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China's banks test US legal system

As China’s big banks expand in the U.S., they are testing how far U.S. judges can go in demanding account records located in China.

In a closely watched case, Kering SA’s Gucci and its other luxury brands allege that some of their most troublesome counterfeiters have accounts with Bank of China Ltd. and have issued subpoenas for information about their transactions. The bank is fighting the effort.

U.S. District Judge Richard Sullivan in Manhattan has repeatedly ordered Bank of China to comply, but the bank has said that producing the information would violate Chinese law and has disclosed only a fraction of the records demanded by the court. On Tuesday, lawyers for Gucci and Bank of China will square off in a hearing to decide whether the lender should be held in contempt of court and pay a multimillion-dollar fine for defying the court’s orders.

The case wades into relatively new territory for U.S. courts, and the outcome could set a blueprint for U.S. lawyers trying to pierce China’s secrecy laws in future cases.

“U.S. courts don’t have a lot of insight into banking records in China,” said Mark Hanchet, a partner at Mayer Brown LLP. “Here’s an example of a court actually penetrating that.”

Gucci points to Bank of China’s New York branch and wire transfers from Bank of China’s own accounts, known as correspondent bank accounts, at Chase Bank in the U.S. as a reason U.S. courts should have jurisdiction in this case. Bank of China said the requested records in China are unrelated to its business in the U.S. and that Gucci should instead litigate this case in China.

Bank of China’s U.S. lawyers and representatives in China didn’t respond to requests for comment. Gucci’s lawyers and a spokeswoman for Kering declined to comment.

The bank’s lawyers have said in court filings that China has a vital national interest in protecting its citizens’ account security to promote and develop its nascent banking system.

These disputes are common in counterfeit cases. In a series of lawsuits, high-end jeweler Tiffany & Co. has tangled with Chinese banks as the company seeks to enforce monetary judgments against alleged counterfeiters.

China’s top four state-owned banks in recent years have targeted overseas expansion to offset slowing profit growth and smaller lending margins at home. Overseas assets at the banks are up almost 10% from the end of last year, totaling $1.3 trillion. Bank of China has been one of the most aggressive of that group, with 19% of its total profit coming from foreign operations.

That expansion is bringing them into conflict with a U.S. legal system that typically views abiding by U.S. law as the price foreign companies must pay to benefit from doing business in the country.

U.S. lawmakers have long complained about China’s lack of cooperation in legal proceedings. In a May report, a congressional commission that monitors U.S.-China economic issues wrote that Chinese businesses in the U.S. use “the shroud of Chinese law, including official secrecy laws” to keep themselves “largely immune from the jurisdiction of U.S. courts.”

U.S. judges have tried to resolve the disputes by ordering plaintiffs to make their records requests through provisions of an international treaty, a solution suggested by Bank of China as well in the Gucci case. But plaintiffs have argued that the method is too slow and unwieldy.

This dispute dates back to 2010, when the brands sued a group of people, accusing them of counterfeiting goods like Gucci handbags and then selling them online in the U.S. Gucci alleged the counterfeiters wired the illegal proceeds to accounts at the Bank of China, making the bank records indispensable for finding out how much revenue the counterfeiters made and whether other perpetrators were involved.

Bank of China fought subpoenas for those records, saying in court filings that they could subject the bank to criminal prosecution and other penalties in China.

Judge Sullivan found Bank of China in contempt of court in 2012, imposing a fine of $75,000 plus $10,000 a day until the records were produced.

After an appeals court found his original order too ambiguous and kicked the case back to him, the judge issued a new order in September, saying U.S. courts do have specific jurisdiction in this case to order Bank of China to produce the documents. He said there is no evidence that China rigidly enforces its bank secrecy laws and that the U.S. interest in protecting its intellectual property clearly outweighs China’s state policy.

Gucci has asked Judge Sullivan to punish the bank by ordering a $12 million cash payment as compensation for how much the counterfeiters would have owed the brands in damages. Bank of China called the $12 million request baseless in a filing on Tuesday.


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