles Cuniberti, a law professor at the University of Luxembourg, told Handelsblatt Global Edition. "At some point, Clearstream may put its commercial reality above legal proceedings.”
It’s interesting because probably 200 years ago this would be a fact question, and now it is a law question. Katherine B. Forrest, Judge, Southern District of New York
The case stems from an earlier U.S. court order that required Iran to pay $2.65 billion in compensation to families for its role in a 1983 bombing of a U.S. barracks in Beirut. Iran has refused to pay, forcing the families to find other means.
The families’ key target has been the Iranian central bank. In 2013, they succeeded in getting Clearstream to release $1.8 billion in funds that it was holding on the central bank’s behalf through an account with Citigroup in the United States.
Clearstream has also settled separate charges that it violated U.S. sanctions against Iran. It agreed to pay a fine of $152 million in early 2014 for serving as an intermediary that allowed the Iranian central bank to purchase securities in the United States. Prosecutors in New York are also considering bringing additional charges against the bank.
Now, lawyers for the families in the Beirut bombing are going after additional funds being held in Luxembourg, which have been frozen ever since the European Union imposed sanctions on Iran in 2012. But handing over this money has been a step too far for Clearstream, which argues that the funds lie outside of U.S. jurisdiction.
To prove it one way or the other involves a tricky legal question: Did the money ever pass through the United States, and who owned it when it did?
The families’ lawyers argue the money was indeed held in an account for J.P. Morgan in the United States - how else could the Iranian money be denominated in U.S. dollars?
“We can come after them because the money never should have left here…your Honor has the power to unwind what shouldn't have happened,” said Patrick Rocco, an attorney for the plaintiffs, according to a transcript of arguments heard in September.
Clearstream strongly denies this. While it obviously has money in the United States, its lawyers argue this money was never owned by Iran’s central bank, Bank Markazi. Clearstream takes dozens of actions a day on behalf of clients – buying bonds, acquiring stocks – but it makes these trades on its own account.
“They must say, ‘You are holding an asset belonging to Bank Markazi and I want to you turn it over to me.' They cannot assert a claim in this case, in this jurisdiction, unless they can say 'and that asset is here in New York,' and they cannot say that,” argued Karen Wagner, lawyer for Clearstream, in the transcript.
Even if Ms. Forrest rules in favor of the palintiffs, the case won’t necessarily end in New York. Enforcement is local. Even if the U.S. court were to order the funds turned over, it would be up to a court in Luxembourg to enforce the ruling and force Clearstream to hand over the money.
"The place of enforcement where the assets are situated has exclusive jurisdiction,” Mr. Cuniberti said. “From a European perspective it is clear the U.S. court would be regarded as lacking jurisdiction."
That doesn’t mean Clearstream is out of the water.
Even if the U.S. court can’t order the money turned over, it could get back at Clearstream by other means, such as fining the settlement house for violating its order, said Mr. Cuniberti.
That could put Clearstream in a legal bind, leaving it to pay the fine or close operations in the United States. It may choose to settle the case simply to avoid such complications.
Christopher Cermak and Gilbert Kreijger are editors with Handelsblatt Global Edition in Berlin and cover finance, companies and markets, and economics. To contact the authors: [email protected], [email protected].