A federal court case involving three Chinese banks is raising questions about Beijing’s commitment to abide by agreements with the United States — a day before President Trump is scheduled to sign the first major trade deal of his administration with China.
A senior Justice Department official said China has failed to observe terms of the 2001 Mutual Legal Assistance Agreement, and a federal judge ruled recently that seeking legal help from China under the accord has proved fruitless.
“It’s still on paper, but they don’t fulfill their obligations under it,” the official said in an interview.
China has used the agreement to block two investigations of Chinese financial assistance to North Korea in violation of U.S. sanctions on Pyongyang.
The official said that in court motions “we persuaded the judge that that would be a fruitless exercise and that the banks which choose to do business here are accountable to U.S. law the same way a U.S. bank is, and their records should be brought forward and the court agreed.”
The issue of Chinese compliance with its international agreements will take center stage this week. The United States and China are scheduled to sign phase 1 of a massive bilateral trade agreement Wednesday that is meant to ratchet down tensions and roll back tariffs in the trade war. U.S. officials say the agreement commits China to buying at least $200 billion in American agricultural, manufacturing and other products, but private analysts say Beijing will be hard-pressed to meet those numbers.
U.S. officials have insisted that the still-unpublished text of the agreement will contain enforcement provisions to ensure Beijing’s compliance.
A White House spokeswoman had no immediate response when asked when the text of the phase 1 trade deal would be made public or whether it would contain enforcement mechanisms. Chinese officials have yet to discuss any aspects of the deal publicly.
The agreement will create a U.S.-Chinese forum to resolve disputes. The forum will be led by U.S. Trade Representative Robert Lighthizer, the Trump administration’s point person for the talks, and Chinese Vice Premier Liu He, who has led China’s delegation to the trade talks.
The Trump administration has rejected similar dialogue under previous presidents as unproductive. The U.S.-Chinese forum will be held semiannually and will be aimed at resolving disputes, a Treasury spokesman said.
The partial agreement followed China’s rejection in May of a comprehensive trade agreement that U.S. negotiators said was intended to curb unfair Chinese trade, regulatory and other practices.
June Teufel Dreyer, a China analyst and political science professor at the University of Miami, said she is skeptical of Chinese compliance with the trade accord.
“All I can say at this point is that Beijing’s track record on complying with agreements gives me no confidence that they will live up to this one,” she said.
Critics say Beijing has failed to live up to Chinese President Xi Jinping’s promise in 2015 to halt government-backed economic cyberespionage and a pledge not to militarize disputed islands in the South China Sea. The Pentagon discovered in April 2018 that China had deployed advanced anti-aircraft and anti-ship missiles on islands in the Spratly Island chain near the Philippines.
Secretary of State Mike Pompeo said in a January 2018 interview that Chinese compliance with agreements is something the U.S. government faces in every negotiation and discussion.
“The answer is always really very simple: Whatever outcomes are determined have to be verifiable,” Mr. Pompeo said. “They have to have a methodology by which enforcement can take place, which means sharing of information and transparency so that we can see what the other side is doing so you can understand if, in fact, they’re abiding by the agreement.”
The secretary said “only time will tell” whether China will honor the trade deal.
Anders Corr, president of the international consulting firm Corr Analytics, said he does not regard China’s government as a trustworthy counterpart in any agreement.
“And I’m quite sure the administration shares this view,” he said. “So they will have built into any deal that is even partially acceptable a staged set of sub-agreements that depend on prior irreversible compliance by China.”
The compliance provisions are needed because China has “violated numerous international agreements,” including the United Nations Convention on the Law of the Sea and its commitments under the World Trade Organization, Mr. Corr said.
The controversy involving the 2001 Mutual Legal Assistance Agreement involved Justice Department subpoenas of three Chinese banks, two with offices in the United States, that investigators linked to illicit support for North Korea’s nuclear program. The banks have been under investigation for years on suspicion of helping the government in Pyongyang raise hundreds of millions of dollars in U.S. currency through exports of coal and other products.
U.S. sanctions intended to squeeze the North Korean regime prohibit banks that do business in the United States from handling such transactions.
The Chinese banks refused to comply with the subpoenas, saying that would put them in conflict with China’s domestic financial laws. The Justice Department, they argued, must seek access to the bank records through the Mutual Legal Assistance Agreement. However, a district judge ruled that “the historical record demonstrates … an MLAA request of China for such bank records is not a viable alternative,” according to a court document in the case.
The Mutual Legal Assistance Agreement sets up procedures for the U.S. and Chinese governments to obtain documents in criminal investigations and to cooperate in legal matters. In the case of the bank subpoenas, the Chinese Justice Ministry wrote to the court promising to cooperate with the records request, but only if the Justice Department made the appeal under the agreement.
The Justice Department refused, arguing that the process was of little use in criminal investigations because of Chinese noncompliance with many formal requests.
According to court filings, the Justice Department’s office of international affairs, the central U.S. authority under the Mutual Legal Assistance Agreement, has made 50 requests for bank records in the past decade but received no responsive records in 35 cases.
“And of the 10 requests submitted within the last two years, the United States has received at most one response,” said one court paper, adding that “China failed to produce documents in one of those cases even though the United States informed the [Chinese Justice] Ministry that the request was time-sensitive due to an upcoming trial.”
In the case of the three banks, which were not identified by name, China opposed U.S. sanctions on a North Korean front company in Hong Kong linked to the banks. Chief Judge Beryl A. Howell of the U.S. District Court for the District of Columbia ruled last year that the three companies were in contempt for failing to comply with the subpoenas and fined them each $50,000 per day.
Bloomberg News reported that the three banks appeared to be the China Merchants Bank, the Bank of Communications and the Shanghai Pudong Development Bank, identified as among China’s 10 largest banks. The banks told Bloomberg that they were not under investigation for sanctions violations.
In a second case involving covert Chinese support to North Korea, an FBI agent revealed in court papers that although China agreed to work with U.S. authorities in providing bank records under the Mutual Legal Assistance Agreement, China never handed over any records. The FBI agent testified that based on the lack of cooperation “the MLAA process is not an effective way to obtain bank records from Chinese authorities with respect to investigations involving North Korea.”
That case involved a request for Chinese bank records regarding Dandong Hongxiang Industrial Development Co. Ltd., a North Korean front company in China.
The agent was quoted as saying “one reason that Chinese authorities do not want to assist with North Korean investigations is that producing such records could reflect badly on the Chinese government and the Chinese financial industry.”
Adam Hickey, deputy assistant attorney general in the national security division, said in a speech in April that China’s failure to support the Mutual Legal Assistance Agreement is a problem related to the rule of law.
“Over the past 10 years … China has rarely produced bank or similar transactional records pursuant to multiple MLAA requests,” he said. “And in the minority of cases where it produced records, they were incomplete, untimely or inadmissible.”
Mr. Hickey said when U.S. authorities sought to compel Chinese businesses in the United States to produce records, “the Chinese government threatens them not to comply, on pain of sanctions under their laws.”